Panels - The informal economy: views from academia

Chaired by Stephen Pursey, Cabinet of the Director General Alice Sindzingre, Senior Research Fellow, Centre National de la Recherche Scientifique, Paris, and Research Associate and Visiting Lecturer, School of Oriental and African Studies, University of London.

The academic debate on the concept of informality focuses on the definition and the dichotomy between formal and informal. There are conceptual problems with the vagueness and pluralities of definitions of the informal economy, as well as difficulty in measuring something that is not well defined, resulting in large variations in estimates.

There are also logical inconsistencies in terms of hierarchy and exclusiveness. For instance informality is often defined in terms of the criterion of a form which simultaneously coexists with a series of substantive criteria. Therefore the form (which is often a negative one) is at the same time defined as a set of features, which entails logical problems. The respective features of the informal, moreover, do not constitute necessary and sufficient characteristics that would unambiguously assign phenomena in either the formal or informal category. In addition, labour statisticians recognize the difficulty of drawing a formal-informal dichotomy.

Another logical problem is that informal activities may be defined as a sector, which is both a motive and an outcome of macroeconomic analysis and national accounts building. Informal may also refer to types of firm or of firm features. It may refer to employment. It may also be defined as an activity or a type of activity.

The formal-informal dualism represents a partition of the world into two and only two categories, with the formal being defined by default, by what is non-informal and vice-versa. Both categories are residuals of each other. Given that there are only two categories in this dualistic system, if the first category loses workers, the latter will necessarily arrive in the second category, as they have no where else to go.

Some characteristics that differentiate between the formal and the informal include:

• discriminative capacity of criteria - macro level differences vs. heterogeneous firms;
• the dichotomy formal-informal hides the dynamics of employment processes;
• the endogenous response to government regulation (informal disappears if it is relaxed);
• the unrecorded character of its activities, which is a continuum rather than a dichotomy;
• labour flexibility - some activities may involve both formal and informal contracts;
• low barriers to entry (skills, capital, credit, networks);
• low degree of organization;
• sometimes lower levels of income, but studies show large variations in earnings;
• skilled-unskilled more relevant, as globalization negatively impacts unskilled.

The meaning and relevance of the concept of informal has been significantly influenced by policy determinants. Donors see it as a political economy and governance concept. For governments it is linked to national accounts. In developing countries it relates to economic reform and possible roles in policymaking. International organizations have contributed to the shaping of the concept and the interest of the Bretton Woods institutions in the informal sector is related to accuracy of the calculations of GDP and growth, strengthening statistical services and taxation.

The concept of informality is less a dualism than a continuum in many ways:

• contracts, including informal arrangements and transactions;
• institutions (self-enforcing constraint vs. formal regulations);
• individual level (trade offs on norms according to situations, adherence to rules according to their credibility);
• within activities (multiple employment, entrepreneurs operating in both sectors households with members in both the formal and informal);
• between activities (unclear borders, market linkages, corruption, value chains).

The impact of globalization is dependent on the type of activity and type of economy. Rather than being issues of formal and informal, it is more about skilled and unskilled workers. Globalization will hurt the unskilled workers.

There are also unwritten, informal rules that can be more coercitive and even more complex than formal ones, especially where the state is not credible. However, they can also be more efficient because they correspond to local norms.

The debate today is that the informal economy covers very different objectives and complexities. There are as many concepts as there are situations and yet we use the same word to talk about very different realities and problems.

Ms. Flodman Becker prefaced her presentation by saying that her experience is what is seen on the ground in informal settlements, mostly in the cities, where informal economy operators are deprived of all basic economic rights and deprived of a voice. Although not all poor are informal, almost all of those who are informal are poor.

She has encountered prejudices in her work towards the informal economy which include perceptions that their activities are merely survivalist and not interesting, that the informal economy can never really contribute to economic growth, that people choose to be informal actors, or that they are involved in criminal activities.

