Five myths about the informal economy that need debunking

A street vendor in Hanoi, Vietnam. Rather than being “helpless and hopeless”, many informal workers are self-reliant and ambitious. Wikimedia, CC BY-ND

Five myths about the informal economy that need debunking

On July 1, 2019, Australians will be able to call a new “black economy hotline” to report any businesses “dodging their responsibilities” as taxpayers. It’s part of a larger government initiative launched to fight against informal economy. Meanwhile, 7,000 kilometres to the northwest, the Global Times reports that Bangladesh is seeking to formulate a policy that would help the 87% of youth engaged in informal economy, ensure the sector’s sustainable growth and increase the nation’s economy.

These two different approaches show how difficult it is to integrate informal work into an economy: should we fight it or work with it?

As researchers, we often get asked about the “risks” associated to informal economy. Doesn’t it lead to “losses” for a society? Aren’t such workers “missing opportunities”? These questions reveal something else, however: that informality is often perceived negatively.

As citizens and researchers we identified five myths we often hear on this topic:

  1. Informal workers only act in a shadow economy.

  2. Informal workers come from poor and low-education background.

  3. Informal workers are helpless and hopeless.

  4. Informal workers do not use technology so they are left out.

  5. Informal work should be formalised at all costs.

While this list is neither exhaustive nor are these assumptions completely unfounded, we propose some explanations why they may need a debunk based on our ongoing research in developing and emerging economies in which we inspect, deconstruct and revisit pre-conceived ideas about informality.

Myth 1: Informal workers only act in a shadow economy

False: the informal sector’s contribution to non-agricultural gross domestic product (GDP) varies from 25% up to 50% per country.

The informal economy is mixed across the globe and characterised by worker vulnerability, but nevertheless contributes to many products and activities we share daily.

As a worker, you can be engaged in a continuum of formal and informal work. The employment history of 2,000 workers in Bangladesh reveals that most oscillate between jobs with formal characteristics, including written contracts, and others without.

Enterprises have a role too. Research on the Indian manufacturing sector shows that within the first decade of the 2000s the share of workers with temporary contracts with formal firms increased steadily from 16% to 27% across the country.

Garment factory in Bangladesh, 2012. Fahad Faisal/Wikimedia, CC BY-ND

This is not just a characteristic of developing economies, as it also exists within OECD member nations such as the Netherlands, where the tax system may incentive firms to use contract labour rather than salaried workers.

Thus, both legislation on contract structures and tax systems matter when explaining how informal work evolves in a society.

A woman works on a dump, Kolkata, 2016. Often rag pickers are connected to organisations working with municipalities. Sterneck/Flickr, CC BY-SA

Informal work can also be part of a wider system. In Hanoi (Vietnam), informal recycling coexists with municipal waste systems. In Bangalore (India), a mix of public/private, formal/informal water-supply systems have become the norm to provide water according to location of households and their available income in obtaining water.

The informal economy also contributes to global trade, whether in agriculture, services or industry – even across borders. Examples include trade between India and Pakistan or among African countries.

Finally, “informal” does not always mean “unorganised”. The renewed ways in which cooperation, mutualism and solidarity are shaping worker representation is a key feature of their role as economic agents.

While it’s often difficult to quantify the size of the informal economy or the extent of its components, we should refrain from likening it to shadow, hidden or illegal market. It could simply be that the work practice, the livelihood or the presence of individuals are engaged a space that is submitted to legislative loopholes or administrative complexities, which in turn make people and their activities been considered “not formal”.

A street vendor selling flags in Johannesburg during the football World Cup. Wikimedia, CC BY

Myth 2: Informal workers come from poor and low-education background

False: Not in all cases.

According to a January 2019 study conducted for 28 developing and emerging countries, the percentage of informal workers who are poor (US$3.10 per capita per day) is generally higher than that of formal workers. For example, in Colombia 13% of informal workers are poor compared to 1% of formal employees. It also shows that there is a tendency of people coming from poor households to be more frequently engaged in informal work.

While we should take into consideration nuances regarding poverty (which can vary by country and definition used), it is interesting to look at the background, barriers and aspirations of these workers.

