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4.1.4 Approaches of some donors and organisations

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Alessio Lupi24 October 2018


As mentioned above, the reinforced focus on the informal economy in early 2000s brought new initiatives in the field that were reflected by new programmatic approaches by several major donors. Some of them started to treat the informal economy as a cross-cutting issue and eventually attempted to develop an official standpoint towards the issue and/or policy formulation.


1. The European Union

The European Union attaches a large importance to the issues of informal economy and informality at work. Although the document Agenda for Change does not explicitly mention the informal economy as a separate priority and the New European Consensus on Development only mentions it about decent work and ILO labour standards, informality is an issue, both inside the EU and in its foreign aid operations. Internally the informality is linked to the recognition of increasingly complex and atypical employment relationships of EU citizens - new forms that do not fit the classical employer-employee relationship bound by time and place. There is also an increasing concern about a trend towards “casualization of labour” in some segments of the EU labour market. Issues of informal work are related to labour migration, employers’ sanctions, social dumping, functions of labour inspection, but also the technological progress and new economic realities of the shared economies, platform economies, etc. The trade-off between the stringency of regulations and informality is at the EU level addressed by the concept of flexicurity – a combination of flexibility and security that on the one hand removes the unnecessary rigidities of overregulation and on the other hand provides sufficient level of protection to the population.

In its foreign aid interventions the European Union has both explicit and implicit focus on the informal economy. The former is represented by separate calls for projects dedicated to the informal economy and people whose livelihoods depend on it, the latter can be represented by attempts to mainstream the informal economy issues into other interventions and policies. The usual project-based approach has been recently upgraded to a programme-based approach due to the new initiatives, such as the appearance of a systematic component in project implementation – subsequent clusters of projects accompanied by the Research Network Support Facility (RNSF).

EU Concepts and Policies

In defining the informal economy, the European Union refers to the ILO International official documents, which consider it as comprised by informal employment both regardless if the job is carried out in formal or informal enterprises or in household.

In this context, informal employment refers to people being employed without legal and social protection — both in the formal sector and in the informal sector (i.e. in unincorporated or unregistered enterprises). From a statistical perspective, informal employment includes (i) own-account workers, (ii) employers in their own informal sector enterprises, (iii) contributing family workers, (iv) members of informal producers’ cooperatives and (v) employees holding informal jobs (EC, 2018).

Fully aware of the variety of activities, enterprises and workers which could be aggregated within the concept of “informal economy”, the European Union endeavours to address the different aspects, constraints and challenges that this “diversity” presents in its policies and programmes (EC-Europeaid, 2009).

A number of communications from the European Commission (EC, 2006a; EC, 2012a), Resolutions of the European Parliament (European Parliament, 2007), statements (EC, 2004; EC, 2006b; EC, 2010b; EC 2010c; EC, 2011; EC, 2017) and working documents (EC-Europeaid, 2009; EC, 2007) deal with these issues related to informality and with the expected achievements in terms of “decent work” demonstrate that, since the endorsement of the ILO Decent Work Agenda, the EU is committed to address “informal employment” and the related problems it presents: poor working conditions, health hazards, lack of social protection, lack of training opportunities, low productivity, lack of legal protections, major discrimination of disadvantaged groups such as women, young workers, and migrants. In addressing its negative aspects, the EU does not neglect to consider that the informal economy contributes to the economy and to job creation, thus trying to address also, in its policies, the increase of productivity of the informal sector and the smooth transition from the informal to the formal economy (EC, 2007).

As stated by the European Parliament 23 May 2007 Resolution, the EU recognizes that “the concept of decent work goes well beyond safeguarding core labour standards; … (it) includes productive and freely chosen employment, rights at work, social protection and social dialogue, and gender mainstreaming under all four pillars”. The same Resolution considers that “decent work is a centrepiece of the fight against poverty and social exclusion … (and demands) to include the perspective of decent work in all the activities of the European Union and encourages the same in its Member States”.

The common goal of decent work, together with the common concept of the social dimension of globalisation, led to a longstanding partnership between the EU and the ILO, which has been ratified and enhanced by instruments such as the ILO-EC Cooperation Framework, the EC-UN Financial and Administrative Framework and the ILO-EC Strategic Partnership in the Field of Development. This partnership has guided the EC external aid strategies and programmes, with a special focus on labour standards and working conditions, social protection and social dialogue, youth employment and skills development, gender equality and child labour.

In its external and development assistance in developing and emerging countries, EU policies are thus in line with the rights-based approach.

Outside the European area, the EU commitment for decent work is implemented through different measures inspired by the above-mentioned longstanding cooperation with ILO.

EU pre-accession strategy includes measures to promote Decent Work Agenda for candidate countries and the decent work is a central theme also in EU neighbourhood policy in terms of labour reforms promotion, policy dialogue, and cooperation strategies.

Specific bilateral cooperation agreements with Latin America, the Caribbean and Africa include aspects related with decent work as well as trade policies and agreements with Developing Countries. With this regard, an example is the EU’s Generalised Scheme of Preferences (GSP), which sets a system of priority for a list of Developing Countries facilitating their exports toward the EU, thus contributing to economic growth and job creation. In particular, the new GSP + provides additional preferences to those countries which ratify and implement the international conventions on core labour rights.

Similarly, Trade and Sustainable Development Chapters can be an entry point for EU and Partner Countries to discuss issues related to informal economy.

In its development aid the emphasis is still on employment and decent work, although the informal economy is treated as a cross-cutting issue in different strategies and actions tackling poverty eradication and development. Recognizing that globalization, while generating economic growth, has not succeeded in guaranteeing well-being and equal opportunities for all, the European Commission stresses the need of a growth trend that takes into account the social dimension and the priority of poverty reduction (EC, 2007). In this framework, the EU efforts on employment and decent work promotion are intrinsically connected with wider social, economic and environmental goals (EC, 2018), where “employment” is considered as playing the role of “bridge” between growth and development.