However, in reality, the potential for entrepreneurship is substantial. Even with lack of supportive frameworks and insecurity of operations, the informal economy contributes to over 40% of GDP in Sub-Saharan Africa.

She gave illustrations of Harare, Lusaka, Nairobi and Addis where informal workers' shacks were destroyed - one of the extreme consequences of the way people in the informal economy have been viewed by governments and how unaccommodating the system is. Although most of them are providing services to informal settlements that are perfectly legal, these people are invisible. They are not included in any kind of decision-making. They are prevented from achieving their full economic potential and denied their economic rights as well as other basic rights.

However, with economic rights also comes economic power. So, negotiations between governments and different stakeholders would imply a shift of power. There must be political will to reverse the situation. Threats must be turned into opportunities. The alternative is exclusion.

The informal economy is now a priority within SIDA in private sector development policy and is increasingly being targeted as an intervention area in country strategies, using a rights-based approach. Great potential can be released by giving people rights.

However, along with rights goes responsibilities. The potential within the informal economy is tremendous. To build power, so that informal economy operators are not passive beneficiaries, but active contributors, is a long-term process, but not costly.

"The informal sector should not be romanticised as a permanent fixture of the economy or accepted as a catch basin of surplus labour. To do this is to perpetuate the duality between the formal and informal economies where a minority enjoys disproportionate access to resources while the vast majority, though anxious to participate, are excluded by virtue of decade-old policy biases" (Sandra Yu, Supporting the Informal Sector, 1994)

Dr. Dwight Justice, ICFTU, Multinational Enterprises Unit.
Mr. Justice recalled that we were talking about real people who are marginalized and exploited and why they get forgotten. There are some very real social and economic problems subsumed under the concept. The term "informal economy" was not discovered - it was coined to interpret a reality and make some sense of things. In fact, it has come to include many disparate things. Different problems and the need for different solutions are all being grouped together under this one term. It is not a good intellectual construct and does not lead to good policy.

However, the idea of a continuum also is not helpful, as it tends to cover up things that are not connected. The workers prefer the decent work deficits approach.

Informality is principally a governance issue, In the ILO we call that application of standards. We need to have a tripartite approach and focus on providing changes to legal and institutional frameworks. ILO sets the standards and governments need to uphold them. This is the only way that the ILO can make a difference.

Rafael Diez de Medina, Senior Economist, Policy Integration Department, ILO Mr. Diez de Medina reiterated that at the academic level the term informal economy has been extensively criticized and neglected as a concept, although he thought that this is due to lack of clarity in concepts and of empirical evidence supporting them. If one looks at Google, 89% of the hits on the informal economy come from the ILO. So, how are we addressing this? We need to be pragmatic. The informal economy exists, it is growing and it is an important feature of labour markets. Thus, we have to deal with it coherently and usefully, giving answers to policy makers and the different players..

The idea of a dichotomy is not really established as a concept, although the ILO and other institutions have been very active in trying to measure the informal sector in the best way, even when we need a more complex way to measure it because of the complexity of the group.

He said that the idea of the continuum is still very relevant as a guiding concept, despite of its limitations and possible critics. It recognizes the wide spectrum of issues and provides a way to approach them from different perspectives and policies. The ILO has broad experience in the field on these issues and has used that as a basis for designing a model of change. The model serves as a road map on how to deal with these complex issues and looks at it from a broader perspective than just the work being done by the ILO. It also identifies the need for partners in that work. And it focuses on poverty, even when it also acknowledges the existence of free riders in the economy. The goal is to move women and men up the continuum to decent work. We should address the vulnerabilities within the informal economy, trying to formalise it but bearing in mind that it can be very difficult to focus only on that. Prevention is other major issue. The Model of change is a tool to try to identify concrete actions to provide more rights, better jobs and better conditions in the informal economy. It is presented in a multi-media presentation in the knowledge fair.