Emergence of the concept of Informal Sector in development

paradigm: A literature review

Tasmia Foyez 1130057051

Dev 566

August 2013

Master of Development Studies

North South University, Dhaka

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Abstract

The International Labor Organization has first initiated the concept of informal sector in 1972 in its Kenya report with the purpose to generate more employment for millions of job seekers in cities of developing countries (Amin 2005).1 “In the Kenya report ‘Employment, incomes and equality’, not only was the phrase ‘informal sector’ coined; but this concept played a key role in the whole analysis of the employment situation. Chapter 13 of the report is devoted entirely to the informal sector. A separate section of the initial summary and recommendations is on the informal sector. Technical paper 22 is on ‘the relationship between the formal and informal sectors’. And throughout the various other chapters and sections, separate comments and observations are included on the formal and informal sectors” (Paul E. Bangasser 2000/9).2 This review will discuss a brief history of the evolution of informal sector in the development literature.

1 “The Informal Sector's Role in Urban Environmental Management” by Amin, A.T.M Nurul. (iGES,2005). The following sentence is from page

511 of background section. 2 “ The ILO and the informal sector:an instituiotional history” (ILO, Geneva,2000/9) by Paul E. Bangasser. The following quote is from pages iii &

8 of the Kenya mission of 1972 — the “informal sector” is born. Avaialble at, http://www.ilo.int/wcmsp5/groups/public/@ed_emp/documents/publication/wcms_142295.pdf.Also see “Employment, incomes and equity: a strategy for increasing productive employment in Kenya” (ILO, Geneva, 1972). The following quote is from pages 5 & 6 of the Introduction.

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Definitions from ILO and different scholars

According to the ILO (1998: June)3, the informal sector consists of “small scale, self employed activities, mostly at a low level of organization and technology with the primary objective of generating employment and incomes”.

“The 15th International Conference of Labor Statisticians (ILO 2000) defined employment in the informal sector as comprising all jobs in informal sector enterprises, or all persons who, during a given reference period, were employed in at least one informal sector enterprise, irrespective of their status in employment and whether it was their main or a secondary job. The meaning of the term ‘sector’ follows the System of National Accounts (SNA) 1993. For national accounting purposes, a sector (institutional sector) is different from a branch of economic activity (industry). It simply groups together similar kinds of production units, which in terms of economic objectives, functions and behavior have certain characteristics in common. The result is not necessarily a homogeneous set of production units. For the purposes of analysis and policy-making, it may thus be useful to divide a sector into more homogeneous sub-sectors. Informal sector enterprises as defined by the 15th ICLS are a sub-sector of the SNA institutional sector ‘households’. The term ‘enterprise’ is used here in a broad sense, referring to any unit engaged in the production of goods or services for sale or barter. It covers not only production units, which employ hired labor, but also production units that are owned and operated by single individuals working on own account as self-employed persons, either alone or with the help of unpaid family members. The activities may be undertaken inside or outside the enterprise owner’s home, and they may be carried out in identifiable premises, unidentifiable premises or without fixed location. Accordingly, self-employed street vendors, taxi drivers, home-based workers, etc. are all considered enterprises”( Ralf Hussman 2004) .4

Definitions of informal sector in Asian countries5:

Table: One

Source/Scholars Country Official Definition

3 “A Socio-economic Study of Informal Sector Workers.” By Alam, Md. Nazmul, 2012.The following qouted deifinition is from page 101 of

introduction. Available at, http://www.bangladeshsociology.org/A%20Socio

economic%20Study%20of%20Informal%20Sector%20WorkersBEJS%209.2%20Final%20_new_.pdf 4 ‘In January 1993, the Fifteenth International Conference of Labor Statisticians (15th ICLS) adopted an international statistical definition of the

informal sector, which was subsequently included in the revised international System of National Accounts (SNA 1993).’ See “7th Meeting of the Expert Group on Informal Sector Statictis (Delhi Group), Agenda item(i): Defining informal employment and methodologies for its measurment” (ILO, New Delhi 2004) by Ralf Hussman. Following quote is from pages 3&4 of theInternational statistical definition of employment in the informal sector. Available at, http://ilo.org/public/english/bureau/stat/download/papers/def.pdf. 5 ‘The Informal Sector in Asia from the Decent Work perspective( ILO office, 2002/4) by A.T.M. Nurul Amin’. The following table is from pages 9,

10 &11 of the definitions of informal sector in Asian countries from authur’s(A.T.M. Nurul Amin) compilation.

