City2City

Informal employment – informality - is everywhere in the developing world. Understanding the informal economy is critical if one wants to better understand the political, economic and social ecosystem around rural and urban interlinkages.

Despite its importance few have looked closely at the informal economy. Informal workers in developing countries face economic, institutional and social constraints, such as corruption, inefficiency of the production process and barriers, such as red tape and burdensome legislation, preventing them integrating into the formal economy. Yet not all informal workers are the same: “multi-segmentation” is a key feature of the informal economy everywhere, in which a relatively well-off small group of successful individual enterprises coexists with the vast majority of smaller, less successful enterprises operating in precarious conditions and struggling to survive. The latter are often trapped in hardship by barriers preventing their access to things such as credit or training.

The link between social capital and the informal economy is also important, but again has been little studied by economists. Social bonds play a role which is either: positive if the networks help compensate the imperfections in the labor and capital markets; or negative if forced solidarities (especially financial transfers) are imposed within the family and community, which prevent informal businesses to develop.

Ultimately, documenting the dynamics of the informal economy remains a major challenge. Over the long run, the dynamics of the informal sector are driven by demographic, economic and public policy determinants. Yet at least until the global financial crisis, the strong economic growth at the start of this century resulted, for the first time, in a significant reduction in the urban informal sector.

Looking at the mobility between formal and informal sectors and the link between informal employment, income and poverty can help us understand further these dynamics.</p><p>

Poverty and informality are strongly correlated. And so, development policies would do well to help people make the transition from informal to formal employment. However this will take time and so, a two pronged strategy is needed which aims also to increase the incomes (through increased productivity, better access to credit, etc.) and living conditions (especially social protection) of those working in the informal sector.

When the formal labour market cannot provide a livelihood to those wanting to work, the informal sector offers a refuge for workers, even in emerging countries. In developed countries, new forms of informal employment are appearing. Indeed, informality challenges human development everywhere.

On the other hand, instantly eliminating informal economies can worsen socioeconomic disparities. It will disrupt livelihoods of the people, including the most vulnerable groups. What cities need is engaging and integrating informal players into their urban planning and policy interventions.

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