Since its ‘discovery’ in Africa’ in the early 1970s, the informal economy has been the focus of much attention and debate. Recently, the debate has intensified as the informal economy has persisted and continues to grow in many contexts. A large share of the global workforce contributes significantly to the global economy while remaining outside the protection and regulation of the state.
At least half the workforce in most developing countries is informally employed. In some countries, if the agricultural sector is taken into consideration, the share can reach as high as 90 % of the workforce.
There are many perspectives on the informal economy, ranging from those who perceive it as illicit involving illegal workers and ‘employers’, to those who see it as comprised of the working poor seeking to secure their livelihoods.
Professor Martha Chen is the International Coordinator of the Women in Informal Employment: Globalizing and Organizing (WIEGO) network. WIEGO is a global action-research-policy network that seeks to improve the status of the working poor in the informal economy, especially women.
Professor Chen is participating in a High-Level Panel at the European Development Days 2012.
Can you describe the informal economy? There are many definitions and preconceptions of what it is, how large it is and who it involves.
Martha Chen: Historically, the informal economy was conceived of as informal enterprises and entrepreneurs that operate outside the regulation of the state. But this enterprise-based conceptualisation of the informal economy did not incorporate wage employment that also falls outside the regulation of the state. Over the past decade, the International Labour Office (ILO), the international Expert Group on Informal Sector Statistics (called the Delhi Group), and the global network Women in Informal Employment: Globalizing and Organizing (WIEGO) worked together to broaden the concept and definition to incorporate certain types of informal wage employment that had not been included in the earlier concept and definition.
The expanded definition focuses on the nature of employment in addition to the characteristics of enterprises and includes all types of informal employment both inside and outside informal enterprises. This expanded definition was endorsed by the International Labour Conference (ILC) in 2002 and the International Conference of Labour Statisticians (ICLS) in2003. In1993, the ICLS had adopted an international statistical definition of the informal sector to refer to employment and production that takes place in unincorporated small and/or unregistered enterprises.
So defined, informal employment is an important phenomenon – it comprises more than half the workforce in all developing regions and 80 % in some regions. As a share of non-agricultural employment, it is highest in South Asia (around 80 %) followed by East and South-East Asia (65 %) sub-Saharan Africa, (66 %); Latin America (51 %); and MENA (around 45 %). In Eastern Europe and Central Asia, informal employment represents 11 % and in urban China, about 33 %. If you add agriculture, these numbers become much higher, for example, representing 94 % of total employment in India and 90 % in Ghana.
Evidence shows that the informal economy is growing, not shrinking, despite the growth in formal employment. This is because the labour force is growing faster than formal jobs and people are leaving the agricultural sector for cities where they eke out a living in the informal economy if they do not find formal jobs. In addition, in developed and developing countries even those in formal jobs in the public and private sector are beginning to be hired under atypical arrangements. Once an employer does not contribute to social protection, i.e. pensions and healthcare, an employee is considered to have an informal job.
To reduce labour costs, many formal firms hire workers under informal employment relationships. In most such cases, it is the formal firm, not the informal worker, that chooses or ‘volunteers’ to operate informally and enjoys the ‘benefits’ of informality.
According to the Organisation for Economic Co-operation and Development, ‘informal is normal’. Consider self-employment. It is the new informal and it is growing. This includes the self-employed who are not informal; those who hire other self-employed workers; and those who are own-account operators.
The legal framework in most countries does not match the reality of work today. All labour and employment laws are premised on a recognised employer-employee relationship, which only applies to a small share of the workforce. Both informal enterprises and the informal workforce need to be valued for their contributions and integrated into economic planning and legal frameworks.
What are the most important linkages between the informal economy and the formal economy and the formal regulatory environment?
Many observers blur the distinction between linkages with the formal economy – that is, with formal firms – and with the formal regulatory environment. There are many linkages and they are intricate.
Formal enterprises hire informal workers and informal firms are linked to formal firms, particularly in a subcontracting situation. There are backward and forward employment linkages. For example, in the garment industry in China, there is a formal firm making clothing, but a cluster surrounds it consisting of informal firms producing thread, buttons and trim.
Then there is the situation of a small informal enterprise, which is part of the value chain of one lead company. There are various links in the chain. An example is a brand name company in Canada that outsources production to Hong Kong whose suppliers in Canada sub-contract production to home-based workers. These are examples of backward linkages.
An example of a forward linkage is a street vendor who buys chewing gum from a formal firm and then sells it on the street. That vendor is part of the distribution chain of a formal firm. But he or she is an informal worker.
