The informal economy

A defining feature of rapid urbanisation in developing countries has been the growth of the informal economy and settlements. Certain groups suffer disproportionally from informal arrangements, most notably migrants, women, the disabled and children. Children, for example, are particularly vulnerable with mortality rates exceptionally high in informal settlements. Mitlin and Satterthwaite (2012) note that in certain informal settlements in Nairobi (Kenya) child mortality rates are twice as high as the national average. In terms of employment, poor women are often concentrated in low-wage, low-skilled and home-based jobs in the informal sector. They face unique barriers in accessing health and other services, denying them the advantages associated with urban living (UNFPA, 2014b). Informality of all types is a sensitive political issue. Efforts to provide or improve housing for those living in informal settlements, or to bring informal workers into the formal economy by introducing new regulations and taxes, may be undermined by politicians pursing political support (Goodfellow & Titeca, 2012).

The informal economy refers to all units, activities and workers in informal employment and the output from that employment that is partially or fully outside the auspices of government (UN-Habitat, 2015a). Those who are employed in the informal economy face a number of challenges:

  • long working hours, low pay and difficult working conditions;
  • low job security, high turnover rates and low job satisfaction;
  • inadequate social security regulation;
  • difficulty exercising rights, for example combating child and forced labour and discrimination;
  • vulnerable, low-paid or undervalued jobs (particularly for women);
  • lack of representation.

The estimated proportion of people in informal employment in non-agricultural activities is significant (ILO & WIEGO, 2013: xv). In South and East Asia (excluding China), informal employment constitutes on average 60% of non-agricultural employment, ranging from 42% in Thailand to 84% in India. Similar findings are reported in sub-Saharan Africa: informal employment ranges from 33% in South Africa to 82% in Mali.

Women represent a greater share of the non-agricultural informal economy workforce. In South Asia the ratio is 83% of women to 82% of men; in Sub-Saharan Africa 74% to 61% and in Latin America and the Caribbean, 54% to 48%. In Abidjan (Côte d’Ivoire), 90% of women have informal jobs compared with 70% of men (Vanek et al., 2014). Similarly, young people are over-represented in the informal economy. Based on averages across 10 countries, up to 80% of young workers are employed informally (ILO & WIEGO, 2013).

Considering the negative long-term implications of operating in the informal economy for workers and their families, various donors have called for its gradual integration into the formal economy (UN-Habitat, 2015a). Williams and Lansky (2013) distinguish between hard and soft policy. Hard policies seek to deter individuals and firms through crackdowns or penalties, as well as giving positive incentives for compliance with rules and regulations (e.g. directly supporting micro-enterprise development). Soft policies support measures that improve conditions of employment and expand decent work opportunities.

Some advocate a more context-specific and holistic approach, a ‘transition to formality’ (ILO & WIEGO, 2013) that recognises that a gradual process is likely to be more effective. Four broad goals underpin this transition (Chen, 2012: 17–19):

  • creating more ‘decent’ jobs, preferably formal;
  • registering informal enterprises and regulating informal jobs;
  • extending state protection to the informal workforce, especially the poor;
  • increasing the productivity of informal enterprises and the income of the informal workforce.

Transitions to formality should support and enhance, rather than undermine, opportunities and livelihoods (UN-Habitat, 2015a). In the urban context, specific areas of action include:

  • Developing an understanding of the informal economy through data collection and analysis e.g. labour force surveys (Vanek et al., 2014).
  • Adopting tailored, context-specific responses that acknowledge the interrelationship between informality and basic securities such as property rights, land-use status and residency. Extending coverage requires the implementation of coordinated instruments adapted to the characteristics of different groups (ILO, 2008; 2010).
  • Prioritising spatial solutions. Urban planning needs to include informal workers and enterprises, providing access to basic services, facilitating transport and allocating space for expanding productive opportunities to the poor.
  • Planning for social inclusion. Programmes for specific groups need to include economic empowerment of women and youth. Local governments can nurture an enabling environment for collective bargaining by engaging the membership of trade unions, federations and CBOs, etc.
  • Building partnerships. Policies to address the informal economy need to be based on partnerships between authorities (local, regional and national), urban actors (informal economy workers and enterprises) and the private sector.
  • Learning from international good practice. In India, home-based workers have received basic infrastructure services; street vendors have been allocated sites by the local municipality; and waste pickers have received contracts to collect, sort and recycle waste. In South Africa, street vendors receive infrastructure and technical support. Waste pickers in Colombia are paid to collect, sort and recycle waste. The Thai government has implemented an act to support home-based workers.