The EU agenda on employment and decent work focuses on four areas:

§ Maximise decent job creation, supporting job-rich growth;

§ Improve the quality of existing jobs in terms of earnings and working conditions (both in the formal and informal economy);

§ Ensure increased access to these decent jobs, particularly of the most vulnerable in the labour market, through improved employability (education and training) and efficient labour market policies;

§ Mainstream the employment perspective in economic policies/programmes and other sectors such as agriculture, energy or private sector development (EC, 2018).

The EU document Social Dimension of Globalisation insists on the importance of core labour standards and social dialogue in order to promote a fair globalisation. Gender equality is also targeted and declared as an essential aspect of internationally agreed core labour standards. Policy dialogue, private initiatives for social development, conditionalities for trade preferences, corporate social responsibility, are also mentioned as tools to achieve the social dimension of globalisation. Interestingly, the EU adopts the notion of decent work as defined by ILO, which will be subsequently expanded and developed in policy documents, such as the ones described below. 

The first European Consensus on Development (2006) recognised social cohesion and employment as priority areas of intervention and it identified measures, included decent work, to be supported through the thematic, country and regional programmes of the EC. Based on this recognition, the consensus declares that ‘the EU will contribute to strengthening the social dimension of globalisation, promoting employment and decent work for all in order to meet the needs of partner countries.

The EC Green Paper EU Development Policies in support of inclusive growth and sustainable development (2010) on how EU could best support efforts to address growth toward MDGs, enumerate the tools in order to achieve a socially friendly growth, among which: productive and decent employment, social protection and skills development.

Although the document Increasing the Impact of EU Development Policy: an Agenda for Change does not explicitly mention the informal economy as a separate priority, the front of inclusive and sustainable growth for human development includes several aspects linked to informality and informal economy. The EU, it is stated, “should encourage more inclusive growth, characterised by people’s ability to participate in, and benefit from, wealth and job creation. The promotion of decent work covering job creation, guarantee of rights at work, social protection and social dialogue is vital”. Inclusive growth is thus conceived as intrinsically linked to employment, the latter representing “the main transmission mechanism between economic growth and improvements in living standards for society” (EC, 2018). A more comprehensive approach to human development is demanded and this should include developing social protection and vocational training. Development of private sector in developing countries is also included in the document among the pillars to promote human development and access to finance, especially for SMEs and cooperatives.

The focus on private sector is well underlined in the EC Communication A stronger role of the Private Sector in Achieving Inclusive and Sustainable Growth in Developing Countries (EC, 2014),where the transition from the informal to the formal economy, together with decent job creation and better labour conditions, are identified as basic principles to be considered while strengthening the role of the private sector in EU development cooperation. The document recognizes that the private sector provides 90% of jobs in developing countries, with an estimated 60 to 80% of enterprises belonging to the informal sector, thus outlining the central role of informal economy in job creation and in the fight against poverty. The accent should thus be on supporting micro, small and medium enterprises, usually belonging to the informal sector, as well on the creation of regional blending facilities and in the promotion of access to finance in order to enhance productivity and promote formalisation. Among lessons learnt from an evaluation exercise of EU support to private sector in developing countries between 2004 and 2010, a greater emphasis on decent job creation and on cross-cutting issues such as Decent Work Agenda, Youth employment and gender equality are considered as strategies to support a more effective EU role in the area of private sector development. The document identifies some paths for future engagement of EU and interestingly the support to informal sector is well considered and outlined in terms of incentives for formalisation on one side and measures to improve productivity and working conditions of the informal sector on the other side. Among incentives for formalisation, effective institutions, legally systems and secure property rights –especially for land- are mentioned as collateral to loans. Among measures for productivity: access to markets, finance, infrastructures, technical and vocational training. Finally, working conditions can be guaranteed through assets as safer working environment, social services and capacity development of informal support organisations. More in general, the EU will promote an enabling environment for private sector, especially for SMEs (reforms, assistance to support organizations, development of systems of finance and microfinance) though its external aid and development cooperation. In this framework, special attention will be given to promote women’s participation, addressing the special training needs of potential entrepreneurs and facilitating access to finance.

The New European Consensus on Development, even if not explicitly focusing on the informal economy, recognizes decent work as a priority to achieve SDGs, especially for women, youth and vulnerable groups such as forcibly displaced persons. Creating decent jobs is considered as fundamental to achieve sustainable and inclusive growth in developing countries and this will be promoted in line with ILO’s Core Labour Standards. The Document states that the EU will continue to support decent employment both in formal and informal sector, and to promote the transition from informal to the formal economy. Additional issues already found out in the other mentioned documents are reiterated in the New Consensus: the need for social protection and social dialogue, the support to SMEs, finance and productivity. Even if these are not explicitly linked to the issue of informal economy, the latter could be considered as a cross-cutting theme of the aspects to be tackled by the New Consensus.

In its external aid, the focus on increasing working conditions and productivity in informal economy, is reiterated in the EC Staff Working Document Promoting Employment through EU Development Cooperation. Hereby, the attention on the need to increase and to create more job opportunities in the formal economy shifts on improving working conditions and increasing social protection for informal workers on one side and on raising earnings and productivity in the informal economy on the other side.

The latter comes from a standpoint that seeks to balance the need to preserve the high potential of job creation of the informal economy, especially for the poorest, with the aim of promoting a gradual and smooth transition from the informal to the formal economy. The above-mentioned EC Staff Working Document recognizes that the informal economy guarantees income opportunities for people who don’t have access to any other means of livelihood and it also emphasizes the great potential in terms of promotion of entrepreneurship, creativity and innovation. For these reasons, any attempt of formalization, which remains a long-term objective, must be conceived and implemented without the benefits of the informal economy being compromised.

