Instead of stigmatizing or criminalizing those operating in the informal economy, or forcing them to formalize, the first steps towards unlocking the potential of the informal economy are recognition and realization. This was the main conclusion of a lunch seminar held at the Ministry of Foreign Affairs on 27 October on the question: How can the Ministry of Foreign Affairs make its policies and programmes more responsive to the informal economy? Realizing that the informal sector is here to stay, policymakers should focus on making informal work more productive, decent and stable, while at the same time attracting as many informal workers to formal jobs as possible.
On 27 October, the Dutch Ministry of Foreign Affairs hosted a lunch seminar centred around a presentation by Martha Chen, lecturer in public policy at the Harvard Kennedy School and international coordinator of Women in Informal Employment: Globalizing and Organizing (WIEGO), a global research-policy-action network. In her presentation ‘Informality & development: an inclusive approach’, Chen argued for recognition of informal workers and informal businesses in development policies. Natascha Wagner (ISS) and Mayke Kaag (ASC/INCLUDE) were discussants on the panel, which was facilitated by Anouk Aarts (Ministry of Foreign Affairs).
Opening with the statement “I propose an inclusive approach to the informal economy for development”, Martha Chen stressed the importance of recognizing the informal economy in its full diversity with all of its potential and challenges. She spoke of the misconceptions around the informal economy and the possibilities for improved responsiveness by the Ministry to this important part of the economy.
In discussing definitions of the informal economy and its workers, Chen argued that the categorization of informal workers as either ‘self-employed workers in informal enterprises’ or ‘wage workers in informal jobs’ is not sufficiently comprehensive. Where does this leave casual day labourers or sub-contracted industrial workers? According to Chen, a third category – ‘dependent contract workers’ – is needed to encompass all types of informal workers.
Furthermore, it was pointed out that there are substantial regional differences in the size of the informal economy. In the Middle East and North Africa, informal employment makes up 45% of total non-agricultural employment, compared to 82% in South Asia. In Sub-Saharan Africa it constitutes 66%.
Stigmatizing the informal economy
The idea that the informal economy is a non-productive space associated with poverty is only partly true. According to Chen “there is a significant overlap […] but not a complete overlap between working in the informal economy and being poor”. The direct contribution of informal workers to GDP may be low, but a large part of their actual impacts are indirect, through the provision of low-cost labour and low-cost inputs, goods and services to formal and informal enterprises, as well as the provision of low-cost goods and services to consumers.
Despite these indirect effects, the informal sector is still not very productive, compared to the formal sector. According to Chen, fear, stigmatization and criminalization play a large role in this. Fear of confiscation or theft of informal workers’ assets, for instance, constrains investment.
Formalizing the informal?
Much of the debate around the informal economy revolves around the issue of formalization. According to Chen, to what extent formalization is the way forward depends on how it is defined. A narrow definition focuses on registration and taxation, whereas a broader definition also takes into account informal wage employment, employment relationships and the rights that informal workers have. Using a broader definition can help to increase the perceived benefits of formalization for informal workers. Dignity is important in building a bridge between the formal and informal sectors, as stigmatization has a huge impact and can lead to self-exclusion.
Increasing the perceived benefits can lead to formalization, as the idea of informal workers avoiding the state is a misconception, in the view Chen. They may be avoiding the punitive arm of the state, but informal workers and enterprises generally do not operate outside the law. Instead, they want to be protected by the law. Similarly, in contrast to assumptions about tax avoidance as a motivation for remaining in the informal economy, informal workers are often willing to pay taxes. Yet, they would like to see the benefits of doing so, which are often unclear or invisible to them. Moreover, informal workers often simply do not generate enough income or profits to be liable to pay income or other taxes.
The way forward
To become more responsive to the needs and potential of the informal economy, Chen concluded with a policy framework built on three pillars:
- Increase employment opportunities in the formal sector
- ‘Formalize’ as many informal enterprises and informal jobs as desirable and feasible
- Increase returns to labour for the informal workforce through the ‘3 P’s approach’: protection (legally and socially), promotion (support with financial and non-financial services) and participation (in policy making and collective bargaining institutions).
In this regard, formalization should be defined more broadly to encompass not only regulation and taxation, but also social and legal protection, support through investment in the needs of the informal sector (such as for infrastructure and transport), and by enhancing the right of informal workers to organize and be represented.
Chen concluded by citing Ela Bhatt, founder of the Self Employed Women’s Association (SEWA) in India and founding chair of WIEGO:
The challenge is to convince the policymakers to promote and encourage hybrid economies in which micro-businesses can co-exist alongside small, medium, and large businesses: in which the street vendors can co-exist alongside the kiosks, retail shops, and large malls. Just as the policymakers encourage biodiversity, they should encourage economic diversity. Also, they should try to promote a level playing field in which all sizes of businesses and all categories of workers can compete on equal and fair terms.
In response to Chen’s presentation, panellist Natascha Wagner (ISS) stressed the importance of recognizing hybrid economies, which is in line with her own research. According to Wagner, the dichotomy of formal versus informal and the enforcement of formalization can hurt street vendors and other micro-enterprises. Fortunately, progress is being made. For instance, several World Bank projects no longer draw a line between the formal and informal.
According to Wagner, the first step forward is recognition of what is out there: being pragmatic and realistic in acknowledging that the informal economy is here to stay. The second step is providing infrastructure, based on the recognition of informal workers as (potentially) productive economic actors. The next issue that has to be tackled is access to credit. Important in this regard is recognition of the fact that the informal economy is highly heterogeneous. Hence, providing tailored credit can be a risky business.
Mayke Kaag (ASC and leader of the INCLUDE research group ‘Informal workers’ political leverage’) also proposes holistic approaches that work on the functioning of state services to attract informal workers to the formal economy. She pointed to the role of informal workers’ organizations, which can be effective partners in this transition, given their knowledge and social networks within informal economies. However, there are tensions between newly-formed organizations and conventional, professional organizations. Moreover, there are conflicts of interest between and within these organizations. This can muffle the voice of informal workers’ organizations in political and social dialogues.
INCLUDE’s work on the informal economy
- INCLUDE cooperates with the Ministry of Foreign Affairs on the theme of the informal economy and recently released a handout, in preparation for this seminar, containing information on the potential and needs of the informal economy in Sub-Saharan Africa. You can find this handout, titled ‘The needs and potential of the informal economy in Sub-Saharan Africa’, here.
- INCLUDE also used its ‘Policy Question’ to gain new insights and share knowledge on the informal sector with policymakers. You can find the results of these discussions here.