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South Asia

ILO-SAAT and UNDP(1998,p:12)

Bangladesh By implication, the informal sector is comprised of enterprises with less than 10 workers.

Chandra and Pratap (2001,p.413)

India According to the Central Statistical Organization, all unincorporated enterprises and household industries which are not regulated by law and which do not maintain annual accounts or balance sheet constitute the unorganized sector.

Southeast Asia

Joshi(1997,p.145) Philippines Informal sector includes economic activities as self-employed with or without unpaid family workers, and those employed in enterprises with less than 10 persons.

ILO (1992c,p:2) Vietnam Officially defined to include small-scale activities characterized by self-employment, mainly using self-labor and household laborers (usually less than ten), simple technology, low level of organization and unfixed operation of premises and working hours.

East Asia

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Anderson(1998,p.2) Mongolia The informal sector consists of small-scale, usually family based, economic activities that may be undercounted by official statistics, and may not be subject, in practice to the same set of regulations and taxation as formal enterprises.

Horiuchi (2001,p.1) Japan The categories of workers, which can b considered to coprise the informal sector, are the self-employed with employees, self-employment without employees, family workers, and persons doing home handicraft.

(Amin 2002/4)

According to the above definitions, there are some common features, which are easily identified through reading. Most of the scholars defined the informal sector as the economic activities, which is small-scaled and operated by self-labor within family workers without paying. In addition, this sector is comprised of simple technology, which is not under any regulations, and this is kind of lower level of organization.

In my view, informal sector is defined as an officially unregistered form of economic activities, which primarily full-fills the basic needs of poor people in the cities of developing countries except increasing rural to urban migration and lack of protection.

Informal Sector in different terms:

“Kith Hart’s (1973) introduced the terminology “informal sector”, based on a research in a low-income neighborhood in Ghana. Hart argued that informal sector provided a wide range of low cost, labor intensive, competitive goods and services and recommended that the Kenyan government should promote the informal sector (ILO, 1972: 223-32). Kabra (1995), noted thirty terms including the survival sector, non-structured sector, and transitional activities that have been described the informal sector. Despite the heterogeneity of the informal economy,

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workers of the informal sector can be grouped into several basic employment categories, (i) Employer (ii) Self-employed and (iii) wage workers (Chan, 2005:20)”6

Toward labeling the activities in a finest approach, ILO has referred to the same as the informal sector has occupied many minds. Accordingly, many alternative names are invented to portray these activities (See table two). All of these shed interesting approaching into the work of the informal sector. Therefore, simultaneously these terms are not only alternative but also appear to provide a deep understanding regarding the informal sector as a whole.

In the employment paper of ILO in 2004, A.T.M. Nurul Amin has compiled some terms of the informal sector in his report. His report name was ‘The Informal Sector in Asia from the Decent Work perspective’. These names are not only different but also convey a deep understanding of the informal sector as a whole (Amin 2002/4). 7

Table two: The informal sector by some other names

Term Author

Trade-Service Sector Reynolds(1969)

Informal Income Opportunities Hart (1971)

Unenumerated Sector Weeks (1971)

Informal Sector ILO(1972)

Intermediate Sector Child (1973), Steel (1976)

Community of the poor Rempel (1974), Gutkind(1967)

Unstructured Sector Emmerij(1974)

6 “A Socio-economic Study of Informal Sector Workers.” By Alam, Md. Nazmul, 2012.The following quoted terms are from page 101 of

introduction. Available at, http://www.bangladeshsociology.org/A%20Socio

economic%20Study%20of%20Informal%20Sector%20WorkersBEJS%209.2%20Final%20_new_.pdf 7 ‘The Informal Sector in Asia from the Decnt Work perspective( ILO office, 2002/4) by A.T.M. Nurul Amin’. The following table is from pages 8 of

the informal sector by some other names from authur’s(A.T.M. Nurul Amin) compilation.

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Family-Enterprise Sector Peattie(1974), Mazumder (1976)

Irregular Sector Standing (1977)

Unrecognized Sector Joshi(1976),Harriss(1978), CSO(1980) cited in Chandra and Pratap (2001)

Petty Commodity Production Moser (1978)

Lower-Circuit of Urban Economy Santos(1979)

Casual Work Bromley and Gerry(1979)

Non-Plan Activities Sarin(1979)

Non-Westernized Sector Hackenberg(1980)

Urban Subsistence Sector Cole and Sanders (1985)

The Informal Economy Portes,Castells and Benton (1989)

Informals De Soto(1989)

People’s Economy Sasono and Rofi’ie(1987)

Non-formal Sector ILO-SAAT and UNDP(1998)

Brief history regarding Informal Sector8

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“The Informal Sector in Asia from the Decent Work perspective (Geneva : ILO office, 2002/4)” by A.T,M.Nurul Amin. Followiing informations are from pages 1&2 of the informal sector in perspective. Also see Douglass (1998), Mead & Morrison(1996).