There is increased recognition that much of the informal economy today is integrally linked to the formal economy and contributes to the overall economy; and that supporting the working poor in the informal economy is a key pathway to reducing poverty and inequality. And there is increased recognition that women tend to be concentrated in the more precarious forms of informal employment, so that supporting working poor women in the informal economy is a key pathway to reducing women’s poverty and gender inequality.
Many argue that excessive regulations create barriers and costs to working formally. But over-regulation not only raises barriers to working formally, but also raises costs to operating informally. The regulatory environment often overlooks whole categories of the informal economy.
There has been a good deal of deregulation in recent years, not only in financial markets but also in labour markets. Deregulation of labour markets is associated with the rise of ‘informalisation’ or ‘flexible’ labour markets. In today’s global economy, many wage workers are caught between two contradictory trends: rapid ‘flexibilisation’ of the employment relationship (making it easy for employers to contract and expand their workforce as needed) and slow liberalisation of labour mobility (making it difficult for labour to move easily and quickly across borders). When it comes to labour market regulations, as with financial market regulations, the question should not be whether or not to regulate. The question should be about deciding what regulations are appropriate.
A missing regulatory environment can be as costly to informal operators as an excessive regulatory environment. For example, city governments around the world tend to adopt one of two stances towards street trade: trying to eliminate it or turning a ‘blind eye’ to it. Either stance has a punitive effect: eviction, harassment, and the demand for bribes by police, municipal officials and other vested interests. Around the world, few cities have adopted a coherent policy – or set of regulations – towards street trade. Most cities assign the ‘handling’ of street traders to those departments – such as the police – that deal with law and order
Over-regulation, deregulation and lack of regulation are not ideal for the informal workforce or the economy. We need to rethink regulations to determine what regulations are appropriate for which components of informal employment.
It is important to recognise that sector-specific regulations affect the informal self-employed in those sectors and are often biased in the interests of formal firms. There is a need to rethink both commercial regulations and labour regulations to match the realities of informal self-employment and informal wage employment, respectively. Finally, there is a need to recognise the contradiction inherent in calling for regulation of informal enterprises (that is, formalising informal enterprises) and deregulating labour markets (that is, informalising employment relationships).
We need sector-specific rules that are not punitive and that provide formal benefits. Most informal workers are typically willing to comply, but why should they take on the costs of compliance if they are not being supported? It is the larger firms that get the tax breaks. Many neo-classical economists argue that labour regulations are negative, distort markets and constrain economic growth. But the World Bank reports that labour regulations are number11 interms of binding constraints on business.
Our models are too simplistic. A lot of rethinking is needed around these issues.
Are women more at risk in the informal economy?
What we know from our research is that women are over represented in the informal economy – a larger share of women than men are informally employed. This doesn't mean the majority of informal workers are women, but it's because women’s labour force participation is typically lower than men’s.
We tested our multi-segment model with data in a number of countries and we find the same thing everywhere – women are under represented in the top earning part of the informal economy and over represented in the least earning parts. The share of informal employers and employees is lower for women than men. Women perform a lot of industrial outwork.
We need to be mindful of this in policies and interventions.
There is controversy over whether to ‘formalise’ the informal economy. Is this possible given the diverse nature of the informal economy?
Again it is a very complicated issue. When people talk about formalising the informal economy, I ask them, ‘Are you going to create jobs? Are you going to register and tax all of the informal enterprises and workers? What do the informal workers want in return and what are you going to give them?’
The formalisation debate should be turned on its head by recognising that ‘formalisation’ has different meanings for different segments of the formal economy. In addition, it is unlikely that most informal producers and workers can be formalised, although efforts should be made to do so. Most bureaucracies could not handle the volume of license applications and tax forms from businesses, nor could they offer informal businesses the incentives and benefits that formal firms receive. In addition, there are not enough jobs to go around and today’s employers are more inclined to convert formal jobs into informal ones.
In a development context, when considering policies to ‘formalise’ the informal economy, it is important not to think about the informal sector as ‘criminal’, which justifies not doing what you would do for formal enterprises and workers.
What is the appropriate policy response?
There are many good examples of favourable policy responses. Groups in the ethical trade movement are looking at labour relations in global production, particularly in hiring practices.
