Informal Economy

The informal economy entered international development discourse during the early 1970s when an International Labour Organization (ILO) mission to Kenya noted the diversity of small-scale economic activities that were not recognized by public authorities. In addition to what were considered waning traditional occupations, it cited profitable and efficient enterprises. These activities were unrecorded, unregulated, and largely ignored by policymakers and[Page 255] government. Although the ILO study noted the dynamic nature of the informal economy, this economy originally was perceived as consisting of activities that were of little relevance to the formal or “real” economy of a country. Informal occupations were considered to be transitory in nature and were predicted to disappear as development, in the form of economic growth and industrialization, progressed. Today it is widely acknowledged that the informal economy is a fixed characteristic of most countries of the world. Although understandings of informal economic activity and employment arrangements have advanced considerably, full appreciation of this complex phenomenon is far from complete.

Contrary to predictions, informal employment is on the rise in all parts of the world. In 2002, the World Bank estimated that 40% of nonagriculture gross national product in low-income countries and 17% in high-income countries were generated in the informal economy. In developing regions, informal economic activity takes the shape of both self-employment and wage employment in small-scale informal enterprises, including street vending, home-based workshops, and personal services. In advanced capitalist economies, the advance of informal employment is seen in the shift to nonstandard employment relations in the form of hourly and piece-rate employment as well as subcontracting to small informal units and industrial out-workers. And the transition economies of the former Soviet Union and Central and Eastern Europe have seen informal economic arrangements of many types proliferate as economic well-being has faltered. Informal economic activities and employment arrangements in all parts of the world generally do not subscribe to official regulations or provide worker benefits and social protection.

Traditionally perceived as consisting of survivalist activities, the informal economy acquired negative connotations. However, because the majority of informal economic activities provide goods and services whose production and distribution are legal, they are considered “extralegal.” The informal economy is widely characterized by low entry requirements (e.g., capital, qualifications), a small scale of operations, skills often acquired outside of formal education, labor-intensive methods of production, and adapted technology. The informal economy does not include the reproductive or care economies when they consist of unpaid domestic activities, nor does it include the criminal economy.

Due to the heterogeneous character of the informal economy, numerous definitions have been elaborated. The Swedish Agency for International Development Cooperation identifies four trends in defining the informal economy: (1) definition by economic unit and whether it complies with official regulations that apply to its trade (e.g., registration, tax payment, zoning); (2) definition by employment category whereby all work that takes place in an income-producing enterprise that is not recognized or regulated by existing legal frameworks is considered informal; (3) definition based on location or place of work, including home-based workers, street traders, itinerant or temporary job workers, and those who labor between home and the streets (e.g., trash sorters); and (4) definition by income or employment-enhancing potential, ranging from modern enterprises (e.g., data processing) to survivalist tasks (e.g., shoeshining, trash sorting, domestic servant work). Although definition by economic unit is the conventional method to define the informal economy, most observers favor definition by employment category whereby all nonstandard wage workers who work without minimum wage and without ensured work or benefits are considered to be informally employed. The array of definitions should be seen not as an obstacle but rather as an aid to understanding the varying nature and manifestations of the informal economy.

...