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The Informal Economy

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The Informal Economy MARCH 2004 • KRISTINA FLODMAN BECKER Fact finding study The Informal Economy Content Executive Summary ...................................................................... 3 1 Introduction ............................................................................... 5 2. Objectives of the study .............................................................. 7 3. The informal economy development, definitions and composition . 8 3.1 Development and growth of the informal economy..................... 8 3.2 How to define the informal economy ......................................... 10 3.3 How to measure the informal economy ...................................... 15 3.4 The informal economy in developing countries: regional differences....................................................................... 17 3.5 Especially exposed groups within the informal economy ........... 21 4. Informal enterprises ................................................................ 22 4.1 Obstacles faced by informal enterprises ...................................... 22 4.2 Transition from informality to formality..................................... 23 5. Examples of Policies, Strategies and Programmes aimed at the Informal Economy ............................................... 27 5.1 The Role of Governments .......................................................... 27 5.2 Examples of Government Policies and Programmes ................. 28 5.3 Examples of International Programmes ..................................... 31 5.4 The Role of Donors .................................................................... 32 5.5 Conclusions on policy and strategy development ....................... 34 6 The Informal Economy in Sida’s Policies, Strategies and Projects 36 6.1 Sida sector policies and strategies................................................ 36 6.2 Sida Country Strategies............................................................... 36 6.3 An inventory on the informal economy in five Sida partner countries .................................................................. 37 6.4 Examples of Sida projects targeting informal economy actors............................................................................. 40 6.5 The relevance of a strategy for the informal economy ............... 41 7. Main findings .......................................................................... 45 8. Recommendations .................................................................. 48 Bibliography ............................................................................... 49 Appendix .................................................................................... 52 1 Published by Sida 2004 Department for Infrastructure and Economic Co-operation Author: Kristina Flodman Becker Cover Photos: Agneta Sundgren Production: ORGUT Consulting AB Printed by Edita Sverige AB, 2004 Art. no.: SIDA3630en This publication can be downloaded/ordered from www.sida.se/publications 2 Executive Summary Since the “discovery” of the informal economy in the beginning of the seventies, many observers subscribed to the notion that the informal economy was marginal and peripheral and not linked to the formal sector or to modern capitalist development. Some continued to believe that the informal economy in developing countries would disappear once these countries achieved sufficient levels of economic growth and mod- ern industrial development. The informal economy can however no longer be considered as a temporary phenomenon. Furthermore, the informal economy has been observed to have more of a fixed character in countries where incomes and assets are not equitably distributed. It seems that if economic growth is not accompanied by improvements in employment levels and income distribution, the informal economy does not shrink. The situation is therefore that the informal economy is continuously increasing in most developing countries, even in rural areas. Estimates show that the non- agricultural employment share of the informal workforce is 78% in Africa, 57% in Latin America and the Caribbean, and 45–85% In Asia. In all developing countries, self-employment comprises a greater share of informal employment than wage employment. Specifically, self- employment represents 70% of informal employment in Sub-Saharan Africa (if South Africa is excluded, the share is 81% 1), 62% in North Africa, 60% in Latin America and 59% in Asia. Consequently, informal wage employment in the developing world constitutes 30 to 40% of the informal employment outside of agriculture. Over the last decades, it has become clear that the informal economy has a significant job and income generation potential. Therefore, appro- priate policy frameworks and strategies aimed at the informal economy must be developed, without hampering the potential of the informal economy for job creation and economic growth. The main challenge is thus to develop innovative and supportive policies that recognise the contributions of the informal economy and its workforce. As indicated in the Sida background document for PSD, “Making Markets Work for the Poor”, donors have principally devised support programmes towards the informal economy in the form of training programmes for entrepreneurs, technical assistance to enterprises as well 1 ILO, Women and Men in the Informal Economy, A Statistical Picture, 2002 3 as credit schemes. In particular the vast majority of the clients of micro finance programmes are informal economy actors. However, there is seemingly no consensus amongst donors on how to approach the informal economy, what the main problems are and how these could be resolved. An international best practice within this field therefore seems to be lacking. Nevertheless, during the 89th session of the International Labour Confer- ence in June 2001, one central statement was that “The fundamental chal- lenge posed by the informal economy is how to integrate it into the formal economy. It is a matter of equity and social solidarity. Policies must encour- age movement away from the informal economy. Support for exposed groups in the informal economy should be financed by society as a whole.” The steering documents for the Swedish development co-operation, such as the Government Proposition “Shared Responsibilities”, clearly state that measures regarding the informal economy should be taken as part of the necessary steps towards poverty alleviation. The relevance of addressing the problems of the informal economy is also stressed in “Perspectives on Poverty”, Sida’s analytical approach to poverty issues. Ensuring property rights and removing barriers to graduation from the informal to the formal economies of the economy are indicated as means of achieving poverty reduction through economic development. In addition, the informal economy is an issue of concern within Sida’s main areas of activity such as poverty, gender equality, health, HIV/ AIDS, democracy and good governance. Sida should therefore increase the knowledge of the informal economy within the organisation in order to address the problems at hand. There are Sida projects actually targeting completely or partially informal economy actors. However, in order increase project impact in relation to the informal economy, interventions must be very clear on what the target group(s) is (are). More differentiated target group analyses during project preparation, based on an awareness of the informal economy and its specific characteristics, would strengthen the positive effects of the projects in relation to the informal economy target groups. Moreover, because of the innate weakness of the informal economy actors, target group analyses are also important to avoid that interventions have negative effects, which may be the case if any specific groups or segments are overlooked. Sida has, in its background document for Private Sector Development, “Making Markets Work for the Poor”, already taken a major step towards identifying strategic areas of intervention aimed at informal economy actors. The next step for Sida should therefore not be to develop a strategy but to focus on the development of an operational approach in relation to the informal economy. As mentioned above, Sida could for instance con- duct direct surveys in partner countries to identify the actual priorities of the informal economy actors. Finally, as the rights perspective in the Government Proposition focuses on discriminated, excluded and marginalized individuals and groups, infor- mal economy actors evidently qualify for all of these denominations. They have limited voice as well as influence, which are fundamental rights for all. The underlying objectives of all Sida interventions aimed at the informal economy should be to make these invisible groups visible so that they can claim their rights as well as contribute to the development of their countries. 4 1 Introduction During 2002, Sida initiated the development of a private sector policy. According to the instructions for the policy development, Sida should among others highlight issues of relevance to the informal economy in its partner countries. In addition, the Private Sector Development working group is planning to conduct a seminar on the informal economy in developing countries. Within the framework of the current Private Sector Policy Development and in view of the future seminar, Sida has commissioned a consultant, Ms Kristina Flodman Becker, to provide a background for further discussions within Sida related to the informal
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