1. “The Informal IS Normal” Marty Chen WIEGO Network Harvard Kennedy School Panel on OECD Publication PREM Learning Event April 29, 09

2. REMARKS Informal IS normal –significant share of total employment –links with formal economy –expanding in good times, and bad Informality is heterogeneous – this requires: –different causal theories –different policy responses Is informality the problem? Is formalization the solution? Economic Vision: A Hybrid Economy

3. THE INFORMAL ECONOMY Official International Statistical Definitions: –Enterprise-based Definition adopted by International Conference of Labour Statisticians in 1993 Informal sector = unincorporated enterprises owned by households which fall below a certain size and/or are not registered –Employment-based Definition adopted by International Conference of Labour Statisticians in 2003 Informal Employment = all forms of employment without social protection, both within and outside the informal sector Informal Economy Broadly Defined: all economic activities, units, and actors that are not regulated or protected by the state

4. INFORMAL EMPLOYMENT IS THE NORM Worldwide: around 66% of total employment (OECD 2009) Developed Countries: 25-40% of total employment (ILO 2002) Developing Countries: 50-90% of total employment (ILO 2002) Highest: Sub-Saharan Africa + South Asia (as high as 90% in many countries) Medium: South East and East Asia + Latin America (around 65% in most countries) Lowest: North Africa + West Asia (around 50% in most countries)

5. INFORMALITY EXPANDS DURING GOOD TIMES AND BAD Some informal activities expand during economic downturns or crises – survival activities – informal jobs –industrial outwork Some informal activities expand during periods of economic growth –dynamic enterprises –informalized jobs –industrial outwork – notably in global value chains

6. THE INFORMAL WORKFORCE IS HETEROGENEOUS Self-Employed: in unincorporated enterprises –micro-entrepreneurs who hire others –own account operators who do not hire others –unpaid contributing family members Wage Employed: in jobs without social protection –informal employees of both formal and informal firms –casual day laborers –industrial outworkers –contracted workers

7. HETEROGENEITY REQUIRES DIFFERENT CAUSAL THEORIES Different Causal Theories –Choice: whose choice? »entrepreneurial activities (micro-entrepreneur) »informalized jobs (formal or informal employer) »industrial outwork (formal or informal contractor) –Necessity »survival activities (own account operators) »informal jobs (those who cannot get formal jobs + those who cannot negotiate better contracts) »industrial outwork (those who do not have market access) –Tradition »hereditary occupations

8. HETEROGENEITY REQUIRES DIFFERENT POLICY RESPONSES Different Policy Responses: appropriate mix of –Regulation: and taxation –Protection: legal and social –Promotion: policies and programs to promote… »more and better opportunities »more and secure assets: physical + financial + human »better terms of doing business »reduced constraints: supply-side + demand-side + institutional

9. IS INFORMALITY THE PROBLEM? Tax Evasion? –some pay taxes –many fall outside tax structure/brackets –most willing to pay taxes – if benefits guaranteed Low Productivity? –capital output per worker is often low –capital input per worker is also low –most would prefer higher productivity – if this means higher earnings Poverty? –average earnings are low + poverty risk is high in the informal economy –most informal workers are poor + most working poor are informally employed –reducing poverty requires increasing earnings + reducing risks in the informal economy

10. IS FORMALIZATION THE SOLUTION? If being formal (as opposed to being informal) means… –being registered and paying taxes –being legally and socially protected –being productive and remunerative –being organized and having voice and power Then formalization (of the informal economy) should involve… –getting registered and paying taxes –being covered by legal and social protection –receiving support to become productive and remunerative –becoming organized and gaining voice and power

11. ECONOMIC VISION: A HYBRID ECONOMY Formalizing the Informal: not just regulation + taxation but also… –protection »legal rights: commercial + labor + property »social protection –promotion »opportunities + assets »productivity-enhancing support »enabling environment –organization and representative voice “Informalizing” the Formal: reform of economic policies and institutions to include the informal economy/workforce as legitimate… –part of the total economy –target of economic policies + incentives –stakeholder in policy-making and rule-setting institutions