Growth, informality and insecurity

SUKTI DASGUPTA

back to issue

AT the centre of the development debate lies the problem of creating employment in productive work with adequate and regular earnings. In other words, the challenge of creating ‘decent work’. Following poor growth rates in the ’80s, most countries of the developing world except parts of Africa, witnessed moderate rates of growth of GDP in the ’90s. But the labour force also expanded at rates of 2-3% per year on an average, making employment creation a major challenge for policy. Stagnant world demand and decreasing commodity prices have meant considerable difficulties for expanding output and employment while implementing structural adjustment programmes (SAP) in a number of developing countries. The problem is compounded by falling investment in the public sector, advocated by structural adjustment programmes.

Agriculture is still the main source of livelihood in many countries of Asia and Africa. Furthermore, poverty is concentrated in rural areas. However, the share of working population in agriculture has declined in most developing countries. Fragmentation of land, natural disasters and lack of remunerative employment on agricultural land has driven a large part of the formerly agricultural workforce to seek work in urban areas, leading to large increases in urban population in developing economies. The percentage of the population living in urban areas increased dramatically between 1970 and 2000, from 6.6% to 19.8% in Africa and from 7.4% to 25.1% in South Asia.1

 

 

Despite this population increase in urban areas, open unemployment, that is ‘not working but seeking work’ has not risen at a proportionate rate. In the absence of social protection policies, the only coping mechanism that the poor have, no matter how inadequate, is work. In this scenario, employment in the urban informal economy, mostly self-created, has expanded in most developing countries.

In the informal economy, which for many is the ‘employment of the last resort’, work is often distributed among more people, leading to large scale underemployment. As a share of urban employment, the informal economy accounts for over 60% of employment in Africa, between 40 to 60% in Asia, and around 40% in Latin America. Moreover, women constitute a major proportion of all workers in the informal economy.2

Work in the informal economy is mainly a means of survival. Joan Robinson as early as 1937 had noted that, ‘In a society in which there is no regular system of unemployment benefit, and in which poor relief is either non-existent or "less-eligible" than almost any alternate short of suicide, a man who is ...out of work must scratch up a living somehow or other by means of his (sic) own efforts’ (Robinson 1937: 83).

As such employment by definition is unprotected, less remunerative and often unsafe, there has also been a spread of socio-economic insecurity at work.

 

 

The word ‘informal economy’ is rather strongly embedded in the economic and policy literature today. Conceived in the course of some ILO studies (as part of the ILO’s World Employment Programme) in Africa by Hart in 1972, it nevertheless has been severely criticised by some – mainly because till date there is no clear definition. From the ‘informal sector’, we moved to ‘informal economy’, and soon other terms such as informal work and informal employment also emerged.

Strictly speaking each of these have different interpretations, though obviously are closely related. And depending on how we define each, statistics also vary. Yet, despite all these problems and harsh criticism, the concept has survived. To understand why, it may be useful to go back to the person who coined the concept in the first place – Keith Hart, the economic anthropologist. According to Hart this was simply a means of giving expression to ‘the gap between my experience there (in Africa) and anything that my English education had taught me before’ (1990: 158).

Anyone sifting through the vast literature on the informal economy will be surprised at the various ways it has been described – ‘marginal’, ‘survivalist’, ‘working poor’, ‘small capitalist sector’, ‘dynamic’, ‘people’s economy’, ‘entrepreneurial’ are among the descriptions. While there are those who highlight the vulnerability, voicelessness and powerlessness of those in the informal economy, some others speak of work in the informal economy as a means to reclaim some economic power that centralised agents deny them.

The fact that the informal economy has been used to describe such varying types of economic activities – some stagnant, low productive, what can best be termed ‘underemployment’, and some others profitable and dynamic – only means that there exist within this vast amorphous informal economy heterogeneous economic activities in terms of income generating capacities, ownership of work, skills, work status, productive capacity, links to other sectors and to the state. At the risk of broad generalisation, I would like to categorise workers in the informal economy into four groups.

