The Informal Sector
and some Development Paradigms
Hari Srinivas
One-Pager Series E-058. May 2015.
The evolution of development paradigms over the past decades reflects shifting priorities in economic thought, from growth-centric models to those emphasizing equity, employment, technology, and basic needs. Each paradigm, while addressing critical concerns, has struggled to fully achieve its intended outcomes, particularly in the context of developing countries. Within this landscape, the urban informal sector emerges as a persistent and adaptive force, responding organically to the gaps left by formal strategies.
A number of development paradigms that have been in vogue is compared to the informal sector concept:
Growth:
The development decades of the 50s and 60s first threw up this strategy of 'growth.' Aiming for an economic growth of five percent of the GDP, it was assumed that the benefits of this growth would reach all the sectors of the economy.
This did not actually take place. Consequent to the pursuance of this strategy, inter-personal and inter regional disparities, in fact, increased. The urban informal sector could be seen here as an answer or solution to the failure of the 'trickle down' growth strategies.
Growth with Distribution/Equity
Since the growth strategies brought about disparities, later economic and developmental strategies stressed on 'growth with distribution/equity'. It was assumed that strategies which stressed on equitable distribution of growth would be more appropriate. For various reasons, this distribution again did not take place.
In this respect, the urban informal sector, in fact, ensures a more equitable distribution of income among the poor, by employing migrants to the city, through it may be thinly spread (since the job which could be done by one person, is actually done by five or ten persons)
Employment Generation
As a result of the failure of the 'growth with equity' strategy, the focus of development shifted to strategies on 'employment generation, since it was found that the growth-with-equity strategy did not actually generate employment.
Even though this did work to an extent, the formal sector, which these developmental strategies were aimed at, was not able to absorb the multitudes of semi-skilled and unskilled migrants to the city. The urban informal sector has been able, on the other hand, to generate employment for these people with few skills or 'undesirable personal characteristics', since it used technologies which were appropriate and labour-intensive.
Appropriate technology
One glaring drawback thrown up by the employment-oriented strategies was a lack of technology which suited the less developed countries' economies. Blind adoption of western technologies only compounded the the problem. So later strategies stressed on 'appropriate technologies' as a necessary ingredient of development.
But then, the urban informal sector had been using appropriate technology all the time: using local resources, efficiently using or not using scarce resources, reusing and recycling 'waste' materials etc.
Human resource development
While the stress on appropriate technologies was a desirable direction in development strategies, a need for developing skills for these technologies arose. Thus, there was a shift in focus towards the development of human resources.
The urban informal sector has, in this respect, absorbed migrants with little or no skills, trained them in various skills in an informal apprentice way and used it in its own growth - using very little of the formal education processes.
Basic needs
The present thrust of most strategies has been the provision of basic needs like food, clothing, shelter etc. to the population and effect overall long-term growth as a result.
The urban informal sector has been providing basic needs for urban populations and migrants at affordable prices and qualities.
Sustainable Livelihoods and Human Security
The Sustainable Livelihoods and Human Security paradigm emerged during the 1990s as development practitioners recognized that poverty is not simply a lack of income, but also a lack of assets, opportunities, and security. This approach emphasizes the ability of people to build and maintain livelihoods using a combination of human, social, financial, physical, and natural resources. It focuses on reducing vulnerability and increasing people's capacity to cope with economic, social, and environmental shocks.
The informal sector has long provided livelihood opportunities for low-income households through small enterprises, self-employment, home-based production, and community networks. By diversifying income sources and creating flexible employment opportunities, informal activities help households manage risks and maintain a degree of economic security. In many cases, informal workers rely on family support systems, neighbourhood networks, and local knowledge to strengthen their resilience in the face of uncertainty.
Resilience, Sustainability and the SDGs
The Resilience, Sustainability and SDGs paradigm reflects growing recognition that economic development must be socially inclusive, environmentally sustainable, and capable of withstanding external shocks. Influenced by concerns over climate change, resource scarcity, urbanization, and global crises, this approach seeks to build communities that are adaptable, equitable, and sustainable. The Sustainable Development Goals provide a comprehensive framework linking poverty reduction, decent work, environmental protection, and social inclusion.
The informal sector already contributes to many of these objectives through activities such as recycling, repair and reuse services, local food provision, small-scale entrepreneurship, and community-based support systems. Informal workers and enterprises often demonstrate considerable adaptability in responding to economic disruptions and changing local conditions. While challenges remain in terms of working conditions, social protection, and environmental performance, the informal sector represents an important source of resilience and innovation for low-income households and communities.
Implications
Across multiple paradigms - growth, equity, employment, technology, and human development - the urban informal sector has provided functional solutions where formal policies have fallen short. It has absorbed surplus labour, promoted equitable income distribution, utilized appropriate technologies, developed human capital through informal mechanisms, and delivered basic services to underserved populations.
Rather than viewing the informal sector as marginal or temporary, development planning must integrate it as a legitimate and essential component of urban economies, supporting it through targeted policy, infrastructure, and skill-building measures.
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