The Informal Sector

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	Hari Srinivas
	Policy Analysis Series E-067. April 2015.

For local governments who are responsible for the development and management of cities in developing countries, the informal sector represents a dilemma. It presents both advantages and disadvantages that need to be taken into account when designing policies targeted at the sector.

Some of the typical attitudes and statements heard with respect to the informal sector are discussed below.

	Yes ... it generates income for low-income families	In Latin America, the urban informal sector was the primary job generator in the 1990s. An average of 6 out of every 10 new jobs were created by micro-enterprises, own-account workers and domestic services. Informal sector employment grew by 3.9 per cent per annum while formal sector employment grew by only 2.1 per cent in that region. - ILO, 2002.
With the multitudes of rural families migrating to cities either due to lack of opportunities in rural areas, or in search of a better job in cities, the formal sector finds it difficult to offer jobs to the migrants. It is ultimately the informal economic sector that absorbs these migrants and provides them with opportunities to find jobs, create entrepreneurship and raise incomes in comparison to rural levels.

	Yes ... it helps find solutions in the absence of formal processes	With chronic water shortages, many cities in south Asia have been able to supply water to its residents for only one or two hours in a day. The informal sector has stepped in, providing water in tow trucks, hand-drawn carts and other means. In India, a system of operating and maintaining community toilets with bathing, laundry and urinal facilities (popularly known as 'Sulabh Shauchalaya') is a popular service set up with people's participation, and without any burden on the public exchequer or local authorities.
With inefficient and overwhelmed municipal and public services, local governments and public institutions are hard pressed to provide even basic services to low-income slums and squatter settlements. In such cases, the informal sector responds to such basic needs by converting it into a market opportunity, even for infrastructure needs such as water, electricity, toilets etc.

	Yes ... it keeps low-income groups occupied with jobs and housing, in the absence of local governments capacities and resources.	Squatters and slum dwellers comprise the majority of Nairobi's 2.3 million residents. Recent statistics indicate that 60 per cent of the city's population -- 1.4 million people -- reside in the over 100 slum and squatter communities scattered on the fringes and within the city. Most are crowded onto less than 5 per cent of the total residential land in the city.
Slums and squatter settlements are an integral and inevitable part of most cities in developing countries. On one hand they represent shortcomings in both the public sector institutions (including local governments), and the migrants themselves; on the other, they represent the need and desire of migrants to invest in improving their life. A house is a fundamental/basic need, and very few opportunities and alternatives are available to the very poor. Local governments are politically hard pressed to provide necessary services and infrastructure to a group they essentially feel "does not contribute to the city's economy". The urban informal sector steps in again to provide the necessary services informally (albeit sometimes illegally) whether it is land parcels, building materials, labour etc.

	But ... few, if at all pay taxes: difficult to provide services/facilities	In 100 meters of a street in Manila, Philippines, the following informal sector activities were observed: laundry services, flower seller, haircuts, food stalls, household items, shoe shines et al. These were itinerant sellers, those on mobile units (including carts and bicycles) and shops in temporary/permanent structures (including home-shops).
It is true that low-income groups do not pay any taxes - whether residential, business or income tax. This makes local governments reluctant to provide services or facilities to such groups, particularly in face of the 'fear' that this may attract more migrants to the city. Despite the lack of capacity of low-income groups to pay taxes, they are however an integral and important part of the urban economy, providing a smooth continuum of cost-effective products and services to urban residents on a daily basis. A scalable system of fees and at-cost contributions for public services provided (such as toilets) should be upgraded to regular taxes as the groups improve their income levels and standard of living and move out of slums.

	But ... they pollute and generate waste	Informal sector enterprises in Yangon, capital of Mynmar, cut up used tyres to create a number of useful household goods including slippers, flower pots, washers, buckets, pipe connectors and more. Most are done by hand, and employes two to ten people per shop.
This is true though the situation is no different from any average middle-class family. Comparatively, however, they produce much less wastes and recycle most waste where possible (or release it back into the informal economy for another enterprise). It is also important to realize that the pollution and waste generation by the informal sector may be more 'visible' as they are not generally served by formal urban infrastructure networks, or urban garbage services.

	But ... they block streets and hawk haphazardly	Many areas in Bangkok, Thailand, have been designated as areas where informal sector enterprises can sell their wares in an organized and proper manner, without any services provided. At the end of the day, fire engines hose the area with water to clean it up!
The first thing we need to recognize with respect to the informal sector is that they provide important, daily services for the smooth functioning of a city. From laundry service and vegetables, to flowers and haircuts, informal enterprises (whether a one-man enterprise or a family enterprise) respond quickly to market needs and consumer demands, much more so than formal enterprises. The problem arises when these contributions to the urban economy are not recognized and no clear policies are made by the local governments or other formal entities - even if these policies/initiatives are ad hoc and 'informal' themselves.

	But … they squat on land that has other utility uses	Many cities in India have a system of 'declaring' an area as a 'slum' - while this does not entail them to land rights or ownerships, it does provide a perceived sense of tenure security. This is because squatter settlements that have been declared as a slum (under the misnamed "Slum Clearance Act") will not be evicted by the authorities, and may provide basic minimum amenities of water, electricity, sanitation and health facilities in slums. However, not all 'declared' slums are treated this way - some are indeed cleared in the larger public interest.
Evidence from cities in most developing cities show that informal housing and enterprises usually squat on marginalized and vulnerable lands that are not attractive to other users or developers. These include marshlands, river banks, hill sides, and buffer areas around railway lines or expressways. Besides, living densities in these areas are much higher than those achieved in the private or formal sectors (albeit, these levels may not meet minimum comfort standards).