A fish-and-chips street vendor in Chiang Mai, Thailand, 2014. Takeaway/Wikimedia, CC BY

Research has found that informal jobs can mark the entry into the labour market for many youth. As demonstrated in a study about urban-job seekers in Addis-Ababa (Ethiopia), “good jobs” are often not accessible to those coming from poor or low-education backgrounds, as they lack the credentials and the resources to cover the financial costs of searching and applying for jobs.

Informal activities can also complement formal ones. For example, it’s relatively common for teachers in Côte d'Ivoire and Vietnam to increase their income by informally giving private classes to children from middle-class or well-off families.

School in Kenya. In some countries, teachers have also a side job to make ends meet. Lambert Coleman/AFD, Author provided (No reuse)

Myth 3: Informal workers are helpless and hopeless

False: Not at all.

Informal workers do not mean necessarily “working class” or “unprivileged”.

A January 2019 study shows that under an income-based definition, many informal workers belong to the middle class. In Brazil, around 7% of the middle class works primarily in the informal sector. The rate is 30% in Vietnam and almost 40% in Côte d'Ivoire. These workers are often entrepreneurs and their income is relatively far from the poverty line, meaning that their purchasing power is at par with other class groups or formal workers.

But challenges often arise from their immediate surroundings – lack of lodging or limited access to public services – especially when public policies side-line them, as it is the case with street vendors worldwide.

Informal activity can fit within a global project. Here, a woman runs an outdoor kitchen in the South Central Farm in the city of Los Angeles, California (2006). Jonathan Mcintosh/Wikimedia, CC BY

In Bangkok, a 2016 consumer survey indicated that 87% of consumers purchase their daily food from street vendors. Yet many of these entrepreneurs are unable to work as they are caught in between urban development and socio-political disputes.

But when given space and legitimacy, such informal workers can thrive and develop new models. At Warwick Junction in Durban (South Africa), street vendors and traders got together. Through the support of non-profit organisations, they learned about their rights and gave inputs to the design of the market’s infrastructure where they worked, setting an example of urban transformation through social collaboration.

Instead of labelling such workers as “helpless and hopeless” – which underlines an idea of instability – we could actually see them as “self-reliant and hopeful”.

Myth 4: Informal workers do not use technology so they are left out

False: Not quite.

To access markets, informal workers actively embrace technology: in Africa most are already up to date with the latest applications.

The real question is: how can governments best guarantee that such workers benefit from their participation to the so-called gig economy?

As revealed in a November 2018 study of Latin American countries, youth are often confident in their abilities and have high aspirations. Yet they lack school opportunities, vocational training and entrepreneurship programs that can help make their dreams come true. As much as anyone else, they need guidelines about well-being, safety, productivity, wage bargaining, anchoring and credit for their work.

Myth 5: Informal work should be formalised at all costs

True and false: Formalisation efforts are potential policy tools, but they are not the only “way ahead”.

Research demonstrates that reducing the costs to register as a formal enterprise may lead to greater output and wages. However, evidence from Brazil and Colombia shows that it is not always desirable or effective to reduce informality.

Rather, the discussions on what workers, employers and contractors value could help identify which measures to implement and how to reimagining the future of work. For instance, the Community Work Programme in several municipalities of South Africa focused on the idea that even “when labour has no market value, it can create social value”.

It is thus the management of locations, perceptions (as for street vendors) or reciprocal rights and customs (for domestic workers) that need to be addressed, as such environments can put into peril the workers and affect their livelihood.

So what should states do?

States should acknowledge the nature of informal work and break down the range of barriers that prevent workers from obtaining a better livelihood. Better provision of rights, social protection and decent work measures, tailoring policies through the understanding of local environment and groups’ needs, will benefit those engaged in informal work or those moving between formal and informal worlds.

Working toward such goals will help lift the stigma of informality, which is still perceived as a “last-resort” activity.

Last but not least, researchers and policy makers should innovate in identifying informal work and refine statistics to improve the design of programs and evaluation techniques to support women and men of the informal economy.