 

 

The first group is that of owners of informal enterprises (employers). These enterprises are, in a sense, an extension of the formal sector through various putting-out systems. These would largely tend to be manufacturing enterprises, though not exclusively. The differences between these enterprises and formal sector enterprises are many. Informal enterprises usually have 10 or less workers, enterprises may not be registered, workers often have no written contracts, the level of technology is low (often indigenous), and capital intensity is low.

Goods produced by informal enterprises are both traditional and modern. In recent years, the demand for the produce of these modern sector goods has risen, giving informal enterprises a special place in the economic system, even prompting many to argue that they are dynamic. Such enterprises produce small parts for the electrical industry, parts for the automobile industry, precision equipment and clothing and clothing accessories to name a few.

Sub-contracting jobs to informal manufacturing enterprises is a means of cost reduction for the larger firms in the formal economy, and this trend has been steadily increasing in recent years. It is in the work of these micro enterprises that the links between the formal and the informal are most evident. For owner-managers of informal enterprises on the other hand, the lack of regulations and taxes in the informal economy as opposed to the formal sector is an advantage. The intense competition between informal enterprises, however, leads to their high birth and mortality rates.

 

 

The second category is that of ‘own account’ workers. Unlike the first group, enterprises owned by own account workers do not employ any paid employees on a continuous basis. Some of these may be household enterprises based on the use of unpaid family labour. Own account enterprises are closest to the description offered to us by Robinson – many employed in own account enterprises create their employment doing whatever they can to survive.

A majority of own account work is also service work – petty trade, street vendors, porters, barbers, shoe shine boys etc. Available data also show that these trade and service activities constitute the largest share of all work in the informal economy, and a vast majority of these workers are rural migrants.3 Most own account workers cannot break out of poverty, although those that cater to strong markets may evolve into specialised enterprises.

The third group is that of informal wage workers – those who are employed to work in someone else’s enterprise, or in the case of domestic workers someone else’s home, but who are unlikely to have any written contractual relationship. A vast majority of these wage workers are also casual, insecure about their employment relationship and, of course, often exploited.

The fourth group is that of home workers – they are a cross between own account workers and wage workers, and are what may be called the ‘hidden workforce’. Not surprisingly, a major proportion of these workers are women engaged in bidi rolling, bindi making, incense making, garment making, and so on. Some home workers are indeed self-employed – they buy their own raw materials and produce and sell, but a vast majority of others work on a piece-rate basis. A middle person provides the raw materials; they work on the raw material and hand over the finished product to the same middle person. Though not employees in the real sense of the term, they are at the mercy of the person with whom they have a work relationship.

Currently there are no systematic data on the different segments of informality that I have identified. However, based on the data we have, it would not be far fetched to say that own account workers and home workers dominate the informal economy workforce.

 

 

As noted earlier, for many work in the informal economy is ‘employment of last resort’. This is because in general, entry barriers are few in the informal economy. However, becoming an employer in an informal enterprise is certainly more difficult than being an own account worker or a home worker. This is because the capital and the skills required to set up informal enterprise are probably higher than those involved in other informal activities.

Globalization and the growth of sub-contracting have pulled many informal manufacturing enterprises into the global production chain. The risk reducing flexibility and the lower cost associated with sub-contracting have made it an attractive option for many big firms and multinationals. This has increased competition within informal enterprises and has exposed them to foreign competition.4 These kinds of forces may not operate in other forms of informal economy activities which do not cater to strong markets. On the other hand, for a large majority of workers in the informal economy who are own account self employed, home workers or casual wage workers, their economic activities are best characterized by low skills, low productivity and low incomes, with often little scope of upward mobility.

 

 

The Lewis model (1954), which had dominated development thinking in the sixties and seventies, had posited that in a dual economy with a traditional (agricultural) sector, a modern (industrial) sector and a wage differential between the sectors, a transfer of labour takes place from the low wage traditional sector to the high wage modern sector that sustains the process of industrialization and development. The transfer from agricultural sector to urban areas has certainly been a predominant characteristic of most developing countries. As scope of agricultural incomes shrink, and as cities become the centres of industrialization, a traditionally agricultural population is increasingly pushed and pulled towards cities.

