An Essay on the Informal Sector

I realize that it has been a long time since I’ve posted anything on this site and I hope to amend such an absence with more frequent postings but I would like to share some recent and very topical investigations into the Informal Sector in my forays into theory regarding Globalization. So without further ado:

The Specter of the Informal Economy:
Perspectives on How to Define and Confront Late Capitalism’s Greatest Challenge

The Informal Sector is now and undeniable force in the economies of developing nations around the world. Yet opinions on how to reintroduce these unregulated and untapped markets are confined to old models that put the emphasis on innovative legislation that establishes a conducive environment for a healthy and renewed privatized formal labor market that can incorporate the masses of urban poor that have thus far been excluded. This paper will explore the findings of Kristina Flodman Becker in “The Informal Economy” written for Sida, and “The Informal Sector Revisited: A Synthesis Across Time and Space” written for the World Bank’s Social Protection Discussion Papers who represent the proponents of the Globalization project, and Davis’s scathing polemic Planet of Slums.
The concept of the Informal Sector as now contemporaneously understood by economists was first introduced by anthropologist Keith Hart in 1971 according to Bekkers and Stoffers (1995) while Davis, dates the term at 1973. This massive umbrella term to explain the world’s working population that exists beyond the regulation, control, and protection of the government has been, quoting Hernando de Soto, likened to an elephant: “we may not quite be able to exactly characterize its true nature but once we see it we have no doubt what is in front of us. (Mead and Morrison 1996). In general terms, The Informal Economy, (a term which encompasses all interconnected aspects that contain the Informal Sector) is the “non-formal formal portion of the market economy that produces goods and services for sale or for other remunerations” whose activities exist beyond formal arrangements. It should not be confused with criminal economies, such as human and drug trafficking and it is distinct from the traditional sector, which entails agriculture.
The Informal Economy arises and grows when the labor market cannot sufficiently generate jobs for a mushrooming and unskilled population. This discrepancy is further exacerbated by overregulation and excessive taxation imposed by oppressive and rigid governments. While previously thought to be a temporary and inconsequential phenomenon, due to the financial crisis of the 1980’s, the Informal Economy exploded to massive proportions that rendered the formerly marginal sector undeniably permanent. In Davis’ exposé on the Informal Sector entitled “A Surplus Humanity?”, he asserts that, according to his estimates, it is a total one billion strong, “making it the fastest-growing, and most unprecedented, social class on earth.” To give an idea of the extent of this phenomenon, in Africa, “informal work during the past decade is estimated to have accounted for almost 80% of non-agricultural employment, over 60% of urban employment and over 90% of new jobs.
As more research has been done regarding the Informal Sector, it has become increasingly clear that it constitutes a significant portion of the economic activity of developing nations. According to the findings of the ILO , “the average share of the informal enterprise sector in non-agricultural official GDP varies from a low of 27% in Northern Africa to a high of 41% in Sub-Saharan Africa. The contribution of the informal sector to GDP is 29% for Latin America and 41% for Asia.” These incredible statistics are further corroborated by the findings of the World Bank: “…Charmes (1990) finds evidence that the informal sector worker generally contributes to GDP over and beyond the minimum wage. Furthermore, Charmes (1990) suggests that generally, productivity in the sector is much higher than average per capita GNP in the economy.”
Yet, while the Informal Sector is clearly a major component in the economies of developing nations, it provides no real opportunities besides sustaining survival. The real question is how to lift the participants of the Informal Sector back into the Formal realm. Such a transition is obstructed by issues in poor infrastructure, weak institutions, lack of access to formal training and schooling, limited financing and access to capital, restrictive or cumbersome taxation systems and the absence of basic, necessary technologies. In the context of the framework of Swedish development co-operation, the Swedish Government proposition “Shared Responsibilities” of 2002/03 states that:
“by creating opportunities for (…) the poor to fully contribute to economic development, economic growth will be an efficient tool for the fight against poverty. The informal sector is often decisive for a large part of the income of the poor (…). How to integrate it in the formal sector is an important challenge for economic policies.”