With regard to EU’s attention to one of the main pillars of global policies designed to tackle informal economy, a special consideration for social protection is highlighted in the Communication from the Commission on Social Protection in European Union Development Cooperation (EC, 2012a), where its role in poverty reduction and inclusive growth is clearly stated. Recognising that developing countries present a high number of casual and informal workers without access to any form of social protection, the EC Communication calls for placing social protection at the centre of policy dialogue with partner countries and demand to support national social protection policies and programmes. In this framework, a clear link with informal employment is mentioned and the Document claims for an active role of EU Development Cooperation in supporting partners Governments in their decent employment strategies and in creating more and better jobs, in line with core labour standards. The need to provide social protection in the context of informal labour markets is clearly linked with EU’s objectives and the Communication calls for innovative measures in this area, such as micro-insurance schemes.

A second pillar of global policies on informal economy that is tackled by EU Cooperation Policies is Technical and Vocational Education and Training. In EU’s approach, TVET is considered as a relevant and effective tool to provide skills that enable people to access to decent jobs, thus linking informal economy to formal TVET.

The role of TVET for poverty reduction and development was affirmed in the EC Communication Education and Training in the Context of Poverty Reduction in Developing Countries (2002). TVET is considered as a valid alternative for people leaving the educational system that should be strengthened in order to provide a skilled workforce for the formal and informal labour markets. The latter requiring tailored training programmes for informal workers.

The EU Agenda for New Skills and New Jobs (EC, 2010a)sets out key actions in 4 priority areas (a. Better functioning of labour markets; b. More skilled workforce; 3. Better job quality and working conditions; 4. Stronger policies to promote job creation) to strengthen the EU contribution to employment goals as part of its Europe 2020 strategy (employment rate of men and women of 75% by 2020). The Communication states that these objectives will be promoted within its enlargement process, the European Neighbourhood Policy and the Regional Policy Frameworks (ASEM andEU-Latin America).

In developing and middle-income countries, the EU external aid has focused in providing a skilled workforce -especially youth- with an increasing focus on decent work, social inclusion and social protection.

As explained in the EC/DEVCO’s Report TVET and Skills Development in EU Development Cooperation (Europeaid, 2012a), EC actions have been characterised by TVET focused projects and programmes as well as mainstreaming TVET into different types of socioeconomic interventions. In both cases, linking the informal economy, the formal and the informal learning and TVET through the recognition of skilled acquired through apprenticeship has been a priority. Given the dimensions of informal economy and informality at work, skills development and access to lifelong learning opportunities is recognised by the EU as one of the main concern for people whose livelihood depends on the informal economy. Hence, a great effort of the EC has been directed toward formalisation into the informal/traditional systems of skills development (certifications and credit systems).

The above-mentioned EC Thematic Briefing Note on the Informal Economy and Decent Work outlines the following potential policy agenda for the informal economy in developing countries which is built on the deficits identified within the four pillars of the Decent Work Agenda.

  • Pillar 1- Creation of decent employment opportunities (a. to adjust the legal frameworks according to the constraints of the informal economy operators; b. to promote access to education and training for informal workers so to enable them to access better jobs; c. to promote regulations for property rights for the poor thus enabling them to convert assets into capital to be used for entrepreneurship and innovation);
  • Pillar 2 – Rights at work (a. to promote core labour standards and gradual improvement of working conditions in the informal economy; b. to promote labour inspection activities);
  • Pillar 3 - Social protection (a. to promote basic social protection for all: basic health care benefits, income security for children, elderly and disabled, income support for the poorest workers; b. to promote measures to reduce labour accidents and hazards);
  • Pillar 4 – Social dialogue (a. to promote freedom of association; b. official recognition of organizations of informal workers; c. capacity building of informal workers organizations).

In conclusion, the Documents’ analysis leads to the conclusions that the key issues of EU policies are based on the employment focus and the consequent goals in terms of decent jobs, core labour standards and social protection. An emphasis is put on the need to increase productivity in the informal economy, coming from the recognition of its great potential of job creation, to be achieved promoting access to skills development and finance and supporting private sector development. The long-term final objective is the gradual transition from the informal to the formal economy, without the benefits of the informal economy in terms of employment opportunities being threatened. Attention to the theme of social dialogue is also present and one interesting aspect is the declared need for empowerment and official recognition of the informal workers’ organisations.

EU FUnding Instruments and Programmes - 2014/2020

The strategic plan 2016-2020 of the Directorate-General for International Cooperation and Development (EC-Europeaid, 2016) has included the creation of decent job among its specific objectives (SO 2 and SO 3), while promotion of human rights is covered by an additional objective to be achieved (SO 5). The document calls for ‘enforcement of labour laws that promote decent work’ and for ‘Initiatives contributing to the respect of international labour standards’. Indicator 5 under SO 5 is expected to increase to 70 (by 2020) the number of States that have signed and ratified international and regional conventions, including 8 ILO core conventions.

An examination of the Funding Instruments covering EU external aid and development cooperation for the period 2014-2020 highlights the attention of the Development Cooperation Instrument (DCI) on the issue of informal economy and informality at work. Among general principles of the instrument, decent work is mentioned as a cross-cutting issue to be mainstreamed throughout all programmes.

This is particularly evident within the thematic Programme Global Public Goods and Challenges that identify “informality” as a global challenge to be tackled. Human development, including decent work, is among the priority areas of cooperation to achieve poverty eradication. Within this priority area, the Programme includes specific outcomes to be achieved in terms of decent employment policies; development of vocational training systems in line with market needs; improved working conditions in the informal economy; empowerment of people whose livelihoods depend on the informal economy; promotion of the social dialogue and development of social protection systems. Promoting good governance and private sector partnership are mentioned as strategies to achieve these specific objectives.