However, instead of being absorbed by the modern industrial sector (or the formal sector) these rural migrants join the vast numbers employed in the urban informal economy. Though the Lewis model was developed to understand the dynamics of developing economies with unlimited supplies of labour, as Lewis (1979: 223) commented, it described better the development process in 19th century Europe which also had the necessary capital to employ the labour being transferred to urban areas.

 

 

On the other hand, there is hardly anyone who will doubt that high rates of growth are necessary for improving the employment situation. If we take the example of India, the Indian economy has grown at the rate of 5.9% on an average in the ’80s and 5.5% in the ’90s.5 These are not ‘low’ rates of growth on their own. The Indian economy has also managed to avoid many of the shocks that have rocked the East Asian countries in recent years. However, if we compare per capita income growth rates (GDP growth rate adjusted by growth of population) over a medium term period, we find that in India per capita incomes have grown at the rate of 2% annually since 1960 to the mid-’90s compared to per capita growth rates of 5 to 6% in East Asia during the same period!6

Alongside, there is also the problem of assuming that growth will trickle down to the masses on its own. Evidence of the trickle down effects of growth have been few, though some may argue that in India they are reflected in the falling rates of poverty in both rural and urban areas. Inspite of some positive developments, poverty persists, and poverty and insecurity of a large proportion of the working population is a reality in most rural and urban areas.

If the economy were to grow at rates high enough to absorb the underemployed labour, accompanied by institutional change – access to education and credit – low productive activities in the informal economy would shrink. The informal economy is neither always stagnant, nor always a feature of stagnant economies. In growing economies the informal economy may also operate, though at high levels of growth it is likely that growth in the informal economy will be less than the growth in the formal sector. Faster economic growth is likely to lead to faster growth in demand for labour in the formal sector.

 

 

On the other hand, lack of growth and investment along with a drop in productivity and real wages will lead to a rise in certain types of informal economy – those characterized by low income service activities. In other words, the nature of growth of the informal economy has much to do with the economic environment in which it operates. If there were successful macroeconomic growth with strong employment effects, it would stimulate the economic environment for creating good quality jobs. This is confirmed by the ILO (1998) finding that there is a significant negative relationship between GDP growth rates and employment in the informal economy. Mitra (1994) also finds a negative correlation between the rate of growth of employment in the formal sector and that in the informal sector.

No matter what the nature of work, the informal economy provides many with a purchasing power which would have been absent without this source of livelihood. As noted earlier, in this sense the informal economy is a ‘coping mechanism’. It may be argued therefore that supply creates its own demand in the informal sector. However, it is highly unlikely that the compensatory increase in demand that is created by supply of goods and services in the informal economy will on its own counterbalance the low rate of growth of labour demand that gives rise to such survivalist activities in the first place.7

 

 

In the context of informality, it is more meaningful to look at socioeconomic security rather than social security. We are all aware that a vast majority of those working in the informal economy remain outside the reach of social security systems. Socioeconomic security is a broader concept and refers to opportunities of productive employment in the labour market (labour market security); protection against loss of income earning work (employment security); protection of adequate and regular income over a lifetime (income security); protection against accidents and illness at work (work security); opportunities to gain and retain skills at work (skill reproduction security); protection of collective voice in the labour market (voice representation security); and security of access to basic amenities such as adequate food, health care and shelter (basic security).

The first six refer to a person’s work, while the last, basic security, is largely determined by the person’s social and economic status, as well as the existing state sponsored welfare system that allows or enables every citizen the right to basic security. In the absence of any such infrastructure, work provides the means of meeting the basic requirements of life.

Insecurity at work is a function of threat/risk of a particular insecurity occurring and the severity of impact of a particular threat. How people cope with insecurity is affected by available resources, which can be measured at several different levels such as individual, household, community and national.

It surely does not need any sophisticated economic analysis to argue that socio-economic insecurity in the informal economy is high and widespread. Insecurity is embedded in the definition of informality. Workers in the informal economy do not have a legal status, with low levels of education and skills their opportunities of productive employment are few, their employment is not protected, incomes are low and irregular, safety and health conditions at work are dismal, scope of formally recognized training at work is non-existent and a vast majority do not have their voice represented in the labour market.

