A case for formality and a comprehensive social security system

Much had already been said about the ramifications of shutting the economy down on the workers of the informal sector during the earlier days of the lockdown and with each passing week, the effects became evident through numerous reports and incidents. Indeed many saw the crisis as an opportunity in the sense that perhaps sweeping reforms will be made that addresses the existent flaws. The crisis is what can be termed as a critical juncture, a term used by Robinson and Acemoglu in their book Why Nations Fail, which explains a scenario in which instability leads to sweeping institutional reforms. One can only be hopeful that such sweeping reforms take place in the years that follow and although there may be many reforms that are to take place, the one that undeniably has to take the center stage and perhaps has been reflected throughout the crisis is the formalization of informal workers and addressing the flaws in our existent social security system.


During the initial days, it became clear that the relief packages announced by the government mostly applied only to the formal sector, more so the ones that were targeted at the informal sector in the days to follow revealed themselves to be tainted with opportunistic behavior on part of the government and even the general citizenry. In addition to this without access to any form of social insurance owing to their informal nature, their plight worsened as the days passed. The series of events reflects the failure of the government to formalize a major chunk of the labor market; moreover, it also leads one to think about the reason for such failure.
While with each successive budget, the tax base is broadened to include more and more people, a fundamental flaw however is often ignored. This flaw concerns itself with the cumbersome procedures and a complex system of taxation that is hard to contemplate for a layman. Equally important is the ignorance of the fact that a transition mechanism that includes a separate regime for the informal sector in the initial days of formalization is required, has without doubt led to the slow process of formalization. Evidence of this regard can be found in the practice adopted by France and Panama, and other nations that have been successful in formalizing the economy. On a similar note, very little focus has been given on the collection of data, which as a result of federalism and the existence of local governments has indeed become easier.
On the backdrop of the current pandemic, it has also become evident through numerous scholarly writings that during times of supply shocks due to exogenous factors, fiscal stimulus does very little to address the crisis. The reason that follows is simple; fiscal stimulus might not reach the most affected sector and for that matter, a comprehensive system of social security works better in that it covers all individuals in a society and offers a form of cushion owing to the resulting unemployment. It thus also becomes essential to examine the current social security regime in Nepal.
The current social security system in Nepal which is based on contribution is in reality monopolistic in nature and the absence of any other form of competition from other firms runs the risk of being inefficient. Equally important are other flaws existent in the system, which include the high level of contribution on part of the employer, the failure to distinguish between the several categories of employees, the failure to acknowledge the existence of other forms of insurance schemes addressing the same kinds of coverage given by the social security regime.
Before 2018, there were no restrictions on the operation of a social security scheme by a private entity, however, after 2018, the provision of mandatory registration of all employees and employers with the Social Security Fund imposed an implied restriction on the operation of such social insurance by other entities other than the fund itself thereby creating a monopoly in the social insurance market. Moreover, it took away the ability of the individual to assess and choose the most suitable form of protection applicable to him/her (provided all information was easily accessible) and the application of the same standard for everyone an imperfect system was created, one that could, in reality, lead to tax evasions, reduction in wages to cover for the increased premium to be payable by the employer and more importantly a transformation of the formal sector itself to the informal sector.
Both these problems become essential to address because it is not the last health pandemic the world is going to see and neither is it the last economic crisis that the world will see. More essentially, an opportunity exists largely because empirical studies now can be carried out that deal with the impact of economic shocks and health pandemics on the informal sector and validate the existing notion of the need for formalization. In a related vein, the problems existent in the social security system can also be validated and with greater evidence than before, an opportunity for reform thus exists because flaws have become far more evident than they were before.

Yatindra KC

Yatindra KC

Yatindra KC is a researcher at Samriddhi Foundation. His background in law gives him a sophisticated grasp of the many legal aspects associated with the political and economic development of the nation. His real passion comes from his zeal to improve the policy landscape of Nepal through evidence-based policymaking. For the same, he started his career by practicing his legal knowledge in identifying the issues and challenges in many acts and regulations of Nepal that has been hindering its growth. Today, he can be addressed as a proficient youth who through his research has gathered immense knowledge in areas like land management, ICT development, and public transport management. In his efforts to advocate for a better Nepal, he also engages himself in writing blogs and articles on contemporary economic and political issues.