In defining specific priorities and indicators to be achieved within the area of “Employment, decent work, skills, social protection and social inclusion”, the Programme identifies three priorities: a) Supporting high levels of productive and decent employment; b) Extending the social protection coverage; c) Strengthening social inclusion with particular attention to disadvantaged groups (women, youth, migrants, persons with disabilities).

Within the first priority, the Programme states that effective employment policies and TVET systems will be fostered as first objective, included skills development and vocational education and training “taking into account the informal economy” and the Decent Work Agenda. In fact, a specific concern is the lack of effective TVET systems in Developing Countries rarely tailored in providing skills development also to informal workers. A second objective will be the implementation of the Decent Work Agenda and the improvement of life conditions of people whose livelihoods depend on the informal economy. The Programme promotes a right-based approach to employment and labour with a specific focus on informal workers, especially women who represent a significant part of the informal workers. In addition, the Programme is intended to promote innovative approaches to increase productivity and skills development for people in the informal economy and the empowerment of the informal workers through strengthening the organisations of informal workers. In this framework, the Programme is intended also to promote the gradual transition from the informal to the formal economy.

Within the second priority, the Programme recognises that low social protection coverage is typical of countries characterised by a high levels of informality with low taxes revenues. Actually, it does not deepen this linkage but it outlines areas of work in terms of institutional capacity building of Partner Governments to enable them to create, finance and manage effective social protection systems.

The Programme is conceived to develop several Flagship Programmes to be launched gradually in the period 2014-2020 which seek to tackle key issues that go beyond traditional sectors and aim at addressing global challenges such as multi-sectoral or cross-cutting approaches. Among these, the Flagship Programme 11, Rights-based development for the working poor, is clearly linked to informal economy. Even if the document mentions that the informal economy could provide up to 90% of jobs, if agricultural sector is included, thus guaranteeing livelihoods for a huge number of persons, side effects -such as the erosion of tax basis that could be useful for social protection coverage and social services, or for pro-poor programmes- are undeniable. Informal workers are not guaranteed with fair earnings, safe working conditions, labour rights and social protection coverage. This flagship programme seeks thus to address all these different aspects linked to poverty in the informal economy. Recognizing the multidimensional aspect of poverty, the programme aims at supporting innovative solutions to address the different needs (health, education, skills development, productivity) of people dependent on the informal economy through better analysis and understanding. At the same time, the Programme is intended to tackle the issue of formalisation of enterprises, with a special focus on SMEs.

In the framework of DCI, the Programme Civil Society Organisations and Local Authorities (CSOs and LAs) has to be mentioned even if a particular focus on informality cannot be found. The Programme’s aim is to strengthen civil society organisations and local authorities’ role and efforts in partner countries in promoting governance and inclusive growth. Actions at country level (Priority 1) are at the core of the Programme and under this priority we find some specific objectives related to CSOs and LAs contribution in promoting inclusive and sustainable growth. These aspects of the Programme are aimed at enhancing livelihoods of poor people through decent job creation and income generating opportunities, without neglecting the role of vocational training. In this context, the Programme seeks to reinforce service provision for productive activities and access to resources (business support, market access, opportunities for integration of the informal economy, micro credit). The Programme seeks also to support actions to promote social development through measures to improve poor people access to social services such as social protection. In this context, building synergies and complementarity with interventions implemented by public authorities is mentioned as of particular importance.

Remaining at the DCI Instrument, a more specific mention of the informal economy can be found in the Pan-African Programme where one of the priorities of the Africa-EU Partnership is private sector development though, among other measures, appropriate business support services and better access to credit, especially to facilitate the transition of the informal activities into the formal economic sector. This will be also an instrument to promote women transition into the formal economy.

With regards to Human and Social Development, employment issues -especially decent work and social protection- will be addressed through the partnership. In this effort, a priority will be given to increasing job opportunities in the formal economy, promoting the Decent Work Agenda and fostering the integration of the informal sector into the formal economy.

Since the Programme Investing in People has been the main EU initiative explicitly tackling the informal economy, it has to be mentioned in this examination even if concluded. This broad thematic programme for support of thematic action in the area of human and social development has foreseen 4 main priorities among which the fourth one, “Other aspects of human and social development” has dealt with a number of issues linked to the informality: decent work, TVET and Social Protection.

The Programme recognizes that in developing countries the majority of the population depends on informal economy and informal jobs. Underemployment and the increasing number of working poor, especially women and young people, together with child labour are some of the main challenges the Programme seeks to address. In this context, fostering the Decent Job Agenda and decent job creation is considered as a major strategy to be pursued in the EU external aid and development cooperation.


2. The World Bank

The World Bank provides an example of unofficial but strongly institutionalized approach to the policy formulation on the informal economy. Recognizing that informal sector workers are disproportionally poor, less skilled and lacking of access to finance and tools for productivity, uncovered by social protection systems and protection rights, the Institution has been paying increasing attention to the issues of informality, although seen through a different optics than in the case of its rights-based counterpart – the ILO. The analysis developed by the World Bank on the factors linked to informality often have pointed to overregulation, excessive bureaucracy, impact of labour regulations, generous fiscal policies, complicated tax and tariff systems, lack of transparent property rights, or lack of economic and business freedom (as measured, for example, by the Heritage Foundation Economic Freedom indices). The policy recommendations typically have included creating an enabling environment by removing these barriers and obstacles (see for example Box 1 above).

Although the World Bank has not produced specific policy statements on informality, it has been explicit in policy debates; moreover, its numerous publications and researches on the issue contribute to provide an orientation to policies and a theoretical background for the actions implemented by the Institution. It is thus possible to outline World Bank’s approach mostly from policy researches, but it has to be kept in mind that these do not imply any immediate and concrete commitment.

