The Informal Economy: Here to Stay?

By Hussain, Atiya | International Trade Forum, October-December 2011 | Go to article overview

The Informal Economy: Here to Stay?


Hussain, Atiya, International Trade Forum


In the 1960s and 1970s, the informal economy was widely expected to shrink with economic growth. Yet in spite of strong global growth and a massive increase in international trade, informal activity appears all the more pervasive. It is now estimated that an average 60% of employment in developing countries is in the informal economy.

The International Labour Organization (ILO) defines informal labour as 'all economic activities by workers and economic units that are--in law or in practice--not covered or insufficiently covered by formal arrangements.' In 2002, the ILO concluded that the bulk of new employment in recent years, particularly in developing and transition countries, was in the informal economy.

The informal economy has traditionally been viewed as the last resort for workers who cannot find a job in the formal economy and must, nonetheless, earn a living. But the sector is diverse, notes Martha Alter Chen, who teaches at the Kennedy School of Government at Harvard University and coordinates the global research-policy network Women in Informal Employment: Globalizing and Organizing (WIEGO). It spans home-based producers, casual workers, street vendors, own-account workers and informal employers. Informal workers often produce, distribute or provide services for the formal economy.

The importance of the informal economy in developing countries is starkly illustrated by data from Africa, the continent with the highest concentration of least developed countries (LDCs). In sub-Saharan Africa, three out of four people are unofficially employed; the non-agricultural informal sector creates employment opportunities for 91.5% of women, compared with 70.7% of men.

Harmful to the economy?

Traditionally, a large informal sector is viewed as harmful to the economy. Concerns, from consumer and worker protection, and safety measures to hygiene and other standards, stem from the under-regulated nature of the informal economy. More serious concerns stem from the fact that capital intensity and productivity are considerably lower than in the formal sector. Evidence suggests, for example, that it is often the bigger and more productive companies that benefit from trade liberalization.

Perhaps the most troubling of findings about the informal economy is that it appears to keep the poor entrenched in poverty. Since no real productivity gains are created, the sector is, in effect, a drag on development as well as trade. A recent review of empirical studies suggests that low productivity growth along with income inequality eventually block access to capital, skills and markets.

Observers such as Anushree Sinha, who authored the study on trade and the informal economy for the ILO in October 2011, make a distinction between the dynamic potential of informal enterprises, made famous by Peruvian economist Hernando de Soto, and the low productivity of informal workers, who, whether employed by formal or informal companies, have little access to training or social and legal support.

The potential of the informal economy

Palatable or not, informal work lies at the heart of the employment challenge facing developing countries. LDCs alone will require 10.2 million additional jobs every year from 2005-2015, according to UNCTAD estimates. While the agricultural sector absorbed much of the surplus labour in the past, increasing urbanization and environmental pressures mean that this will no longer be the case. Moreover, in the wake of the global financial crisis, the world economy seems less favourably poised for growth. The profound fiscal and financial uncertainty in many major economies throws up questions for developing countries about the viability of the export-led development route focused on international markets.

'We really have to shift our thinking,' says Chen, who along with other WIEGO activists and researchers has been pushing to redefine informality to include not just enterprises that are not legally regulated, but also employment relationships that are not legally protected. …

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