The Beautiful Truth in the Ugly Facade of Informal Sectors
On an average sidewalk in a city in developing coutries, one can encounter all sorts of businesses; ranging from the local street foods, plastic toys and balloons of cartoon characters, men and children would offer to shine your shoes for 20 pesos and others would offer to fix your old watch, sometimes one could pass by oddities of fortune tellers, lottery guessers, and snake charmers. In fact, these businesses would extend to the busy city streets, a boy carrying a wooden box would sell basic necessities of water, candies and cigarettes when the traffic lights would turn red, teenagers hanging from a jeepney would call out and usher passengers in, and a kid would signal his arms when one would park a car at an establishment.
They are the vendors selling your favorite street food, the jeepney drivers plying highways for over 12 hours to have a decent profit, the domestic helpers, carpenters, artisans and also the smugglers, drug peddlers, and prostitutes. They are just some of the workers in the so-called informal economy. The International Labor Organization (ILO) defines informal economy workers as those “independent, self-employed, small-scale producers and distributors of goods and services.” The National Statistical Coordination Board (NSCB) adopted a more nuanced definition of the informal sector: “The IS [informal sector] consists of “units” engaged in the production of goods and services with the primary objective of generating employment and incomes to the persons concerned in order to earn a living.” These units typically operate at a low level organization with little to no division between labor and capital as factors of production. It consists of household unincorporated enterprises that are market and non-market producers of goods as well as market producer of services. This means these are owned or operated by households engaged in the production of goods and/or services that are not constituted as legal entities independent of the households or household members that own them.
With the substantial upsurge of urban population and migration in developing countries as with the prevalent failure of the rural and urban formal sectors to absorb additions to the labor force, the relative ease of entry and low requirements for education, skills, technology and capital enables the informal sector to provide catchment for workers given the present condition of the growing unemployment problem through which a bulk of the population is able to derive a subsistence income. Thus, worker productivity and income tend to be lower in the informal sector than in the formal sector. Moreover, since their industries are not legally registered, workers in the informal sector do not enjoy the measure of protection afforded by the formal modern sector in terms of job security, decent working conditions, and old-age pensions.
Despite the hostile policy environment given that informal sector is unregistered with the government, the informal sector thrives and provides a surplus of employment opportunities to the urban poor and rural migrants although living, working conditions and incomes are often not much better. Furthermore the formal sector is reliant to the informal sector for cheap inputs and wage goods for its workers, and the informal sector in turn depends on the growth of the formal sector for a majority of their income, as such they are a potent source of consumers and producers in the economy.
As, Jomo Kwame Sundaram, Assistant Secretary-General for Economic Development describes, “Cities are precisely where the pressures of migration, globalization, economic development, social inequality, environmental pollution and climate change all come together.” In recent decades urbanization has continued in nearly all developing countries, even those that have experienced only minimal industrialization. While people are moving from place to place more and more, the world is undergoing the largest wave of urban growth in history. More than half of the world’s population is living in cities and this is increasing at rate of 1.5 percent (United Nations Population Fund, 2016). This rapid urbanization coupled with population growth is changing the landscape of human settlement.
This movement of people from rural to urban is supported by the Todaro Model and Harris Todaro Model. Todaro migration model deems rural-urban migration as an economically rational process despite high urban unemployment. As migrants calculate urban expected income and move if this exceeds average rural income, given that most urban cities are concentrated with industries which provides more job opportunities and benefits and taking into account the population growth and migration imply a large potent market. Furthermore, the Harris Todaro Model is equilibrium version of the Todaro migration model that predicts that expected incomes will be equated across rural and urban sectors when taking into account informal-sector activities and outright unemployment.
Rural-urban migration is directly related to the development and spread of the Urban Informal Sectors (Skeldon, 2002). This is grounded on the dualistic model of economy; an urban city is composed into a formal and an informal sector. In urban sectors of developing countries which has taken place at an unexpectedly rapid pace prompts the creation of an informal sector as there is limited resources and opportunities for jobs in the formal sector to accommodate both the burgeoning number of people born in their cities as well as the influx of migrants from rural areas.
Since rural-urban migration took place in searching for jobs, adding up to the population and unemployment in the sector, those migrants would still prefer to stay in such sector and temporarily settle with an informal job because aside from the demand prices are way higher than the prices for some in the rural areas. Where there is large population, there is higher consumption rate and income comes with it. Very few of the fortunate migrants are able to manage to secure jobs in the formal sector. Low wage, low security, high labor intensity in the informal jobs has reduced living standard of the migrants in such sector.
In some cities, the typical range of informal-sector employment share is from about 30% to 70% of the population (Todaro, Smith, 2015). Moreover, workers in the informal sector do not enjoy the measure of protection afforded by the formal modern sector in terms of job security, decent working conditions, and old-age pensions. Large fraction inhabit shacks and small cinder-block houses that they themselves have built in slums and squatter settlements, which generally lack minimal public services such as electricity, water, drainage, transportation, and educational and health services.
Despite decades of benign neglect and even outright hostility, the informal sector persists as economic exchanges occur between the formal and informal sectors are prevalent. Formal sector people buy cheap inputs from the informal sector, and the informal sector in turn depends on the growth of the formal sector for a majority of their income. Thus, there is a need to consider the effect of the informal sector to the economy.