“The ILO and the informal sector:an instituiotional history( ILO, 2000/9 )”by Bangasser, Paul E. The Following informations are from pages 2-4 & 12-24. Available at, http://www.ilo.int/wcmsp5/groups/public/@ed_emp/documents/publication/wcms_142295.pdf .

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After the Second World War, there was a time of confidence and optimism for the developing countries as the decolonization started. It was about 1950s and 1960s at that time. As Europe and Japan were successfully rebuilding after the Second World War, there was a similar somewhat deliberate economy-building effort could also be applied to the newly emerging countries.

Arthur Lewis (1954) created an optimistic development model for this optimism. Due to the resource limitations and need for capital accumulation, this model was based on unlimited supplies of labor by turning a widely perceived ‘liability’ (surplus labor) into an ‘asset’. Lewis primarily thought of export-led industrialization for utilization of surplus labor and increasing capital accumulation. At the same time, Raul Prebisch’s “center vs. periphery” (1949), Harvey Leibenstein’s “big push” (1957), W. W. Rostow’s “stages of economic growth” (1960) method of argumentation were virtually always same. The subject was material well being, indicated by measurable income per capita. The conceptual tools were taken overwhelmingly from economic science.

However, at the end of 1960s, the urban-industrial centre pattern of development was increasing migrants which fading the optimistic viewpoint. Lewis and Todaro explained this reality theoretically. Nevertheless, Lewis mentioned about pessimism on urban problem like; employment, housing or other services which cannot be solved at the urban end. Urban employment is becoming a big issue in the developing countries. Therefore, this urban-industrial centre pattern interest switched to rural-agricultural model of development with backing from Harris-Todaro type models. John R. Harris and Michael P. Todaro in their two sector model have explained about some issues of the rural-urban migration, unemployment and Development. According to this model, when rural income is higher than rural wages, this migration happens and economy may have high rates of unemployment. When expected rural wage is equal to rural wage, equilibrium condition happens. Harris and Todaro suggested in their models that, first-best policy would be subsidizing manufacturing along with restrictions of rural migration. Therefore World Bank policy at that period focused on rural development and rural poverty alleviation.

However, many scholars argued against rural development though it did not change the pessimism since urban nesters’ and slum dwellers’ conditions remained pitiful. Thus, in 1972 ILO employment mission to Kenya raised anticipation through their “discover” of a “sector” as this is explained above in the definition. They viewed as engaged in many “ingenious” activities with little capital and locally available resources. This came out to be renovating Lewisian optimism though higher population growth, political and social instability leads to non-

“REGIONAL DEVELOPMENT DIALOGUE(RDD), TWO DECADS OF INFORMAL SECTOR STUDIES:LESSONS LEARNED.Vol.17,No.1, (Spring

1996)”by Amin, A.T.M. Nurul. The following informations are from pages vii,viii, ix of Editorial Introduction. The informal sector paradigm: analytical contriibutions and developmenttal role.

“Harris-Todaro model of Urban Unemployment”. Tangul Abdrazakova, Anastasia Bogdanova by Professor Edward Tower (Spring 2013). The following information regarding the model is from pages 3 & 16 of introduction and conclusion. Available at http://sites.duke.edu/econ567_01_s2013/files/2013/04/HarrisTodaroPaper.pdf

I have written down the history part with the help of these paper’s information from the following pages.

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realization of the Lewisian pattern of development in most developing countries. However, developing countries as Korea, Taiwan and more recently Thailand reflect some resemblance to Lewisian pattern of development.

According to Cole and Sanders (1985), newly emerged term of informal sector ‘urban subsistence sector’ (see table: two above) has definitely formed a new outlook for realization of the Lewisian pattern of development in the developing countries. In the urban-industrial economies the subsistence sector has created, a relationship similar to Lewis’s hypothesized relationship between the “rural-subsistence sector” and the “urban capitalist sector”. Therefore, this allows to competition which contributing to capital accumulation.

