Global Policy Forum

by Chris Kraul

Candelaria Vuicob, a Mayan street vendor, has sold fruits and vegetables on the streets of the gritty Lucas de Galvaez market since she was 8 years old. After more than six decades of harassment from cops, government officials and blackmailers, she said enough was enough and decided to go legit. "Now I don't have to pay mordidas ," or bribes, Vuicob, 71, said.

Vuicob gave up the life she has known since childhood to become a bona fide businesswoman with an identity card and a ledger to record her wholesale purchases of produce. She was coaxed to sign on with a pilot program run by the Tax Administration Service, the Mexican equivalent of the Internal Revenue Service that so far this year has brought 3,700 vendors into the mainstream economy. Most pay no taxes because their annual sales are too small, but their observance of the rules makes it easier for the government to keep track. In developed countries, Vuicob's transition would be no more than a footnote, but in Latin America, where more than half of all workers are employed in the underground economy, her conversion is a small victory in a battle against forces that are helping to keep the region poor.

Studies show that the underground economy is expanding, becoming one of the more alarming and troublesome aspects of the continent's financial malaise. Its expansion perpetuates poverty and deprives the government of tax revenues to improve health, education and infrastructure. It increases taxes for those who are legal because they have to make up for tax revenues that are lost. A large informal economy works to stunt growth in several insidious ways, economists say. Businesses that stay underground tend not to join together to push for common causes or savings that come from economies of scale. The only credit open to informal businesses is through loan sharks, and so "it's quite impossible to expand," said Isaac Katz, an economist at Mexico City's Autonomous Technological Institute.

"Workers in the informal economy tend to earn less than those in the formal economy doing the same kind of work, sometimes less than minimum wage," Katz said. Businesses that aren't legitimate usually have less safe and hygienic working conditions for their employees, he added. The success of efforts in Merida and similar programs are not enough to reverse the decade-long trend. A recent study by the Inter-American Development Bank found that the number of street vendors and other workers who make up the informal economy rose this year to 60% of Latin America's labor force, up from 57% in 1998 and 52% in 1990.

Stagnation Discouraging Legitimate Enterprise

The rising percentage of workers paying no taxes and receiving no benefits is just one troubling dimension of the economic downturn in Latin America. Stagnant growth, falling investment, shrinking trade and rising unemployment have shaken even relatively stable countries such as Mexico. Argentina, once an example of the success of the free market, is near collapse, caught in a four-year recession and drowning in debt it has no hope of paying. As the formal economy's growth has lagged, fewer jobs are created, leaving workers no choice but to go underground. Latin America's economic growth dropped to about 2.8% during the 1990s, down from 3.3% in the 1980s. Those are disappointing figures for a region where the economy must expand at 4% to 5% annually to generate enough jobs just to keep up with population growth.

Bureaucracy is another big contributor to the growth of the underground economy, the IADB study found. Red tape hurts small-business owners when they try to register, said Donald Terry, manager of the IADB multilateral investment fund that makes loans to small businesses to legitimize them. The average registration process for a small business in Latin America requires 13 procedures requiring 92 working days to complete. "We found that in many countries the burdens and regulatory constraints in joining the formal economy are so substantial that most rational people decided not to join it," Terry said. The IADB is sponsoring several pilot programs in Colombia and Central America to try to shorten the procedures.

The outlook for Mexico, which up to now has withstood the global downturn better than other Third World countries, is darkening. The country's stagnant economy will have forced as many as 4 million workers to join the informal work force during this year and through 2002, said Macario Schettino, an economist at Monterrey Technological Institute's Mexico City campus. That figure includes the 2.8million workers entering the work force who can't find formal jobs, as well as 1.2 million who have lost or will lose their jobs by the end of next year, he said. Things are as bad if not worse in most of the rest of Latin America, where informal employment will only continue to grow. The region as a whole is expected to show as little as 0.5% growth this year, said Jose Antonio Ocampo, director of the United Nations' Economic Commission for Latin America and the Caribbean.

"The worst is the uncertainty over the future," Ocampo told reporters last week in Bogota, Colombia, adding that Latin America's economic crisis is the worst since the fallout from the Mexican peso crisis in 1995. The hope that free-market reforms would bring Mexico closer to First World status has so far been unfulfilled, said Julio Boltvinik, a professor of sociology at Colegio de Mexico in Mexico City. "The velocity of growth in Mexico has not been sufficient," Boltvinik said.

Appealing to Vendors' Civic Conscience

The success of the Merida pilot program lies partly in the streamlined process, reducing the average registration time to two days, down from 10 days, said Silvia Tenorio, head of taxpayer assistance at the regional office of Mexico's tax collection agency, known as the SAT. The program also includes an outreach function by which 15 employees spend part of their workweek in the street talking to vendors.

"At the end of the day, people register to avoid the bother of being searched for doubtful merchandise, or contraband. And we appeal to their consciences, telling them that by paying taxes they will see the benefit in better schools, streets and city services," Tenorio said. Once the vendors arrive at the Merida office of the SAT, they are shepherded through a registration process that takes a few hours at most. Documentation and the important identity cards are ready the next day.

Standing amid the citrus and squash piled high in her stall, oblivious to the passing multitudes on her busy street corner, Vuicob said she is trying to do her part by legitimizing her tiny operation. "Nobody forced me to register; I am just trying to conform," she said. "It's better now. Before they were always checking [for contraband ], always assessing fines or asking for a bribe. Now they leave me alone."

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