Chapter 10: Conclusion and Recommendations
4.2 BACKGROUND
The role of the informal business sector in poverty reduction is critical: if the sector provides the much needed jobs, it therefore improves the quality of life of the poor.
Any attempt to manage it should consider this important role of the sector, and actively determine to be developmental in nature, so as not to negatively affect it.
The informal economy has always been thought of by economists as bad news for the world economy. Authorities have viewed this sector as a nuisance to other commercial activities and to traffic, due to the fact that it takes place mainly at road intersections (Bhowmik, 2003: 02). Sometimes referred to as the underground economy, the informal economy is becoming far more important now, providing relief from the effects of the global financial meltdown (Barta, 2009). Upon studying the city of Ahmedabad in India, Martha Chen argued that the informal economy should be seen as a solution to urban decay and employment, and not a problem as is currently the case (Barta, 2009). Some authorities like those in the city of Ahmedabad who have recognized the importance of the informal sector have engaged in some
interventions in order to create more informal jobs. The approach has included providing trading space like markets at bus stops.
Despite its importance, the participants in the informal sector are generally not regulated, lack legal recognition and are not protected (Chen, 2004: 4 and WIEGO, 2005).
Some researchers argue that the informal economy is becoming a permanent element of some poorer countries. In certain instances, it is argued that this sector grows due to the inability of the formal sector to create jobs that match population growth (Barta, 2009). Despite the beliefs that the informal sector is only found in developing countries, this sector is found in developed areas like New York, Madrid, Toronto.
This sector encompasses everything from street vendors, home-based workers and waste recyclers to unlicensed cab drivers (Chen, Jhabvala & Lund, 2002: 4, and Bradley in Reddy, 1995: 115).
It is also acknowledged that this sector plays an important role in economic growth and poverty reduction. In fact, the informal economy is now seen as a safe haven for a darkening financial climate. There is acknowledgement that there are insufficient economic opportunities in the formal sector. It has also been observed that employment in the informal sector grows during periods of economic crisis (Chen, Vanek & Carr, 2004: xiii). As a result, some countries consider the contribution of the informal sector when determining their economic growth (Swinburn, Goga &
Murphy, 2006: 3).
It has also been observed that during periods of economic crisis, employment in the informal sector increases. For example, millions of people who lost formal jobs during the Asian economic crisis, tried to find or create jobs in the informal economy (Chen, Vanek & Carr, 2004: 24; Chen, 2004: 7 and ILO, 2002b: 10). Chen (2004: 7) indicates the role that the informal sector plays in creating jobs during tough economic times. This brings about the reasons for people to join the informal economy. While some people turn to the sector to get additional income during inflation, others turn to the sector just to get the income to survive. Others simply get
involved to supplement their formal sector income (Chen, Jhabvala & Lund, 2002:
10). Other people join the informal economy because they are unable to engage in business activities in the formal sector (ILO, 2002a: 1). These debates gave rise to three schools of thought on the characteristics of the informal sector, and how it is linked to the formal economy or the formal regulatory environment (Chen, Vanek &
Carr, 2004; Valodia, 2006 and Chen, 2004).
Some schools view the informal sector as existing independently and not related in any way to the formal sector. This school of thought is referred to as the dualist school of thought. The structuralist school of thought, in contrast, views the existence of the informal sector as a result of the structural arrangement by the capitalist development. It sees the sector as co-existing and being interdependent on the formal sector. According to the legalist school of thought, the informal sector consists of entrepreneurs who choose to operate informally in order to avoid the costs, time and efforts of registration. This school of thought views the existence of the informal business sector within the perspective of licensing and regulations (Chen, Vanek &
Carr, 2004: xiv & Valodia 2006: 3).
Another school of thought maintains that the informal economy sector is a transitory stage. This school of thought believes that an economy will go through the informal stage before it matures and becomes more developed. Despite all these, it is clear that the sector works under various disadvantages. These obstacles can, however, be overcome by adopting prudent and focussed policies (www.gdrc.org).
Although the schools of thought appear different, Chen, Vanek & Carr, (2004: 24) maintain that there is a need for an approach that integrates various elements of the schools. This is because while some individuals (or households) engage in survival activities that have limited link to the formal economy, other entrepreneurs choose to avoid regulations (legalistic school). Other participants are subordinated to larger firms (Chen, Vanek & Carr, 2004: 24 and Chen, 2004: 7). In fact, Chen (cited in Barta, 2009) advises that instead of viewing the sector as nuisance, authorities should see it as offering an opportunity to address urban decay and unemployment.
Bhowmik (2003: 2) makes a very interesting observation of the link between the urban poor and the informal sector participants, particularly the street vendors. In this relationship, low income groups get cheap and affordable goods from street vendors.
Bhowmik maintains that in the absence of street vendors, urban poor would have to buy from expensive shops and in the process often are worse off. He goes further to say that actually the street vendors subsidise the poor.
Contrary to beliefs that the informal sector is made only of survivalist enterprises, some authors argue that in certain instances earnings for workers who moved from formal sector employment to the informal economy increased (Valodia, 2006: 3). This view is supported by Kucera & Roncolato (2008: 322), when they maintain that in some circumstances people in the informal economy get better income that some people doing formal jobs. In such cases informal workers are better off economically than even formal workers. Barta (2009) also provides a case study of a woman in Bangkok who is earning more in the informal sector than what she earned in the formal sector before she was laid off by a clothing company.
Referred to as the twilight economy, marginal economy or the underground economy, the term informal sector is defined in many ways by different people. Depending on the reason for analysing the sector, informality is often perceived through the lens of licensing, regulation, tax and criminal law (ILO, 2002a: 23 and Barta, 2009).
4.3 DEFINING THE CONCEPTS: INFORMAL SECTOR AND