The Size, Origins, and Character of Mongolia's Informal Sector During the Transition

Mongolia's informal sector has expanded far more quickly during the transition than its formal sector, largely because of greater ease of entry into the informal sector. Current policy discourages entry into the formal sector. The explosion of informal entrepreneurial activity during Mongolia's transition to a market economy represents one of the most visible signs of change in this expansive but sparsely populated Asian country. To deepen our understanding of Mongolia's informal sector during the transition, Anderson merges anecdotal experience from qualitative interviews with hard data from a survey of 770 informals in Ulaanbaatar, from a national household survey, and from official employment statistics. Using varied sources, Anderson generates rudimentary estimates of the magnitude of, and trends in, informal activity in Mongolia, estimates that are surprisingly consistent with each other. He evaluates four types of reasons for the burst of informal activity in Mongolia since 1990: ° The crisis of the early and mid-1990s, during which large pools of labor were released from formal employment. ° Rural to urban migration. ° The market`s reallocation of resources toward areas neglected under the old system: services such as distribution and transportation. ° The institutional environments faced by the formal and informal sectors: hindering growth of the formal sector, facilitating entry for the informal sector. Formal labor markets haven't absorbed the labor made available by the crisis and by migration and haven't fully responded to the demand for new services. The relative ease of entering the informal market explains that market's great expansion. The relative difficulty of entering formal markets is not random but is driven by policy. Improving policies in the formal sector could afford the same ease of entry there as is currently being experienced in the informal sector. This paper - a product of the Development Research Group and the South East Asia and Mongolia Country Unit, East Asia and Pacific - is part of a larger program of research on the impact of institutional changes in Mongolia, and on the rule of law in transition economies