The Informal Sector

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	Hari Srinivas
	Case Study Series E-108. March 2020.

The Informal Sector's Role in Urban Development

But these challenges are exacerbated by an increasing proportion of its population that are migrating to cities and urbanized areas, fleeing the vulnerabilities of the agricultural sector and other "push" factors.

Amid a lack of abilities and capacities for positive action from governments, the urban informal sector (used here interchangeably with the 'informal economy') thrives for precisely the same reason - to alleviate poverty and create jobs. Taken together, the different sectors of the informal economy - manufacture ring, trade, housing, services, finance etc. - play a critical role in ensuring that these newcomers not only get the services that they need to establish a foothold in the city, but also participate and engage in the formal urban economy.

But negative attitudes and approaches towards low-income migrants and the informal economy at large still continue (See 10 Myths about the Informal Sector). How can we change our attitudes to the informal sector and understand its true contribution to the developmental processes?

Rethinking the "Love-Hate" Relationships

But the realization that more than 60 to 90 percent of urban economic activity, particularly in cities in developing countries, are in fact informal, has led to a rethinking of this approach and a move towards more reconciliatory and inclusive policies. Job creation and skill development policies for poverty reduction have also driven this rethink.

Defining the Inherent Advantages of Informality

• Ease of entry into the sector, enabling quick setup and entry.
• low initial investment and low resource-base startup of informal enterprises
• predominant family ownership
• Manufacturing or trade focus that is essentially small in scale
• Manufacturing/trade activities that are labour intensive and use adapted/local technologies
• Enterprises that are unregulated and do not pay taxes, but nonetheless operate in competitive markets - in most cases forming supply chains that support the formal sector
• Informal processes of acquiring knowledge, skills and capacities
• Provision of wage labour and on-the-job apprenticeship

The lessons are there - with forward-looking local governments that have taken positive steps in implementing inclusive economic growth policies, taking into account the contributions and advantages of the informal sector.

Penang, Malaysia

Take the example of Penang in Malaysia. Instead of clearing away and scattering mobile food hawkers in its old Georgetown area, the local government "repackaged" them as an essential feature of the town fabric. This was done by including them in its heritage and tourism programmes. The city organized the hawkers into groups and provided training on basic hygiene and etiquette aspects of food management. The city designated and designed hawker centers where food hawkers could congregate with their mobile stalls. These centers were equipped with common services facilities and eating areas, provided lighting and other urban services, and many other enhancements. Such steps drew the hawkers into the larger fabric of the city's character, without destroying the essential (informal) character of the hawkers themselves.

Bandung, Indonesia

The case of Bandung in Indonesia is similar. A large number of informal stalls operated, selling a myriad of daily necessities around the city center. Without driving them away or clearing off the area, the city designated an area where the stalls could be set up by informal enterprises. The designated area had marked off stalls and had a large roof covering it. It was regularly cleaned and provided with water, electricity and other basic services.

Bangkok, Thailand

Bangkok provides similar common areas for informal sellers which are regularly cleaned up by water tankers. Bangkok is well known for its informal sellers that crowd its sidewalks, selling to tourists and locals alike. In particularly crowded areas frequented by tourists, the city gas provided common areas where sellers can set up shop - and such areas are regularly cleaned up by water tankers and the local fire service.

Based on field visits to the three cities of Penang, Bandung and Bangkok, interviews with planning and local government officials, as well as review of official documents and literature on the theme, the following lessons emerge:

Stategies for Informal Entreprise Improvement

Strategies for Informal Enterprise Improvement

• forming groups or associations among the informal enterprises to articulate their views and to facilitate better communication

• training and capacity building on fundamental health, sanitation and other critical issues including financial management, microfinance etc. to work in the informal sector.

• provision of common facilities for groups of enterprises (especially when they were organized into groups or associations) such as seating areas, sanitation facilities electricity and water.

• enabling of payments for better urban services/utilities, including rent of spaces for businesses

• working with informal enterprises to remove criminal, corrupt and other exploitative elements in the sector.

The middle ground achieved by the above strategies and examples have two key complementary policies - (1) maintaining the essential benefits of informal enterprises and (2) providing basic urban services and utilities for these enterprises to benefit the overall population.

Reconciling Informality

Their strategies - such as establishing designated vending zones, group formation for collective bargaining and communication, and providing training and basic urban services (like water, electricity, and sanitation) - successfully formalize the support structure around the informal sector without destroying its core strengths: ease of entry, low initial investment, and the ability to serve local needs quickly and affordably.

The key takeaway from these examples is that "formalizing" the informal sector is about support and reconciliation, not obliteration. Local governments aiming to achieve the Sustainable Development Goals (SDGs) for poverty and job creation must shift their attitude from seeing the informal economy as a liability to recognizing it as a dynamic asset.

The experiences of Penang, Bandung, and Bangkok provide a clear blueprint: by maintaining the economic flexibility of informal enterprises while simultaneously ensuring they have access to common facilities and essential urban utilities, cities can leverage this vast economic activity for the benefit of the entire population. This inclusive model of local governance offers valuable lessons globally - particularly for developing counries, proving that positive engagement is the most effective way to reconcile the informal sector with the demands of a modern, organized urban environment.