There is a widespread assumption that the informal economy has low productivity and, therefore, contributes to low growth in countries (Levy 2007). The issue of productivity is important both for countries and for individual workers and their families as it sets a limit on the living standards they can expect. In many contexts, informal enterprises and workers are less productive than formal enterprises and workers. However, it is important consider all factors of production, not just labour. Compared to formal workers and enterprises, informal workers and enterprises have fewer, or less valuable factors of production other than their own labour: such as capital, land and technology. Second, they also have less bargaining power to demand their share of value added. The value of their production is often captured by employers, intermediaries along the supply chain, and especially the lead firms at the top of the supply chain.
Heintz and Pollin found that most of the developing countries (14 out of 20) experienced growth in informalization; four experienced a decline; and two experienced little, if any, change. Informalization increased in three countries with respectable per capita growth rates (>2%) and declined in two countries with poor per capita growth rates (<1%). “These patterns suggest that informal employment has been increasing faster than formal employment, even in countries with strong rates of growth” (Heintz 2006:17). The authors concluded that “higher rates of growth are generally associated with smaller increases in the rate of informalization. At very high levels of growth, informalization may decline” (Ibid: 18; Heintz and Pollin 2003).
Urban informal sector should be promoted for the reasons, that it generates surplus despite hostile environment, it creates jobs due to low capital intensively, with access to trainings and apprenticeships creates demand for less or unskilled workers, uses appropriate technologies and local resources, recycling of waste materials, and more benefits to the poor especially women who are concentrated in the informal sector.
Prohibition to informal workers probably for the reasons that they don’t give out tax where it seems that they don’t have any contribution, and that many of them do business at unprotected and unsecured places would give bigger problem to the governing bodies, to the economy and the country as this would imply the modification of labor and human rights and require strict and just enforcement. Workers from informal sector are consumers of which could greatly affect the production and the economy because, as consumption drops off, so as the production, and then the economic growth slows. Prices and demand would be affected. Therefore, for a sustainable economic growth in developing countries, urban informal sector is deemed necessary. Promotion of this provides solutions to important issues in a developing country.
A major problem to the development of the informal sector is the lack of regulatory environment. It is essential that policymakers determine what kinds of commercial and labour regulations are appropriate for the informal self-employment and informal wage employment. Both economic and social policies have a direct impact on the informal economy. While no single prescription can address the concerns of all categories of informal enterprises, activities, or workers, there is a growing consensus that a comprehensive policy framework should entail four broad goals:
First, create more jobs, preferably formal jobs, through labor-intensive growth. Employment goals must be integrated into development strategies. The overall structure of employment opportunities must be transformed to allow the working poor to take advantage of available opportunities.
Second, register informal enterprises & regulate informal jobs. Registering and taxing informal enterprises should be done by simplifying bureaucratic procedures and offering benefits and incentives in return for paying taxes. Concurrently, appropriate regulations should discourage employers from hiring workers informally—or informalizing existing jobs. Employers should be encouraged to contribute to health coverage and pensions for their workers, and extend other benefits. In connection to this, since they are taxed, government should at least provide a secure place for these workers so as not to cause disturbance or disorderliness.
Third, extend state social protection and legal protection to the informal workforce. The need for health care and pensions coverage and also the need to extend legal protection to informal workers regarding their property rights, labor rights, and business rights for example the Labor Rights which talks about the rights of tenants and their right to property ownership.
Fourth, increase productivity of informal enterprise and incomes for informal workers. This can be done through supportive measures to improve assets and market access, to provide legal identity and rights, to raise productivity, and to improve terms of trade or employment. Another is through measures that reduces risks and address market power imbalances, and that reduce policy or institutional biases which work against informal enterprises. This requires recognizing how market power imbalances and policy biases favour large formal enterprises over smaller informal enterprises, formal workers over informal workers, and men over women within these categories.
In addition to the comprehensive policy framework, government or concerned departments should also educate and provide seminars, workshops, or training programs to the sector for such activities would instill more knowledge and enhance the abilities that would develop them to become better, thus developing also the urban informal sector as a whole.
To ensure policy responses are appropriate to the constraints and risks faced by informal workers, they must gain greater visibility in official labour force statistics and greater representative voice in rule-setting and policymaking processes. Efforts to strengthen organizations of informal workers must be increased and sustained. What is needed, most fundamentally, is a new economic paradigm: a hybrid economic model that embraces the traditional and the modern, allowing the smallest units and least powerful workers to operate alongside the largest units and most powerful economic players.
The informal employment is the main source of employment and income for a substantial number of the workforce in the developing world. Both informal enterprises and the informal workforce need to be valued for their contributions and integrated into economic planning and legal frameworks. Such reasons deem that the urban sector should be promoted so that it could to achieve an inclusive and sustainable economic growth that will give benefits such as higher employment opportunities and productivity that would be available for all.
’’’ REFERENCES:
Heintz, James. Globalization, Economic Policy and Employment: Poverty and Gender Implications. 2006
Heintz, J & Pollin, Robert. Informalization, Economic Growth and the Challenge of Creating Viable Labor Standards in Developing Countries. 2003
Skeldon, Ronald.. Migration and Poverty. Asia-Pacific Population Journal, 17, 67-82. 2002
Santiago, Levy. Good Intentions, Bad Outcomes: Informality, Productivity, and Growth in Mexico. 2007
Todaro, M. P., & Smith, S. C. Economic development (11th ed.). Harlow: Pearson Education Limited. 2011
United Nations Population Fund. The World’s Cities in 2016. 2016
Informal Labor Organization. Informal economy. 2002
National Statistical Coordination Board (NSCB). NSCB Resolution No. 15, series of 2002. 2002
-As compiled by Ageas C.,Chua A.J, Pahilangco E., Miso H. ‘’’