The Informal Sector: Legalization or Laissez-Faire?
Maldonado, Carlos, International Labour Review
It is an undisputed fact that the informal sector is a growing and increasingly complex phenomenon in the economic, social and political life of many developing countries. In Latin America, this sector accounted for 83 per cent of the 10.1 million jobs created between 1990 and 1993;(1) in Africa, two out of three city-dwellers already earn their living in this "survival sector", which is expected to generate 93 per cent of additional urban jobs in the 1990s.(2) The promotion of this sector is one of the main issues in development policy today.
With the adoption of structural adjustment policies and the revival of neo-liberal doctrines in the 1980s, two opposite and controversial positions emerged with respect to this sector. On the one hand, there were the advocates of stricter control over the conditions for engaging in informal activities in order to guarantee a return on investment in modern enterprises, given the threat of unfair competition from the informal sector (this view was very widespread in Africa, as a result of the decline of the regulatory role of the State). On the other hand, there were those who believed that the legislative and administrative system must be thoroughly reformed in order to free the initiative and economic potential of microenterprises (the approach adopted by the neo-liberal reform movement in Latin America). Both of these perspectives are reflected in the ILO's Employment Policy (Supplementary Provisions) Recommendation, 1984 (No. 169), which calls for recognition of the importance of the informal sector as a source of jobs (27(1)), but simultaneously calls on countries to "seek progressively to extend measures of recognition to the informal sector", though it recognizes that integration of the informal sector may reduce its ability to absorb labour and generate income (29 (2)).
The legal status of informal establishments, their relationship to the State and the role of public institutions are therefore of major importance. However, what is informal and what is legal depends on the local situation, which itself varies considerably. What in fact are the realities behind the alleged "illegality" of the informal sector? Is the inadequate regulatory approach of the existing institutional framework the only reason for illegality? Are the underlying causes to be found elsewhere than in the legislation? Is it due rather to the unfavourable structural position of small-scale producers? Should the problem of entrepreneurs' lack of information and of their negative perception of laws and institutions also be taken into consideration?
To reply to these questions, it is important not only to gather empirical information enabling an assessment of the extent to which tax regulations and labour legislation are observed, but also to anticipate the impact that strict compliance with such rules would have on the distribution of income, investment, the level of production and employment of enterprises in the informal sector. Those effects need to take account of how far they currently operate within the law, of their size, location and the branch of activity in which they operate. Several studies have been carried out in about 20 countries by various institutions with different analytical perspectives, to assess the conditions in which regulations are applied, as well as the repercussions of institutional and legal constraints on the creation, operation and development of informal activities.(3)
This article will first examine the hypotheses that explicitly or implicitly underlie the studies conducted on this question. A summary will then be made of the findings of studies conducted by the Instituto Libertad y Democracia (Lima), by the ILO Regional Employment Programme for Latin America and the Caribbean (PREALC), by the Organization for Economic Cooperation and Development (OECD) and by the International Labour Office (ILO). Finally, the results will allow conclusions to be drawn on the relative validity of the various initial hypotheses, on the policy implications and on future research. …