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INTRODUCTION: summary of most signifcant policy debates

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Alessio Lupi24 October 2018


The size and growth of the informal economy as currently defined in terms of employment and contribution to GDP are too important to remain left to their spontaneous development all the more so as the characteristics of the related jobs are far from what could be expected from a rights-based approach. Moreover the potential of these economic activities could be enhanced as well as the living conditions for the informal workers provided that an enabling environment is created. The transition from the informal to the formal economy is henceforth on the agenda of many international agencies and many countries.

A basic question that needs to be answered when designing the policies tackling the informal economy is the character of relationships between the informal economy on one side and other national social and economic characteristics on the other side. If any significant relationship is observed, it is also important to examine the presence or absence of causality. If a causal relationship can be found between certain socio-economic parameters and the informal economy, then acting on these parameters would influence also the informal economy, thus making the policies more effective. In this Volume we start by providing stylised facts documenting the potential relationships between the informal economy and other features of the socio-economic context.

We use our measure of the informal economy - the share of employment in the informal economy in total non-agricultural employment (developed in Charmes, RNSF, ARS Progetti 2016) to demonstrate that this variable does not exhibit any systematic regional pattern. Large differences exist within the continents and even starker differences can be observed at the national level. There is also no obvious North-South divide, neither East-West divide. The intra-regional variation in terms of informal economy incidence is large. Similarly, there does not seem to be any systematic relationship between the informality and the socio-economic typology defined by the “varieties of capitalism” (VoC) concepts. One can easily show that this popular and academically respected typology is not consistent with the observed degree of informality.

Most academic studies find that the extent of informality is significantly linked to poverty incidence and GDP/income level. However, the existence and direction of causality has not been established to a sufficient degree. For example, the cause of reducing tax costs, wage costs or costs of compliance with various regulations can motivate some economic units to remain fully or partially informal. In such a case the poverty reduction may not lead to reducing the extent of informality. Rather, policies aimed at lowering these costs could be more effective. Finally, the extent of regulations is often blamed for pushing the economic units and workers into the informal sector. However, most of the authors agree that deregulation can affect the informal economy only if accompanied by a number of other measures, notably an appropriate enforcement.

One of the obvious problems is the fact that for some individuals and economic units being informal is not a necessity, but a rational choice. Therefore, some authors suggest that certain degree of enforcement may be more effective than purely dismantling the various barriers. Similarly, empowering the people dependent on the informal economy by providing them with finance, skills and access to services may increase their income and productivity, and improve their living and working conditions, but does not necessarily imply that they will become parts of the formal economy.

Approaches towards informal economy can be divided between empirical and normative ones. The former are characterised by a value-neutral stance and they are focused on explaining the state of affairs through observation. The latter are focused on the exploitation of values and on achieving a desirable situation postulated in terms of these values. In order to formulate certain value-based apparatus in relation to the informal economy, its value has to be assessed. The informal economy, although largely perceived as a negative phenomenon, has also many virtues. In particular, its large potential for employment, the use of human resources that are untapped by the formal sector due to various barriers, and being the “employer of last resort” for the poor is often appreciated by the stakeholders including governments and international organisations. Acting on the informal economy is thus subject to various warnings and limitations.

Despite the plethora of analyses, there is no internationally accepted approach towards the informal economy. In the absence of a clear-cut technocratic solution to the problem of informality, governments and donors tend to shape their interventions according to normative approaches based on their priorities, values, and ideological orientations. Therefore, in the common pursuit of reducing the informal economy, some governments may increase the regulations, monitoring and enforcement in order to get the informal economy into the spotlight, other governments may opt for decreasing regulations in the hope to induce a spontaneous formalization of the informal economy’s units. Similarly, some donors and international organizations may advise to deregulate, decrease administrative barriers and tax burden, while others may on the contrary advise to introduce new social contributions or safety nets to cover the poor, and to improve monitoring and enforcement.

Informal economy can be addressed in explicit and implicit ways. The latter is achieved mainly in the framework of poverty reduction, which represents a major goal of the current global development frameworks. Other global goals that are closely related to the informal context include, for example, the reduction of inequality, support of social inclusion, provision of education and skills, support to governance, institution building and partnerships. Poverty alleviation occupies a central place among the implicit strategies tackling the informal economy. This is mainly due to two reasons: (a) the significant relationship between the extent of informality and poverty at the national level, and (b) the fact that combating poverty has been at the centre of global international development frameworks since more than two decades. Given that the phenomenon of poverty has strong links to the informal economy and to the developing world, those working on poverty reduction are permanently confronted with the informal economy and face the challenges posed by informality.

Despite the increasing interest of governments and donors in reducing the informal economy, ILO is the only major international organisation that developed an official normative approach in this regard by adopting several key documents describing its position towards the informal economy and providing a normative advice how to tackle it. For other organizations that do not have such a comprehensive position towards the informal economy, the formulation of policies is usually provided by consultants whose views do not necessarily represent the institutional point of view. One has to admit that the lack of official standpoint on the informal economy is partially caused by the lack of unambiguous research results that could inform and inspire the official positions. On the side of relevant key actors focused on securing livelihoods, voice and visibility to poor workers in the informal economy, WIEGO – Women in Informal Employment: Globalizing and Organizing - is an influent global network committed with capacity building and awareness raising of informal workers and advocating for local, national and international policies addressing informality.