Self-employed people definitely need a better regulatory environment. What are the rules about who can sell where on the streets; or selling fresh and cooked food – are they biased? If you are a waste collector can you bid for a waste contract? Who can fish where? What about forest gatherers? Every sector has rules and regulations and those are what bind people. Most of the existing rules are biased towards the formal private sector.
There are four pillars of a comprehensive policy framework. First, create more jobs. Second, register informal enterprises and regulate informal jobs. Third, extend social protection to informal workers, particularly the working poor. Fourth, increase the productivity of informal enterprises and the income of the informal workforce by creating a favourable policy environment, improved terms of trade, appropriate legal frameworks, and protection against risk and insecurity.
These are the policy responses. The challenge is how to do it.
There is obviously a role for governments, but what about other stakeholders? How can they become engaged?
A major actor is the private sector, including the hiring practices of firms. There is a strong role for NGOs. Informal workers need organisation and representation. This is an issue that affects all segments of society because of the strong links between the informal economy and poverty as well as with growth.
Not all informal workers are poor, nor are all working poor engaged in the informal economy. But there is significant overlap between working in the informal economy and being poor. This is because the quantity and quality of employment available to women, men, and households significantly affect whether they are poor.
The informal economy is often associated with low productivity, but it makes a contribution to economic growth – one that is increasingly significant for high-income and low-income, countries. In many contexts, informal enterprises and workers are less productive than formal ones. But to improve individual earnings, household incomes, and overall growth, there is a need to explore what ‘productivity’ and ‘productive growth’ mean in the informal economy, and to rethink the definitions and measures of productivity.
Are there models where urban policies, regulation and planning have protected informal workers?
Formalisation of the informal economy can and should take different forms, including: shifting informal workers to formal jobs; registering and taxing informal enterprises; providing business incentives and support services to informal enterprises; securing legal and social protection for the informal workforce; recognising the organisations of informal workers and allowing their representatives to take part in rule-setting, policy-making, and collective bargaining processes.
But the limits to formalisation need to be understood. First, it should be recognised that formalisation is not a one-time process involving a specified set of steps. Rather, formalisation should be seen as a gradual ongoing process involving incremental steps and different dimensions leading towards varying degrees and types of formality.
Second, it should be recognised that formalisation will not proceed quickly or automatically for all those who choose to formalise. The bureaucratic procedures and incentives for registered informal businesses need to be retooled and streamlined. Labour standards and benefits for informal workers need to be carefully negotiated by employers, workers, and government.
Third, it should be recognised that formalisation will not be feasible or desirable for all informal enterprises or all informal wage workers. Rather, it should be assumed that many informal enterprises and informal wage-workers will continue to do what they do and remain informal or semi-formal (at least in some dimensions) for the foreseeable future.
A good example is the street vendors and barrow operators in Durban, South Africa at the Warwick Junction, site of the Early Morning Market. In South Africa, one-third of all economically active persons are engaged in the informal economy and in urban areas, nearly 30 % of all informal workers are involved in trade. More than 8 000 street and market traders are active at the Warwick Junction Early Morning Market, which was set to celebrate its 100th anniversary in 2010.
This market was considered an example of best practice of street vendor management and support because of the high levels of consultation with the street vendors. This resulted in a high level of self-regulation and a sense of ownership of the area by the street vendors.
In February 2009, to everyone’s surprise, the Durban/eThekwini Municipality announced its plans to grant a 50-year lease of public land to a private developer to build a shopping mall on the site of the Early Morning Market. The plans called for a redesign of the whole district, ensuring that foot traffic, estimated at 460 000 commuters a day, would be directed past the mall rather than the informal traders at the Early Morning Market.
There was a groundswell of opposition to the proposal. A major civil society campaign opposing the development was launched. Street trader organisations were supported by the Congress of South African Trade Unions and the South African Community Party. Durban is also the headquarters of the international alliance of street trader organisations – StreetNet. Civil society groups meet regularly under StreetNet. In this campaign, they were joined by urban practitioners and academics who wrote letters to the press, arranging public debates and giving technical assistance, including advice on environmental impact assessment processes, heritage legislation, urban design and architectural inputs. Centre to this campaign was a series of legal cases pursued by a public interest, non-profit law firm, the Legal Resources Centre.
Central to the case was challenging the process that the municipality used to award the contract to a private real estate developer, drawing on administrative law. This involved close scrutiny of council documents requested by the legal team.
In April 2011, the municipality rescinded its 2009 decision to lease the market land for the mall development – a major victory for the traders. It is unlikely the case would have been won on the basis of socio-economic rights alone. But civil society input was key to the legal case.