World wide the informal economy is booming during recession with OECD estimating more people employed in informal sector than the formal – 1.8 bn to 1.2bn. The constituency of this growth is worrying with ILO estimating an extra 200 million people earning less than $2 per day by 2010 – all in the informal economy. Yet some are from formal jobs, using the informal sector as a cushion, an insurance, until things pick u again. photo-1

Historically, the informal economy has been seen as problematic by developed country governments owing to lost tax revenues, workers’ lack of unions rights, low wages and the exploitation of the poorest. And developing country policies and approaches to economic planning and management are largely apeing the developed world’s model.

Yet, the recession is alerting us to the inherent resilience in the informal economy globally. It has existed for far longer. It is an evolved, even natural economy, suitable for local interactions. It cushions formal employment dropouts. And in developing countries it is larger, on average 40% of GDP over 17%.

But right now it is being stretched in developing countries. More informality coupled with less demand, owing to the recession’s cumulative impact, equals lower prices, and an even more competitive market. While the informal economy might be able to apparently support growing numbers of entrants (see this India example), it is unclear if this means lower overall individual earnings and margins? “Smaller-and-Smaller Slivers of a Shrinking Pie

The simultaneous growing informality and poverty is clearly a worry. Yet the apparent resilience of the informal sector hints at a solution; that developing country governments would be wise to reroute their economic development planning from the path of the developed world, and to make visible the informal economy, give voice to its participants and begin to validate their presence as useful and welcome economic actors through targeting them with appropriate economic policies. How can the developing world’ governments help the informal economy without formalising it?

Advertisements