V-goods and the Role of the Urban Informal Sector in Development
Gustav Ranis and Frances Stewart
The informal sector typically accounts for a high proportion of the workforce in developing countries. It is often described as a low-productivity backwater 'sponge' which absorbs those who can't find productive employment in the rural areas or in formal urban activities. In contrast, others suggest that the sector can make an important and indeed increasing contribution to production and income generation.1 The purpose of this paper is to advance this debate by taking a closer look at the sector itself and analysing its relationships with the rest of the economy.
There is, of course, a vast literature on the urban informal sector, much of it devoted to the question of how to define the animal.2 Some define it with reference to its legal status--i.e. the informal sector comprises all activities that fall outside the reach of government regulations (e.g. de Soto 1988). Others define it mainly in terms of the size of establishments, broadly covering micro enterprises of less than ten workers. Still others emphasize the use of simple, traditional technology. Many, including the ILO Report on Kenya ( ILO 1972), adopt elements of each of these definitions. In this paper we shall spend little energy on definitions. Our main focus mill be on establishments of 10 or fewer (mainly family) workers; although, in some contexts, some of these establishments might well be classified as formal by some of the above criteria, the pursuit of very precise definitions is not critical to our analysis and would not be particularly productive.
In Section 2 we analyse the determinants of the overall employment level of the informal sector at any point in time in a macroeconomic context. In Section 3 we elucidate some important features of the urban informal sector, dividing it into a traditional component which provides a living for those not absorbed elsewhere, and a modern component, which is largely
We are grateful to Kate Raworth, Niall Kenward, and Ryan Schneider for research assistance and to Giorgio Barba Navaretti for comments.____________________