One would think that the response by the international community of economists as to how to integrate the Informal Sector back into the fold of the government would be more complex, but the very basic premise is that innovative legislation must be enacted with sensitivity towards the demands of the impoverished in order to create an economic climate that is conducive for a more healthy formal labor market. The Sida study concludes that:
“(…) in a perfect world, there would be few advantages of remaining outside the formal national economy. Taxes and fees would be reciprocated by adequate service delivery from the part of Government and access to proper and relevant institutions. Therefore, the more complex and unfavourable the institutional framework is, the greater becomes the
incentive to remain informal. “
Such a statement basically perceives the government as the “architect of a positive enabling environment” and is hopeful that where the Formal Sector woefully failed, with new, favorable and innovative legislation, privatization will finally fulfill its role of providing for the countless people currently subsisting in poverty. This can be achieved for example, by broadening the definition of what a worker is and extending registration with new, inclusive laws. Also relaxing stringencies regarding access to credit and to establish government agencies dedicated to providing the necessary legal and organizational framework for incorporating the informal sector has been successful in the policies of India, Kenya, South Africa and China.
Yet such simple resolutions provided by dominant economists seem antiquated considering Informal Sector has emerged to offset the destructive policies of the very Structural Adjustment Policies imposed by the IMF in the pursuit of “fiscal austerity.” The ingenious improvisation of slum dwellers to create a livelihood beyond the management of decrepit and corrupt governments of developing nations is not the saving grace of these struggling nations as a platform back into the Formal Sector. Given that it is beyond the control of regulatory legislation that maintains humane standards within the workplace, the Informal Sector is rife with exploitation and “ensures the abuse of both women and children.” In Saharan Africa alone, the informal economy represents 92% of the total job opportunities outside of agriculture of which women perform nearly all of these jobs. The Informal Sector is characterized by horrific conditions as evinced by several different accounts executed by the Human Rights Watch cited by Davis in which children were abducted for labor, paid obscenely meager wages and toiled in extremely dangerous circumstances.
Neoliberal globalization has clearly dissolved traditional forms of production without providing access to the formal labor market.(Challenge pp 40, 46; Thomas Mitchein, Henrique Mirandam and Mariceli Paraense,……) Thus the majority of those who survive on the outside must improvise through unregulated enterprises but will not, as Davis argues in contrast to the hopes of Sida and the World Bank reports, in fact ever gain entrance into the formal sector. Altogether constitute two fifths of the economically active population of the developing world. (Challenge)
Davis postulates that the Informal Sector is not a graduation into the formal sector and that the unregulated market is the conversely the destination for redundant private workers and “sacked” public employees who have been pared away by SAPs. Upward mobility is simply “a myth inspired by wishful thinking” William House, in his case studies of Nairobi’s slums, proposes a distinction between micro accumulation and bare poverty. According to his model, the dichotomy between informal and formal sector is inadequate, and further distinction must be taken into account of a pool of untapped “dynamic entrepreneurs” and much more vast of unemployed labor with insufficient resources and training to ascend out their economic straits.
Another reason why the bootstrap ideology that the informal sector will lift itself out poverty given the conducive environement is unfeasible is because, as observed by Frederic Thomas in Kolkota, new jobs are generated but instead existing positions are fragmented and hypercompetitive. (Thomas, Calcutta p114) Furthermore, while micro-lending is helpful to enterprises that have a basic framework for business, according to Serajul Hoque’s study in the Journal of Contemporary Asia “Micro-credit and the Reduction of Poverty in Bangladesh” micro-credit has had little macro impact on actually reducing poverty because they have no real changes of accumulation beyond survival.
In response to the inadequacies of both the informal and formal sectors to provide basic living conditions for subsistence, it has been observed that people of Kinshasa have resorted to “villagizing” their urban slums, thus returning to traditional means of living by producing their own food in vacant lots. (De Boeck, “Kinshasa” p266)
Davis’s cynicism reaches its ultimate pinnacle with the final chapter of his book, and with the evidence he provides, pronounces the Globalization a failed project. While he is clear that the one billion people that constitute the informal economy are trapped within their seemingly hopeless situation, Davis provides no answers or clear alternatives to late capitalism’s most pressing quandary. Instead, he paints us a defeated portrait of a future world distinctly segregated between the privileged and the inevitable world of terrible slums that is strangely redolent of contemporary anarchist literature. He leaves us at a crossroads between pressing forward to continue the trajectory of progress through innovation or dystopian polarization between the world’s classes. Yet, by providing no resolution or creative option, he maintains the dominant narrative posed by the forces of Globalization that the poor will indeed lift themselves from the oppression poverty once the conducive environment is established.

Niels-Hugo Blunch , Sudharshan Canagarajah, Dhushyanth Raju “The Informal Sector Revisited: A Synthesis Across Time and Space” (The World Bank, 2001) P3
Becker, Kristina Flodman. “The Informal Economy” (Sida, 2004) P11
Becker, Kristina Flodman. “The Informal Economy” (Sida, 2004) P5
Planet of the Slums P179
Planet of the Slums P178
J. Charmes, cited at Women in Informal Employment: Globalizing and Organizing (WIEGO), Second Annual Meeting, Cambridge, Massachusetts, 22–24 May 2002
ILO, Women and men in the informal economy – a statistical picture, 2002
Becker, Kristina Flodman. “The Informal Economy” (Sida, 2004) P19
“The Informal Sector Revisited: A Synthesis Across Time and Space” P7
Becker, Kristina Flodman. “The Informal Economy” (Sida, 2004) P22
Becker, Kristina Flodman. “The Informal Economy” (Sida, 2004) P6
Planet of Slums P181
ILO,Decent work and the informal economy, International Labour Conference 90th session, 2002
Planet of Slums P178
Jan Breman, The Labouring Poor: Patterns of Exploitation, Subordination, and Exclusion, New Delhi, p 174
Planet of Slums P180
Planet of Slums P181
Planet of Slums P183
Planet of Slums P194


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