Major policy approach of the Bank to fight informality has originated from De Soto paradigm, conceiving informality as a response to excessive state regulation. Most of the analysis has thus concentrated on the role of business and labour regulations in creating and increasing the informal sector. This negative effect is, however, perceived as mitigated in countries with better institutions where regulations are aimed at improving business environment (Loyaza et all, 2005). The Policy Research Working Paper The impact of regulation on growth and informality analyses the effects of regulation on economic growth and the size of the informal sector, concluding that a heavy business regulatory burden, especially in product and labour market, induces and increases informality. High costs and taxes faced by the formal sector (Braun and Loayza, 1994; World Bank 1995; Palmade et all 2005), and the impact of labour regulations mandating a minimum wage above market levels (Loayza, 1994; Loyaza et all 2005) has been identified as causes of the formation of the informal sector. These theoretical positions have prompted the Institution to advocate for labour market flexibility and business deregulation.

The World Bank’s 1995 World Development Report Workers in an Integrating World complies with the orientation of previous analyses and states that high taxes and regulations lead to an increase of the informal sector. Labour policies in developing countries are considered as unable to affect workers in the informal sector and favouring only those formally employed, who are the minority of workers. Since labour standards implementation in developing countries concern only the minority of workers, measures such as minimum wage are difficult to be justified in these countries. The report states that this evidence does not imply that labour policies are not necessary but that they must complement community and informal solutions aimed at improving the working environment. The report introduces a concept that will then be recurrent in the analysis and actions of the World Bank and which concerns the actions needed to increase productivity, namely access to credit and skills development. Security conditions of informal workers, including social protection, are also tackled. Since informal workers continuously face dangers (health, security, income), improved working conditions could be promoted not by legislation but by “direct public action in areas such as provision of water and sanitation, roads and drainage, environmental health, public transfer programs (e.g. public works method) complementing informal income”. Exploring what Governments should do about informal economy, the Reports suggests three type of policy interventions: i) to remove antilabour biases which slow the process of formalization (biases against work in agriculture or favouring formal over informal work); (ii) to reduce, and enforce, tax and regulatory burdens on formal economic activities; iii) to support small firms development through credit and skills development on marketing, new technologies, business.

Subsequent publications were about the same topics. In the attempt to outline solutions to curb the growth of informality, the document Rising informality (Palmade et al., 2005), published in the World Bank’s Viewpoint collection, insists on major simplification of labour regulations and reduction of taxes as primary steps to eliminate barriers to formalization. In parallel, access to finance should be promoted as one of the main incentives to formalization along with the improvement of public sector governance since accountability and transparency will encourage firms to move to the formal sector. Government’s accountability will be further developed in other publications where stronger institutional capacity along with stronger enforcement are integrated as milestones beside business environment reforms.

The flagship Report Informality: Exit and Exclusion, published in 2007, presents several policy messages for the Latin American and Caribbean Region arising from the analysis of the multidimensional causes of informality. Messages to policy makers contained in the document focus on the need for better policies aimed at enhancing formal sector’s productivity on one hand and by redressing constraints, barriers and costs of formalization on the other hand. A more productive formal economy is expected to encourage informality decrease. This goal can be achieved through a mix of investment climate reforms (reducing excessive regulations and taxes, and facilitating business entry) and human capital enhancement measures, so that a skilled workforce can be available for a growing formal economy. In parallel, a change with regard to the “culture of informality” should be achieved, mainly improving the perception of the State and building an effective and inclusive social contract. In this framework, labour policies should accompany economic growth rather than impede it because of excessive costs and ineffective institutions. A redesigned labour code combining strengthened safety nets, workers’ protection and representation with the necessary flexibility is thus required, along with its enforcement. Reengineering social protection systems in order to cover all citizens, and not only workers of the formal sector, represents a central role. In this context, a long-term vision on social protection is needed and the report suggests that “there is a case for providing a package of minimum essential direct cover, de-linked from the labour contract and financed through general taxation.” On the side of formalization, barriers should be reduced through administrative simplification and reduced costs; and incentives should be promoted, such as increasing access to bank credit and other form of external finance support, and access to information and advisory services. What is interesting compared to previous analyses is the consideration that a renewed social contract and the central role of social protection are envisaged as pillars in the process of formalization.

At the level of direct actions in communities, the World Bank’s recommendations have focused on the role of complementing measures mainly revolving around finance and skills development. Lack of access to finance limiting the capacity of informal entrepreneurs to offset risks has been one of the main concern and a substantial research and numerous projects have been supported in this area. Improving access to credit and microfinance, along with business development services, have been advocated as strategies to support those working in the informal economy.

Skills development has been another common policy recommendation (Adams et al., 2013). In a publication on informal enterprises in Kenya (Safavian et all, 2016), the education level of the owner of the informal enterprise is found as correlated with the chances of productivity and expansion. In this framework, education and skills development are instruments to promote both formalization and productivity in the informal economy. The latter is particularly pointed since, despite any effort, the reality is that a large share of firms will remain informal because costs exceed benefits from registration. Acknowledged that small firms provide income and employment, it is worth supporting them so that they become more dynamic. “Increasing the skills of the main owner appears to be the most effective means to increase productivity and growth, while lowering barriers to financial access could further support microenterprises to increase survival rates and maximize their opportunity to grow and expand”.

In recent years, recommendations have progressively shifted to the critical role of employment and job creation on poverty reduction strategies. This role has been clearly emphasized by the Institution although the emphasis is more on underscoring the general economic benefits rather than focusing on human rights approach.