However, at the end of 1974, the World Employment Program (WEP) and the Employment Department itself went through a major structural reform. That new structure was based on technical theme like, rural development, technological choice, income distribution and urban migration and so on. Six of the seven major research themes dealt with rural employment or rural development. Nevertheless, the issue of urban unemployment or the urban informal sector was viewed as a reflection of tension and disparity between the rural and the “modern” or formal urban sectors. Therefore, research on urban unemployment was a secondary priority, not the dominant concern of top management.

Despite this, in the decade of the 1980s, the concept of the urban informal sector spread rapidly. It became one of the five “global themes” of the Medium Term Plan for 1982 to 1987 (approved by the Governing Body in 1980). For the first time, informal sector activities began to appear in other major programs besides the Employment Department. Anyway, the 1980s, market dynamism was no longer limited to traditional capitalist market economics. It was the renaissance of the market economy. It was mainly in the world of the informal sector economy where market dynamism first became finest. Clearly, in all market acceptances developing economies the informal sector began to flourish. Developing countries like China, Viet Nam where market economy existed but due to bureaucratic controls and overregulation, it functioned incorrectly informal sector has emerged forcefully there even “invading” some third world countries as Hernando de Soto has described in his well known study (The Other Path).

In the early 1990s, with this transition towards market economy saw a deep transform in development paradigm. In the 1995 ILO report on world employment, demonstrates the informal sector as reducing underemployment and poverty. According to the World Development Report in 1995, WB moves to its focus from formal sector (FS) to informal sector (IS) which are now a having a global impact. Meanwhile, the informal sector began to draw attention from different groups like, employers, NGOs.

Conclusion

Through a profound transformation in the market economy, the concept of informal sector has coined into the development paradigm. Informal sector is an emerging occupational sector in cities of developing countries for those people who are mostly less skilled and illiterate. Most of

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them migrate from rural to urban areas for their betterment of lives and livelihoods. Their only hope is to live their lives in a better way toward fulfilling through basic needs. Therefore, they start small-scale business without any official registration by the government like as vendor. Nevertheless, the workers who are involved in this informal economy have no rights, access to basic social services and social protection.

Bibliography

1. Bangasser, Paul E. The ILO and the informal sector:an instituiotional history. Employment sector. CH-1211 Geneva 22 : ILO, 2000/9. Employment paper.pp. 8. Available at, http://www.ilo.int/wcmsp5/groups/public/@ed_emp/documents/publication/wcms_142295.pdf

2. “Employment, incomes and equity: a strategy for increasing productive employment in Kenya”. ILO, Geneva, 1972. pp. 5- 6.

3. Amin, A.T.M Nurul. The Informal Sector's Role in Urban Environmental Management . International Review for Environmental Strategies . s.l. : the institute for Global Environmental Strategies(iGES), Vol.5,No.2,2005. pp.511-530

4. Hussman, Ralf. 7th Meeting of the Expert Group on Informal Sector Statictis (Delhi Group), Agenda item(i): Defining informal employment and methodologies for its measurment. Geneva : ILO, New Delhi, 2-4 February 2004. pp. 1,3 and 4. Available at, http://ilo.org/public/english/bureau/stat/download/papers/def.pdf

5. Amin, A.T.M. Nurul. The Informal Sector in Asia from the Decent Work perspective. Employment sector. Geneva : ILO office, 2002/4. Employment paper.pp. 7 -11.

6. Amin, A.T.M. Nurul. Editorial Introduction.The informal sector paradigm: analytical contriibutions and developmenttal role. REGIONAL DEVELOPMENT DIALOGUE(RDD), TWO DECADS OF INFORMAL SECTOR STUDIES:LESSONS LEARNED.Vol.17,No.1, Spring 1996. pp. vii,viii, ix

7. Tower, Professor Edward. Harris-Todaro model of Urban Unemployment. Tangul Abdrazakova, Anastasia Bogdanova. Spring 2013. pp. 3 & 16(Introduction and Conclusion). Available at, http://sites.duke.edu/econ567_01_s2013/files/2013/04/HarrisTodaroPaper.pdf.

8. Alam, Md. Nazmul. A Socio-economic Study of Informal Sector Workers. Bangladesh e-Journal of

Sociology. Volume 9, Number 2. 2012. p. 101. Available at,

http://www.bangladeshsociology.org/A%20Socio-

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11. This small and non-technical book, with its sub-title “a non-communist manifesto”, especially captured the minds of that time. W. W. Rostow’s The Stages of Economic Growth (Cambridge; Cambridge University Press, 1960) went through thirteen printings between March 1960 and November 1965.

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