 

 

If we consider income security to be fundamental among all the mentioned securities, then informal economy workers are undoubtedly in very insecure situations. A majority of such workers earn low incomes, often less than poverty incomes. For a vast majority, incomes are highly irregular. Results from surveys carried out in Ghana and Tanzania reveal that 79% of the ‘working poor’ (those who are working but who earn less than a dollar a day) in Ghana and 95% in Tanzania worked in the informal economy. And over 85 to 90% of workers in the informal economy reported irregular incomes.8

Poverty compounds the many risks faced by workers in the informal economy. For the self-employed the risks relate to the uncertainty of the market, lack of capital and to lack of legal status. Any of these could result in the collapse of their business. Also, as already stated, competition is great among informal enterprises that subcontract work for larger enterprises, resulting in intense pressure to engage in cost cutting to survive in this competitive environment. For wage workers the risk is mainly that of loss of work because employment in the informal economy is not legally protected. Moreover, for casual workers it is also a question of finding work that is remunerative.

 

 

Illness and loss of work or workdays lost due to illness are also major problems. Inability to work because of an illness can cost a worker his or her job employment. This is especially so for wage workers but also true for the own account self-employed that may not have any family help. Women workers risk loosing their work because of pregnancy. Furthermore, these women are often unable to rest either before or after child birth because they cannot afford to not work, resulting in severe damage to their health. Illness can also result in a huge financial burden leading to bankruptcy, or selling of assets or borrowing and getting caught in the cycle of taking loans to pay off loans, or even that of free labour to the loan provider.

For a majority of workers in the informal economy a not uncommon pattern is movement from one crisis to another, managing to break even till another crisis strikes. As noted above, the crisis are varied – both related to work and to other aspects of life.9 Those who are not able to cope spiral further down into poverty. Moreover, a crisis may result in the withdrawal of a child from school, or a change in the pattern of labour market participation of family members.

The impact of insecurity and vulnerability in the informal economy is stronger because of lack of coping strategies. There is hardly any institutional support for coping with crisis so workers in the informal economy fall back on family and friends, or their savings and assets, all of which are far from adequate. While local level coping mechanisms in the form of community and kinship networks are extremely important and provide valuable support to members of society, they cannot be substitutes in the long term for sound social protection systems.

Moreover, the extent of financial support from community and kinship networks may be limited because those from low income groups are likely to hail from communities with low financial resources. In addition, it is likely to put further strain on an already vulnerable community. Workers in the informal economy are therefore in a situation best described as high insecurity combined with inadequate coping strategies or high insecurity combined with powerlessness in coping with insecurity.

 

 

In this context I would like to underscore that insecurity is probably widespread today among all members of society. However, the impact of insecurity on those in the informal economy is stronger mainly because the coping strategies that are available to them are inadequate.

In a survey conducted by the ILO’s programme on socio-economic security in Gujarat (2000) among low income women workers, we find that as high as 93% of those in urban areas reported a crisis in the last three years that affected the family’s financial situation.10 For a majority (30%), the single major cause of crisis was expenditure on a social function or illness, while 28% reported loss of work. The survey also found 85% of those in urban areas reported that their earnings varied over the year, of which 24% reported substantial irregularity.

The survey also found that while risks abound the coping strategies are few or limited. One form of coping strategy in the informal economy is multiple employment. This, however, leads to ‘self exploitation’ – long hours of work and accompanying stress and strain. Yet, 26% of women surveyed were involved in more than one employment in the course of a day. The survey also verified the fact that available coping mechanisms were local, in the form of family and community networks – 78% of those who witnessed a crisis in the previous three years went for help to family or community members. The incidence of debt was very high – 80% of the low-income women workers revealed that their household had a significant debt, indicating high vulnerability.

 

 

The expansion of the informal economy certainly has to do with lack of adequate growth, and lack of institutional access to social protection for much of the workforce. Countries in East Asia, which enjoyed relatively higher rates of growth, have a relatively smaller sized informal economy than countries such as India, Pakistan and Bangladesh.