In its Vision 2030, the World Bank aims at ending extreme poverty (reducing the share of the population that lives in extreme poverty to 3 percent) and promoting shared prosperity (increasing the income of the poorest 40% of people in each country). These goals are intrinsically linked to job creation and employment issues.

The World Bank Development Report 2013 on Jobs points job creation and employment as cornerstones for development and poverty reduction. Compared to its more traditional approach, the report introduces the concept that economic growth alone is not enough to guarantee development and that any policy should be examined through a “jobs lens”. Job contributes to productivity and economic growth; it increases living standards providing an income to people and promoting life satisfaction; it strengthens social cohesion connecting people, promoting civic engagement, social and political stability. In this picture, the Report assigns to the private sector the role of main job creator, where the role of Governments is to promote policies ensuring smooth conditions for the private sector development, in particular focusing on three levels of interventions:

  1. Fundamentals: the macroeconomic stability; an enabling business environment (adequate infrastructure, access to finance, sound regulations); human capital accumulation (good outcome in nutrition, health and education); and rule of law (protection of property rights and progressive implementation of rights at work);
  2. Labour policies to guide growth toward effective job creation and inclusion. Such policies should include labour market regulation (e.g. labour laws, minimum wage, social dialogue), programmes to support specific target groups, and a balanced social protection system;
  3. Contextual priorities: given country specific context the most payoff jobs should be identified and supported, removing those market imperfections and institutional failures which prevent private sector development in the most profitable areas.

Several aspects related to informality are tackled. In particular, the Report stresses the need to extend representation and economic rights for the informal workers. Social protection, legal coverage, and representation for the informal workers are mentioned among main challenges within policies aimed at job creation. A special attention is reserved to the issue of formalization, which is a process that on the one hand can strengthen social cohesion, increase living standards of those who can benefits labour rights and social protection, but which on the other hand can limit economic dynamism and productivity where burdens on firms are set. Informality is outlined as a multi-layered phenomenon with some workers forced for lack of opportunities and others having chosen it. The issue whether labour market and business regulations have to be tackled to reduce informality is presented as a controversial question, with a suggested potential major role of business regulations.However, no aspect is considered alone as a solution but a mixed policy approach is suggested: economic growth; human capital; rule of law; effective policies, including social protection; better perception of the role of the State. Formalising economies thus requires a balance of effective regulations and social protection systems both enhancing productivity and improving the social contract between State and citizens.

The Policy Research Working Paper Investment Climate Reforms and job creation in Developing Countries (Rahaman, 2014) interestingly reviews the literature on the role of the Investment Climate (IC) reforms on job creation and tries to identify knowledge gaps to be filled and potential channels to be promoted. Since “9 out of 10 jobs are created in private sector” (World Bank, 2012a), its development, together with business-friendly reforms, are considered pillars of the policy framework for job creation. IC reforms may include regulatory and institutional measures associated to business entry, licenses, permits, fiscal and non-fiscal incentives, investment policies, among others. Recognizing that the majority of jobs in the private sector in developing countries are provided by the informal sector (60-80% of MSMEs being informal), with negative consequences in terms of productivity, growth, and access to credit, the paper explores results from research on the impact of IC reforms on job creation and enterprises formalisation processes. On one hand, the Paper describes how De Soto’s paradigm has inspired World Bank’s surveys and programmes, which have focused on the main barriers to formalisation (tax policies, lack of information on how, and time, to register a firm) and a number of investment reforms all around the world focusing on simplifying business regulations and bureaucracy. On the other hand, the Paper mentions relevant evaluations demonstrating that the effects of IC reforms on business formalization processes are not so obvious, despite the conceptual link between removing barriers/simplifying procedures and transition processes from the informal to the formal sector. Although the impact of IC measures on the creation of completely new formal enterprises is more evident in several experiences (e.g in Mexico’ reform of 2002, World Bank 2014), the impact on formalising existing informal enterprises has not been completely demonstrated. For this reason, in addition to reclaim the need for greater attention to the concrete effects on job creation and formalisation, the paper introduces two interesting research’s paths. Firstly, not all the informal entrepreneurs are highly aspirant formal entrepreneurs who remain informal because of bureaucracy and the high costs for formalisation, but they are rather to be considered as “survival entrepreneurs” who remain in the informal sector because of lack of opportunities in the formal sector. Secondly, a policy question to be deepened is what type of IC reforms, beyond entry business measures on which researches have mostly focused, are needed to promote formalisation of the limited number of high potential formal entrepreneurs. Relevant areas of IC reforms, such as tax and investment reforms have not been taken sufficiently into consideration in evaluations and the paper calls for a greater focus on the interrelation between business entry, operating and exit reforms and on the heterogeneity of the informal sector, the latter requiring attention to other constraints beyond those targeted by IC reforms, such as land titling and registration and lack of evident benefits from formalisation. Critical points of research for the future are thus how to identify the high-potential entrepreneurs and which areas of reforms could promote job creation and transition from informal to the formal sector.

The effectiveness of regulatory measures designed to make easier for firms to formalize had been discussed already in 2013 in the Policy Research Talks Series (World Bank, 2013a), an event organised by the World Bank’s Research Department aimed at fostering dialogue between researchers and operational staff, that came to the conclusion that “Despite a decade of reforms to make it easier for firms to register, however, the trend has barely budged”. On its own, World Bank’s DoingBusiness project, advocating for more efficient business regulations and encouraging related reforms across 190 economies, has not been sufficient to guarantee the transition from the informal to the formal sector. As stated by the World Bank Research Director, AsliDemirguc-Kunt: “The persistence of informality suggests there may be too much focus on becoming formal but not enough focus on the costs and benefits of being formal for businesses and…it’s time to rethink policy approaches to informality”.

