moreover, as illustrated by the Philippine case, given the relatively weak linkage demands emanating from a heavily protected urban formal sector, dominated by large-scale, vertically integrated industry, much of that inflow will end up in the services, the distributive trades, and other activities typically associated with VT. Combined with the effects of an unequal distribution of income on the demand side, under such circumstances we can expect the end of labour surplus to be much delayed, the size of VM to remain modest, and an expanding VT to have to continue to provide subsistence for growing numbers of poor households.
Our overall conclusions are as follows. First, it is important to decompose the informal sector into its modernizing and traditional components. Second, one should not write off the whole sector as a stagnant sponge, since its modernizing component may make an important dynamic contribution to the development process. Third, public policies should take the potential contribution of this sector into account and not favour F but instead be even-handed, especially with respect to credit, technology diffusion, infrastructure, and price interventions. Finally, while the informal sector may play an important role, once labour surplus in the economy has been eliminated, VT will disappear and VM should merge into F.
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