sustainable markets The Informal Economy A primer for development professionals on the importance of the informal economy in developing countries Muyeye Chambwera, James MacGregor and Antonia Baker International Institute for Environment and Development 3 Endsleigh Street, London WC1H 0DD Tel:-+44(0)207 3882117 Fax:+44(0)207 3882826 www.iied.org For further information please contact Muyeye Chambwera [email protected] Could the informal economy be the route to deliver the big sustainable development ideals such as the Green Economy, Millennium Development Goals and Poverty Reduction Strategies, given that its share is rapidly increasing and that the poor mostly operate here? In some developing countries, the share of the informal economy is greater than that of the formal economy. Government planners, donors and NGOs could use the informal or the formal economy to help lift up the wellbeing of the poor and address global challenges such as climate change, but choosing one over the other could lead to most efforts missing the mark. Planning food security, agricultural development, climate adaptation, low-carbon development, and housing requires a careful consideration of the current and future role of the informal economy. In attempting to answer questions about whether or not the informal economy is an impediment to development, whether it should be eliminated or promoted, we realise that the informal economy is not fully understood, is not clearly separated from the formal economy, is difficult to measure and does not necessarily imply illegality. These are among the 10 key messages that this paper raises for development professionals operating in any sector, in developed and developing countries. First published by International Institute for Environment and Development (UK) in 2011 © International Institute for Environment and Development. All rights reserved International Institute for Environment and Development 3 Endsleigh Street London, WC1H 0DD www.iied.org [email protected] Designed by Eileen Higgins [email protected] Printed by Park Communications www.parkcom.co.uk Cover image © Chris Stowers / Panos ISBN: 978-1-84369-822-7 Product code: 15515IIED Please recycle Disclaimer: This paper represents the view of the author and not necessarily of IIED. The International Institute for Environment and Development is one of the world’s top policy research organisations working in the field of sustainable development. With its broad based network of partners, IIED is helping to tackle the biggest issues of our times — from climate change and cities to the pressures on natural resources and the forces shaping global markets. Introduction On first hearing the phrase ‘informal economy’ (IE), most people think of illegal activities, such as trading in drugs or prostitution, paying bribes or avoiding taxes. As such, it is often regarded as something that should be eliminated in pursuit of a formal economy (FE). Without much analysis, one can even assume that the IE is a transitional route to formality as economies grow and regulation becomes stronger. Yet, reality seems to confound these expectations, at least in the short- to medium-term. The IE currently accounts for over half of global employment and as much as 90 per cent of employment in some of the poorer developing countries. Due to its flexible nature, the IE is in some ways better able to adapt to difficulties such as the current global recession, providing some measure of support to those most in need. Since it provides employment and income for the most impoverished – particularly women – it is a key route to achieving the millennium development goals (MDGs) of eradicating extreme poverty and hunger, promoting gender equality and empowering women. As such, some governments are beginning to become more aware of the vital role the IE plays, especially for the most vulnerable. Because of this awareness, some now look to policies that support the IE to © Muyeye Chambwera 1 The informal economy currently become more productive, provide a better voice in governance accounts for over and a better quality of life for those dependent on it. half of global Failure to fully grasp the nature, dynamics and drivers of the IE employment presents a dilemma for the sustainable development agenda. and as much Some of the questions may include: (1) Does development entail as 90 per cent eliminating the IE or working with it? (2) Should it be suppressed of employment or promoted, given its predominance? While this paper does not in some of the seek to answer these questions directly, it highlights key features and realities of the IE, providing a context for planning and poorer developing pursuing sustainable development initiatives. Indeed the delivery countries. and outcomes of ideals (such as the MDGs, poverty reduction, climate change adaptation, low carbon development, the green economy, housing for all and