Since the concept of the “informal sector” was coined half a century ago, countries all over the world have promoted the formalization of small- and medium-size enterprises. The perceived benefits of formalization include better access to credit, justice, large formal clients, and, for the government, higher tax revenues. But according to recent literature, most formalization efforts resulted in modest and short term increases in formality rates.
Despite rapid economic growth in South Asia, the majority of workers in the region have low-paid jobs in the informal economy, where productivity is sub-standard and social protection is lacking. In fact, a new report on labor in India – by the Institute for Human Development (IHD) in New Delhi – estimates that 276 million workers live below a poverty line of $2 per day . What can be done to create better jobs in the region? Preet Rustagi, a Professor at the IHD, argues that the key will be improving the quality of human capabilities, notably through better education and skills training.
In the developing world, the informal workforce is at least half of the total workforce, and therefore subject to with low incomes, high risks, and no formal contracts or benefits. We recently spoke with Martha Chen, a Lecturer at the Harvard Kennedy School and the International Coordinator of the WIEGO Network. In part 1 of this two-part series, she argues that "informal is normal."