The "Growing" Informal Economy

A few weeks ago, a guest lecturer in one of my classes said that the informal economy is a declining sector (to clarify, the informal economy means all economic activity that isn’t monitored or taxed by the government. Think of a poor slum-dweller starting a small business from their home). When she said that, I had to think that she didn’t have her facts straight. I’ve researched the informal economy in developing-world cities before, and believed it’s growing with rural-urban migration and urban poverty. I decided that, like a good scholar, I’d do more research into it to see what the real story on the informal economy is.

The answer is that the informal economy is growing, on a global scale. It’s hard to quantify the growth considering it can only be measured by self-reporting, however, many sources will tell you it is an expanding sector. In the past decade, informal employment has accounted for over 60% of urban employment and 90% of new jobs (According to the United Nations). In 2010, Informal employment made up 82% of all non-agricultural employment in South Asia, 66% in Sub-Saharan Africa, and 51% in Latin America. In other words, it’s huge contributor to the livelihoods of the poor. It contributes 25% to 40% of GDP in Asian and Africa, for example.

What’s more important than these numbers are the causes, effects, and solutions to them.  People are forced into the informal economy when they migrate from rural, majorly agricultural, areas into cities with the prospect of finding a job and a better life for their family. However, when they get there, they find that they can’t find a job or are unable to be an entrepreneur in the formal economy because of start-up costs and regulations. The biggest problem with informal employment is that the government isn’t there to regulate wages, working conditions or safety standards, meaning informal workers are often in danger and get paid very poorly. Informal businesses are also at a competitive disadvantage because they lack access to markets and have a bad reputation. The solution to these issues is not to try and get rid of the informal economy altogether, but to recognize the potential it has! Think of how many people are involved in the informal economy, and the innovation that these entrepreneurs create. A few ways to work WITH rather than against the informality might be microfinance, or giving the poor land tenure rights. Can you think of any others? And what do you think about this issue?