At the same time, at the present juncture policy-makers are looking to the informal economy to solve the employment crisis – ‘decent work in the informal economy’ being the slogan. This is because employment creation in the informal sector is relatively cheap. At a time when there is pressure on governments to diminish the size of the public sector and disinvest, advocating employment creation in the informal economy could be an alternative. Moreover, in policy circles the ‘small capitalist’, ‘entrepreneurship’ view of informality is steadily gaining prominence.

However, policy-makers need to be careful about putting too much emphasis on the informal economy to solve the current employment crisis. Insecurity in the informal economy is high, while coping mechanisms available are inadequate. In fact, the informal economy itself may be looked upon as a coping mechanism for a vast majority of workers who are unable to find jobs in the formal sector in the face of non-existent social protection policies.

 

 

The government can play a facilitating role by providing many of those in the informal economy with a legal status, advance loans, provide training and so on. In a sense that may be ‘formalising the informal’. However, the heterogeneity within the informal economy needs to be recognized. Heterogeneity in the informal economy encompasses skills, work status of workers, their productive capacity, their links to other sectors and to the state.

There are some activities in the informal economy that cater to strong markets and have strong linkages with other sectors of the economy which can benefit from government intervention. But there are other activities carried out by a vast section within the informal economy that have little scope for upward mobility. Workers engaged in these latter activities, which are usually at the bottom of the skill hierarchy, need to move to more remunerative jobs to improve their condition. If the state is unable to create more remunerative jobs then providing these workers with access to capital, access to training and market information to enable them to move into higher income activities are again the obvious policy prescriptions. Community bodies, non-governmental organizations, which are already working with parts of the workforce in the informal economy, also have important roles in this regard.

Finally, in spite of the problems of organizing workers in the informal economy, the trade union movement will need to rethink its position vis-à-vis the informal economy because it appears that additions to the labour force in the coming years are likely to be from here. And since the current political economy climate is in favour of moving the onus of job creation and job retention from the state to the individual, having a legitimate voice in the labour market by affiliation to a union assumes even greater importance for socio-economic security for already disadvantaged workers in the informal economy.

 

* The views expressed in this paper are the author’s personal views and may not reflect the official view of the ILO.

 

Footnotes:

1. Data from Table A-9, UN 1985.

2. Data source Charmes (1998).

3. See Dasgupta 2003a.

4. ILO (1998: 169).

5. World Development Indicators (2003).

6. Chopra et al (1995)

7. Dasgupta (2003a).

8. ILO-IFPSES data on People’s Security Surveys in Ghana and Tanzania.

9. Dasgupta (2003b).

10.Data from ILO’s Infocus Programme on Socio Economic Security conducted People’s Security Survey in Gujarat, India, 2000.

 

References:

Charmes (1998), ‘Informal Sector, Poverty and Gender: A Review of Empirical Evidence’. PREM, The World Bank.

A. Chopra et al. (1995), India: Economic Reform and Growth. IMF, Washington.

S. Dasgupta (2003a), ‘Structural and Behavioural Characteristics of Informal Service Employment: Evidence From a Survey in New Delhi’, Journal of Development Studies 39(3).

S. Dasgupta (2003b), ‘Women Organising for Socio-Economic Security’, The Indian Journal of Labour Economics 46(1).

K. Hart (1972), Employment, Income and Inequality: A Strategy for Increasing Productive Employment in Kenya. ILO, Geneva.

K. Hart (1990), ‘The Idea of Economy: Six Modern Dissenters’, in Beyond the Marketplace: Rethinking Economy and Society, R. Fridland, A.F. Robertson and Aldine de Bruyter (eds.), New York.

ILO (1998), Employability in the Global Economy: How Training Matters. World Employment Report 1998-99, ILO, Geneva.

W.A. Lewis (1954), ‘Economic Development with Unlimited Supplies of Labour’, Manchester School of Economic and Social Studies 28.

W.A. Lewis (1979), ‘The Dual Economy Revisited’, Manchester School of Economic and Social Studies 47(3).

J. Robinson (1937), Introduction to the Theory of Employment. Macmillan, London.

United Nations (1985), Migration, Population Growth and Employment in Metropolitan Areas of Selected Developing Countries. United Nations, New York.

World Bank (2003), World Development Indicators. World Bank, Washington, DC.

top