agricultural development) depend on the assumptions society makes today about the future economic scenarios which shape rural-urban dynamics, the use of natural resources, and the way in which product and labour markets operate, among other things. The IE can hardly be measured directly. Even though some individual countries have attempted comprehensive studies, there is little global analysis. The most recent analysis, including World Bank studies, use International Labour Organization (ILO) estimates from 1994 to 2000 and Schneider’s estimates for 110 countries over the period 1999 to 2004, to provide a global cross-section of data. A more up-to-date study is clearly needed to illustrate the changes in the size and nature of the IE, particularly in response to the recent recession. 2 Key messages 1. The global poor and the developing world earn their livelihoods in the informal economy The informal sector currently accounts for over half the global employment, involving an estimated 1.8 billion people as compared to the 1.2 billion of the formal sector (ILO 2002). In developed countries, the IE predominates as a livelihood activity for poorer people. In developing countries, the IE predominates for all but the richer, urban populations. It is of particular importance for people in poor urban and rural areas, and for women and farmers. The size of a nation’s IE is strongly correlated with levels of economic development (see Figure 1). The average size of the IE as a percentage of the Gross National Income (GNI) is 41 per cent in developing countries, 38 per cent in transition economies and 18 per cent in Organization for Economic Development (OECD) countries, according to average estimates from 1999 to 2004 (Schneider 2002). Estimates for 110 countries1 Figure 1 1. Sources: Schneider 2007; World Bank Development Indicators. Informal share of GDP using multiple indicator measures, average of observations available for 1999 to 2004, GDP per capita average for 1999 to 2006. 3 In the developing world, nation size appears to be an irrelevant factor (Lal and Raj 2006). For example the Small Island Developing States (SIDS) show self-employment (a proxy for informal employment) ranging from 5 per cent of non-agricultural employment in 1990 to 2000 in Bahrain to 65 per cent in Haiti (ILO 2002). 2. Globally, the informal economy appears to be growing in both developed and developing countries The main reason for this growth appears to be that formal labour markets have not been able to generate sufficient jobs to absorb a continuously- growing workforce, particularly for unskilled labour (Flodman Becker 2004). In the 15 countries forming part of EU before the expansion in 1995, the share of IE employment2 to total employment increased from 25 to 33 per cent between 1988 and 1998. The corresponding share of IE employment in the US was 25 per cent, where it increased strongly in the 1980s, but did not increase between 1995 and 2001 (ILO 2002). Developing countries also show high growth in the IE. In 1990 21 per cent of the sub-Saharan African (SSA) labour force of 227 million was working in the IE. However, by 1998 40 to 60 per cent of urban employment was estimated to be in the IE (Charmes 1998 in: Xaba et al. 2002). For example, in Kenya, the IE grew at a rate of an estimated 9 per cent a year between 1985 and 1990, and 16.1 per cent between 1991 and 1994. This is 10 times that of the formal sector, which only grew at 1.6 per cent during that period (Xaba et al. 2002). In the 1990s, Swaziland’s urban IE accounted for 10 per cent of national employment. The IE was growing at an average annual rate of 15 per cent, contrasting sharply with the decline of formal wage employment of 1 per cent annually. By the 1990s, the urban IE was contributing 22 per cent to national employment (ibid.). 2. Part time and temporary work and self-employment. 4 Effects of recession 1 Box Growth in the IE appears to have increased during the recession. Estimates show that globally in 2009 there were over 200 million more informal sector workers displaced from formal work, due to rising unemployment. In some cases, the IE can act as a temporary ‘cushion’ against the recession. For instance in Peru, where the IE is estimated at 60 to 70 per cent, the ILO describes the flexibility between sectors as a primary factor in keeping total unemployment down during the current recession. People took on extra part time or full time work to make ends meet (Slater 2010). Dennis Causso, a street vendor in Peru explains ‘I usually work in construction, but when there isn’t any work, like right now, I sell candy on the street and to people on the buses’ (ibid.). However, many of the sectors having high concentrations of informal workers (particularly women) such as export commodities, export manufacturing, and waste recycling are also the ones that have been badly affected by the current global recession.