The policy formulation is in practice guided mainly by the value orientation of the implementing agencies. The rights-based approaches stress the importance of inclusion, protection and empowerment of the people dependent on the informal economy, while business-minded approaches stress the importance of deregulation, business freedom and enabling environment. There seems to be a broad consensus that formalisation of the informal economy is desirable and that it can be achieved through a gradual process, which should be accompanied by safeguarding against the potential adverse effects on the wellbeing of the informal economy subjects.

Among the international institutions that focus explicitly on the informal economy, the ILO plays the role of global trend-setter, mainly due to its long-term experience in the field, as well as its progress in adopting normative documents (ILC Conclusion on the Informal Economy and Decent Work, ILO Recommendation 204 on the transition from informal to formal economy, etc.). Other major donors use mainly the following approaches: treating the informal economy as a cross-cutting issue, mainstreaming the informal economy issues into all types of other interventions, or covering the informal economy under other topical strategies (e.g. Private Sector Development). In general, the approaches are also underlined by the recent move from isolated projects to more complex sets of projects or programmes.

The ILO follows the rights-based approach to the informal economy and inspires the interventions by many other donors and international organizations, including the European Union. This is mainly because in addition to the widespread poverty, the informal economy is characterized also by many other deficits, such as social exclusion, lack of access to services, rights, representation, and voice for the people dependent on the informal economy. Policies and measures that tackle these issues often address qualitative or structural aspects of livelihoods. They focus on the issues of decency, dignity, rights, quality of life, working conditions, etc.

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.

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 within the work programmes dedicated to the informal economy and people whose livelihoods depend on it. The latter are represented by the recent efforts 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).

Another major international agency that attaches a 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 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.

An example of unofficial but strongly institutionalized approaches to the policy formulation on the informal economy is provided by the World Bank that 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 analyses developed by the World Bank regarding the factors linked to informality often point to overregulation, excessive bureaucracy, 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 indexes). The policy recommendations typically include creating an enabling environment by removing these barriers and obstacles. At the level of direct actions in communities, the recommendations usually include improving access to credit or microfinance, business development services, provision of technical, financial and entrepreneurial skills and training.

The review of existing documents and materials lead to identify three specific approaches and three main technical or sectoral approaches underpinning policies designed to tackle the informal economy: the three general approaches include taxation, upgrading the informal activities within the value chains and organising the populations dependent on the informal economy. The three main sectoral approaches include social protection, skills’ enhancement through technical and vocational education and training, and finance.

At macro-economic level, the very first concern of the States and of the financial institutions providing aid and counselling to the governments of developing countries was about taxation: if it was true that the informal economy did represent such a share of GDP, then it should be transformed into governments’ resources and revenues, all the more so as the provision of support to these firms transform them into formal activities that become liable to the payment of taxes. Although the willingness to tax the poor may be found paradoxical and counter-productive in countries where tax evasion is likely to be more important among formal actors, the huge numbers of informal operators allow considering the broadening of a very narrow tax base. Doing so, governments are focussing their action towards the upper tier of the informal economy - that is the informal micro enterprises - rather than the lower tier or the income-generating activities. However the basic principle to be attained should be that whatever resources accrued to the State through taxation of the poor they should be offset by the resources the State redistribute to the poor in various manners.

As a precondition of formalisation, the design of a tax that would fit with the realities experienced by the informal operators has been attempted in several countries in Africa and Latin America: the principle of a synthetic or presumptive tax, as experienced in several African or Latin American countries is to be simple, unique, advantageous, based on objective criteria other than the wage bill though contributing to the social protection of the employees.

Upgrading informal activities within the value chains is two-fold. On the one hand home-based workers sub-contracted – through various intermediaries - by large outsourcing firms seeking cuts in their labour costs, maximisation of their profits and flexibility have to be protected. The hard working conditions and low pay that prevail in a system with sub-contracting in cascade require actions in terms of obtaining decent work conditions through organisation, bargaining and social dialogue and on the other hand in terms of sensitization towards enforcement and reinforcement of more efficient corporate social responsibility, making large companies accountable for the working conditions of the workers they hire, even indirectly through sub-contracting, giving voice to consumers and their representative organisations. On the other hand contract farming or agri-food processing (that are the equivalent of sub-contracting in industries) may also be synonymous of long hours and hard conditions of work for low wages or low rewards, whereas the inclusion into international markets may also provide new opportunities for small own-account producers and more favourable environment for the development of new businesses, innovative processes, and better working conditions.