In the same year, the report Informal Economy and the World Bank (Nancy Benjamin et al., 2014) summarizes the research results related to the informal economy and provides policy advice for the Bank’s interventions. The report reviews recent literature, methodologies, and relevant Bank studies as a way to share information with country teams interested in expanding their knowledge of the informal sector and related policy debates. The review leads to the following four main areas where development policy can be improved by taking the informal sector into account:

  1. “Improvements should be made along a continuum”: considered the heterogeneity of informal firms, different policy approaches are required for different firms, where the aspects of utmost importance of employment and productivity should have predominance;
  2. “There should be public-private collaboration on mutual reforms”: many efforts to improve firm productivity have focused on aspects of the production function (labour skills, credit) while public aspects have been mainly tackled as a cost (taxes, cost of compliance with regulations). However, evidence from research demonstrates that characteristics of the public sphere strongly influence the choices of firms regarding informality;
  3. “Research indicates a strong relation between basic skills and labour outcomes”, this is particularly evident within the informal sector. Skills development of informal workers is thus of utmost importance. With regard to business services programs, on-going research is refining results on successful experiences;
  4. “Informal trade is pervasive in developing countries and the networks developed in informal trade—wholesalers, credit suppliers and money-changers, transporters— are a strong presence in the informal sector.” This kind of trading systems can discourage foreign investors and can undermine trade policy and the international competitiveness.

The report formulates the following recommendations corresponding to these four main areas where development policy can be improved by taking the informal sector into account:

  1. A research agenda and an action plan should be launched “to investigate and implement policies that assist small informal firms to improve their performance while encouraging large informal actors to modernize”;
  2. “Launch the kind of practical public-private dialogue that can reveal elements of a public-private bargain that enhances both public performance and private contributions to public finances. Such a dialogue toward this mutual need for reform must include actors from the informal economy and not be confined to constituents focused on defending the status quo”;
  3. “Pursue the development of worker training and business service programs with a view to improving the capacity of vulnerable participants and improving the performance of the smallest firms along the continuum (as indicated above), but not with a view to formalizing or taxing them. Put in place the necessary incentives and reform packages to encourage large or sophisticated informal businesses to formalize progressively”;
  4. “Examine trade policies for elements encouraging informal trade and pursue governance reforms, such as crosschecking between customs and fiscal authorities that can render trading networks more transparent while better integrating developing countries with the global economy. At the same time, the impact of informal trade on the incomes of impoverished border regions should be taken into account, and alternative income sources should be considered. Regional integration initiatives should be mobilized to foster more regional policy coordination to avoid the kind of distortions that set the ground for smuggling between member countries”.

Despite the latest World Bank’s Doing Business Report (World Bank, 2018a) reminds that business measures are related to the occurrence of informality and that excessive business regulations make it “too costly for firms to engage in the formal economy”, recent policy messages assign progressive importance to new approaches, which coexist with the original ones. Besides reforms to create an enabling environment for formal business, instruments to promote wellbeing, rights, representation and increased productivity for informal workers begin to be reiterated.

In particular, social protection has become an important issue in tackling the informal economy. Recognizing that social protection and labour policies buffer individuals from shocks and equip them to improve livelihoods, the World Bank’s Social Protection and Labour Strategy 2012-2022 support them as pillars to reduce poverty and promote inclusive growth. Taking a step forward from its previous Social Protection’s Strategy, one of the goals is to extend social protection to low-income countries, where the informal sector is predominant. Moreover, in its attempt to address current gaps, the new strategy commits with expanding the coverage of social protection and labour programs to informal workers. The central role of “job and opportunities” is reiterated where the main challenge is that of workers’ skills and productivity, which calls for: partnerships with the private sector; strengthening of human capital; protection of core labour standards and a sound balance among protection and competitiveness.

In September 2016 a new global partnership between the World Bank and ILO for universal social protection was launched (World Bank, 2016). Related statement recognizes social protection as a central component of National Development Strategies and essential to achieve the corporate goals of World Bank’s Vision 2030. Although the statement does not specifically mention the informal economy, the expected benefits from universal coverage clearly affect informal workers: prevent and reduce poverty; increase productivity and income; and prevent from shocks and losses.

In exploring new modern paths to address informality, the World Bank’s Innovation Policy Platform, a web-based interactive space, suggests a possible positive impact of innovative entrepreneurship. Although researches on the topic are few, various examples have demonstrated the capacity of innovative entrepreneurship to offer employment opportunities to disadvantaged groups (e.g low-skilled young people and women) who are over-represented in the informal economy and who can be pushed to move into the formal sector to enjoy its benefits. Innovative entrepreneurs are more likely to operate in the formal economy since they are growth-oriented and in need to take advantage from formal benefits such as education and credit. Policy makers should be aware of the potential capacity of innovative entrepreneurship and support it through improved access to finance, findings, risk-sharing arrangements and partnerships along with broader policies supporting general business formalization through reduced costs and increased benefits from registration.

The draft of the World Development Report 2019 on the changing nature of work, formulates that, despite improvements and reforms of the business regulatory environment, informality has not been reduced in developing and emerging countries over the past two decades. The share of informal workers is stable and even increasing in some regions or countries. Millions of informal entrepreneurs and workers, who rarely make the transition to the formal sector, are still exposed to the same risks as in the past (poverty, social security, low productivity) and they are very likely to remain in the informal sector because it is their only opportunity.

