Inclusive Growth and the Informal Economy

Martha (Marty) Chen Fri Aug 21, 2015
Topics: Economy

There is a growing consensus in the international community that economic growth needs to be inclusive: that it needs to be broad-based and create productive employment opportunities for the majority of the working-age population. But there is less consensus about what should be done about the informal economy.

Many policy makers continue to stigmatize the informal economy as a problem: as illegal, as a drag on the economy. Yet a majority of the workforce in most developing countries, a growing share of the workforce in most developed countries, and most of the working poor, especially women, are informally employed. And most informal workers are trying to earn an honest living, not evade taxes or regulations. What should inclusive growth mean for the working poor in the informal economy?

In January 2015, the World Economic Forum (WEF) published a framework for benchmarking inclusive growth in six policy domains: education and skills; employment and labour compensation; asset building and business environment; corruption and rents; fiscal transfers; basic services and infrastructure. The WEF Framework notes, at the outset, that wages and returns to self-employment, especially small businesses, constitute a very high percentage of income in all but the wealthiest households. It acknowledges that:

  • Many working families run small businesses and they need regulations which make it easier to start and run a business and also financing plus cellular and broadband internet connectivity to enable their businesses.
  • The working poor need social safety nets to mitigate the effects of external and transitory livelihood shocks; social insurance to cushion risks associated with ill health, disability, work-related injuries and old age; and social assistance such as in-kind transfers to meet the minimum needs of the chronically poor so that they too can participate in, and benefit from, growth.
  • The working poor need basic services, notably health, and basic infrastructure, such as shelter, power, water, sanitation and transport.

While these measures of inclusion are of critical importance, the WEF Framework does not address the key barriers to making growth more inclusive of the working poor in the informal economy. It does not address the fact that informal enterprises and workers are not included in economic planning, nor the fact that most policies, laws and regulations are biased towards formal enterprises and workers.   

"For economic growth to be truly broad-based and inclusive, the working poor in the informal economy must be recognized for their contributions to economic growth and integrated in economic plans and policies. Only then can inclusive broad-based growth for the majority of the working-age population be achieved."

The first step is to recognize that informal workers are legitimate economic agents who contribute to the economy. The second is to recognize that most formal regulations—labour and employment law as well as commercial law and sector-specific policies—are designed for formal firms and workers and, thus, are irrelevant to, biased against or hostile towards informal enterprises and workers. And the third step is to formulate appropriate policies, laws and regulations to support informal enterprises and workers—with representatives of informal workers involved in the process.

In sum, an inclusive approach to economic growth must recognize, validate and integrate the working poor in the informal economy. What is needed is a new vision and approach that validates economic diversity and allows the informal and formal economies to co-exist in a hybrid economy.

This approach will require a radical reappraisal of economic planning to integrate informal enterprises and informal workers. This will require an inclusive approach to policy-making and planning whereby organizations of informal workers are invited to have a seat at the policy table. Around the world, the working poor in the informal economy are organizing and beginning to assert their collective voice: they would welcome opportunities to help shape the wider regulatory and policy environment in which they live and work.