Organising is at the core of the actions and policies designed to enhancing the livelihoods of populations dependent on the informal economy. Whatever the angle under which the question is apprehended, organising is the way and means to address it. Organising aims at obtaining the recognition of informal workers’ rights and supporting the communities of working poor. Sooner or later all policies and projects intervening in the field come to the organisation of the populations they support, because organising is key for financing, for extending social protection, for increasing its share in the value chain, and more generally to gain visibility, voice and self-esteem and confidence.

Two types of actions can be distinguished toward the organisation of vulnerable populations: a first and important one, which is illustrated by organisations such as SEWA (the Self-Employed Women Association) or WIEGO, is the attempt to intervene at global (regional, national and international) and political levels in support of the recognition of informal workers rights. Examples of such actions refer to workers such as waste-pickers, domestic workers, street vendors and transport workers, in other words informal workers who are not geographically located in places where they can meet together and who are especially vulnerable. Another type of action toward organising informal workers refers to local or sectoral development projects – donor- or government-funded – that try to rely on or revitalise pre-existing self-help groups in order to help communities in self-financing or contributing to social protection schemes or more generally giving visibility and voice.

With regard tosocial protection, its universalisation is goal 1.3 of the SDGs: “Implement nationally appropriate social protection systems and measures for all, including floors, and by 2030 achieve substantial coverage of the poor and vulnerable”. Beside good practices of capacity strengthening of public agencies or self-help groups, it seems clear that for most of the international and bilateral institutions, as well as governments, social safety nets may bethe solution that will allow achieving the goal of universal social protection. If so, the path is still long towards the transition from the informal to the formal economy. Of course, providing workdays to poor populations is positive but it cannot be considered as the unique solution towards achieving such an ambitious goal.

Social protection for informal workers must be mainstreamed and be a long-term commitment, but good practices and lessons learned from projects have still a role to play in the implementation of such national policies and national policies could play a role of coordination in this respect. Furthermore inefficient bureaucracies, immersed in clientelist practices, cronyism and devoid of resources, need to be sensitised, incentivised and accompanied by grassroots organisations in order to operate their mutation, not to say their revolution: serving the people rather than having the people at their service.

Technical and vocational skills enhancement is one of the major issues that should be taken into account in addressing the informal economy, for at least two reasons: on the one hand on-the-job training remains the main provider of skills in the informal economy, and on the other hand, all the youth enrolled in TVET official programmes will not be absorbed in the formal labour market and many of them will have to find their way within the informal economy. This highlights the strong inter-connection between TVET provision and the informal economy on the following fields:

  • Recognition and upgrading of skills developed in the informal economy, training of informal trainers, and upgrading of informal apprenticeship schemes;
  • Access to higher-level skills training for improving the informal workers' performance;
  • Formal and informal TVET schemes enabling learners to develop entrepreneurship and start-up businesses to come out from poor wages and insecure jobs.

The challenges lay in the place and role given to apprenticeship and the ways and means by which formal TVET systems strive to upscale the traditional-informal systems. Recognition of skills informally acquired is also a challenge as well as the adaptation of formal systems to match the new needs of the global economy. Today one of the most important issue that transition policies from the informal to the formal economy are facing is the absence of recognition of skills informally acquired, a pre-condition that is nevertheless necessary if a start is to be given to mobility from the informal to the formal enterprises.

The positive role of microfinance in enhancing the livelihoods of people dependent on the informal economy is generally recognised although some voices have begun to be heard about the risks of over-indebtedness. The combination of tight needs with large numbers of operators constitutes a vibrant market and has been the basis for the development of micro-finance and financialisation and the search for profit has progressively taken precedence over the solidarity motivation. However, these microfinance institutions in search of profit can also play a role in supporting the poor and vulnerable people dependent on the informal economy, even if they firstly seek after the most rewarding loans.

Micro-finance is defined as a set of financial services such as savings, micro-credit, insurance, money transfer, adapted to the needs of low-income and poor persons (especially those who do not have bank accounts). Because they have no collaterals, the poor have no access to the official banking system. In this sense, financial inclusion – the objective that microfinance aims at achieving – may be seen as a dimension of social inclusion.

Micro-finance has long existed in traditional societies under the form of rotating savings/credit schemes or clubs (known as “tontines” in Western and Central Africa or “merry-go-round” in Eastern Africa). Important actors gradually emerged between the mid-1970s and the mid-1980s, including the Grameen bank that Nobel Peace Prize winner Mohamed Yunus founded in 1983. Others include the Self-Employed Women Association (SEWA)’s micro-credit bank based in Ahmedabad, Gujarat, India

The various domains open for States’ and Civil Society Organisations’ intervention have been explored since a long time and the review of policies benefit from many experiences in the field at macro (national), meso (regional) and micro (local, households/enterprises) levels.

Taxation is the only of these domains that is the hands of the State. In all other cases, the micro-level experiences tested and implemented by CSOs (funded by international or bilateral donors) can be capitalised, adapted to local conditions, generalised and converted into national policies. Similarly, national policies can be supported, enhanced and improved at local levels thanks to CSOs, particularly in contexts of scarce budgetary resources.


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