The report suggests three pathways for Governments to promote job creation: to enhance human capital through skills development and lifelong learning; to strengthen social protection through “progressive universalism” as a guiding principle to cover workers of the informal sector; to stop tax evasion. With particular regard to the informal economy, additional measures suggested to Governments are: promoting formal jobs within the framework of factory development; improvements on infrastructures as to promote the establishment of firms in poor and rural areas; simplify procedures and reduce costs to start a business; remove heavy regulations and promote incentives for formalisation. Despite the awareness that the deregulation did not result in a decrease in informality, the report insists on some suggestions that have characterized the approach of the Bank since the beginning: business reforms leading to easier regulations; reducing regulatory burdens; reduce costs and times to start a business. While admitting that core labour standards are essential, the Report draws attention on the costs on firm these entail, thus affecting productivity and acting as an obstacle to formal work. The challenge is thus to balance workers’ protection, including for informal workers, and firm flexibility in the management of human resources. Flexicurity remains thus the main objective.

A greater attention to social inclusion can be found in the Report if compared with the 2013 Report on jobs. The need to understand how social protection and labour institutions can be strengthened in the context of the changing nature of the work as to ensure poverty reduction and the protection of informal workers is stressed. Social assistance interventions are claimed as necessary to increase productivity of informal workers. Need for representation of both formal and informal workers is highlighted and the necessity to renovate labour unions and institutions to make them relevant in the new work context and to give voice to informal workers too. Active labour markets programmes are demanded from Governments to ensure counselling, training and information also for those working in low-productivity jobs. However, issues related to the formalization of economies and related incentives for businesses entry into the formal sector are not addressed.

On the side of formalization, a set of policy recommendations applicable to developing as well as emerging and developed countries are synthesised in a paper prepared for the World Bank as part of the programmatic Turkey country economic memorandum(World Bank, 2009). A fundamental principle for policies is the need of a detailed understanding of the specific country-context. A detailed knowledge of the nature of informality in each country will support the identification of the necessary mix of policies to reduce informality and to promote the transition from the informal to the formal sector. Here, as in other World Bank’s documents (World Bank 2011, Benjamin, 2012), the authors suggest a policy package comprising “carrots” (tax reduction, simplification, benefits from formalization) and “sticks” (enhancement and enforcement of improved laws and regulations) to be adapted to the local context. “No one policy”, is stated, “is likely to work on its own: rather a package of policies to achieve various goals – economic growth, social protection, inclusion and trust- may work best”. A package of successful policies should include several elements, depending on the country context: regulatory reforms encouraging firms formalization; promoting business creation through simplified registration’s procedures and business services; identifying effective labour regulations that do not translate into barriers for firms’ expansion through an excessive workers’ protection; strengthening enforcement of improved laws; creating a more inclusive social system as to enhance human capital and economic growth; building social trust and a “culture of compliance”. A good balance of enforcement and incentive tools is thus conceived as a good path to promote the transition to the formal economy.

Similar conclusions on the necessary policy initiatives are contained in a technical note produced by the World Bank for the Government of Ukraine (World Bank, 2011), which concludes that a wide range of policy actions could be implemented to reduce informality. However, the note highlights that there has been little evaluation of the results achieved by past experiences inspired by the “carrots and sticks” approach and that more empirical analysis is required to provide evidence of the effects of these policies.

Still on formalization side, a co-publication of the World Bank and the Agence Française de Développement on informality in West Africa (World Bank, 2012b) provides policy responses by distinguishing between large and small informal enterprises. While for large enterprises policy implications are related to formalization, for small ones interventions should aim raising productivity: credit, business services and training being at the top. This can be seen as a pragmatic orientation that, on the one hand recognizes that the informal sector is essential for job creation, on the other hand that its chances of growth are intrinsically limited. Therefore, although the mix of carrots and sticks is again mentioned, the formalization of small businesses remains a long-term goal but with uncertain chances of success.


3. The Swedish International Development Agency

Another agency that attaches large importance to the informal economy issues is the Swedish International Development Agency (SIDA). The informal economy is covered under the umbrella of private sector development that was initiated by SIDA in 2002. The instructions for policy development included the task to highlight the issues of relevance to the informal economy in SIDA’s partner countries. In an attempt to develop a more systematic program approach to the informal economy, SIDA commissioned a report “The Informal Economy” by K.Flodman Becker (2004). The commissioned study followed two main objectives: (a) to determine the relevance for a SIDA strategy on the informal economy, and (b) to provide a background for further analysis of the informal economy in view of the SIDA strategy elaboration.

The report underlined that “a number of steering documents for Swedish development cooperation, such as the Government Proposition “Shared Responsibilities”, clearly state that measures regarding the informal economy must be taken as part of necessary steps towards poverty alleviation”. In its background document for Private Sector Development “Making Markets Work for the Poor” SIDA identified strategic areas for intervention aimed at informal economy actors. Therefore, the report recommends that the next step for SIDA should not be to develop a strategy, but to focus on the development of an operational approach in relation to the informal economy. More concretely, the report provides the following recommendations:

  1. SIDA should develop an operational approach towards the informal economy;
  2. SIDA should ensure that the projects that directly or indirectly target the informal economy actors include differentiated target group analysis in order to ensure the maximum project impact;
  3. SIDA should perform field studies in a number of partner countries with the objective of identifying which intervention areas would generate the greatest impact;
  4. SIDA should reassess existing projects that are targeting groups belonging to the informal economy, in order to increase effectiveness and impact and to avoid any negative effects;
  5. SIDA should exchange views with other donors on matters related to the design, implementation and evaluation of informal economy programmes and projects;
  6. SIDA should pursue the idea to conduct a seminar on how to best support informal enterprises in order to gradually integrate informal economic units into the informal economy.

Thus the approach adopted by SIDA is not the one of preparing a stand-alone strategy dedicated to the informal economy. The informal economy issues have been integrated mainly under Private Sector Development strategy and policies, topically attached to the poverty reduction and other related goals. The approach is based on treating the informal economy as a cross-cutting issue. The above-mentioned recommendations essentially support the creation of operational integrated approach based on mainstreaming the informal economy issues and considerations into a broad spectrum of activities of the organization.



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