last modified: Monday, December 19, 2005 10:53 AM |
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Economic Development & The Global Informal Economy |
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David Epstein |
davideps@umich.edu |
IntroductionCommercial activity outside the governmental system responsible for regulating such activity is referred to as "informal". This describes the majority of transactions in the Peruvian, Ethiopian, and Indian economies. Once viewed as a temporary phenomenon caused by globalization, the informal economy is now seen by many economists as a permanent fixture of capitalist development. According to the International Labour Organization (ILO), about 40 million formal jobs are created globally every year and about 48 million new people seek jobs annually. (ILO, 2002:95) The informal economy helps to bridge this gap, especially in the developing world. |
source:"The Informal Economy", SIDA |
There is a lively discourse about what to do with the informal economy. Some people advocate for doing nothing at all. Those who do advocate for intervention usually do so for either moral or economic reasons. The first group posits that government and civil society have a responsibility to provide the poor with a higher standard of living. The second group recognizes the contribution of informal work to the rest of society (Table I) and seeks to develop the sector economically. This essay will first provide a general overview of problems encountered by workers and business owners in the informal economy and offer potential solutions. It will then offer a brief case study of SEWA Bank in India to illustrate how such problems and solutions actually function on the ground in a busy city. Focus Points for Local Economic DevelopmentBefore intervening in the informal economy, it is vital to study the local context in detail. Unfortunately, many economists argued that the sector would disappear in time, providing little motivation for governments to |
Table IContributions of the Informal Economy to Society (1) Contributes to GDP (2) Produces a large share of goods used by middle and low-income groups (3) Provides a training ground for entrepreneurs (4) Absorbs more unemployed workers than less labor-intensive jobs in the formal sector Source: Chen 2/2002 |
conduct research. Many countries are only now collecting reliable data on the size, diversity, linkages, and demographics of the informal sector. Economic development should mitigate the particular problems revealed through research. Workers in the informal sector can be self-employed or work for someone else and receive a wage. People in different situations face different circumstances. Listed below are common sources of difficulty and potential avenues for related economic development.
Barriers to FormalizationFormalization is the process by which an informal business becomes fully legal under the law. This usually requires firms that exist in a day-to-day state of flexibility and change to interact with the more rigid apparatus of government. Corruption can cause acute problems since informal business owners are frequently in a vulnerable position. As the table to the right indicates, starting a business is frequently slower, more expensive, and more difficult in some of the very same countries with high rates of informal employment such as Peru and Ethiopia. There are numerous steps toward formalization--and thus gradients to informality. The process must provide tangible benefits to business owners. If it does not, many will choose to avoid the additional burdens of regulation and taxation that come with legality. |
source:"The informal Economy", SIDA |
The Self Employed Women's Association (SEWA) was registered as a trade union in the state of Gujarat, India in 1972. Two years later the organization started a cooperative bank based in the city of Ahmedabad with $1,300 contributed by 5,000 members . (Chen 2003) Where not specifically cited, the information for this case study is from the bank's website, www.sewabank.org.
Business ModelShortly after its creation, the bank started a "doorstop banking" program by driving vans to meet with members, the vast majority of whom are women. In 2000, a field staff of "handholders" was mobilized to offer face-to-face service wherever it is most convenient for individual bank customers. This staff is assigned a fixed geographic area and thus develops lasting friendships with clients and a detailed understanding of their business needs. The bank stresses the importance of working around the schedule of people employed in the informal sector and around the small sums of money frequently deposited and withdrawn. SEWA Bank minimizes the amount of writing and reading necessary to complete loan applications and other common forms. |
image source: sewabank |
The bank tailors its services to address the specific problems encountered by workers and business owners in the informal sector in India. Clients can receive loans specifically for upgrading infrastructure at their place of business. Bank coordinated life insurance, maternity benefits, and asset insurance help provide a support system similar to that of the formal sector. Clients also receive business counseling, minimizing the negative effects of poor education and lack of access to information. Chen (2003) found that customers use these services differently, depending largely on their specific role in the informal economy:
As can be seen, SEWA and SEWA Bank work closely with clients to find solutions to problems encountered in the informal economy. These innovations serve as the basis for local economic development and community building.
This essay has provided an overview of the major issues facing business owners and workers in the informal economy in the developing world. The short case study of SEWA Bank was selected because of how the organization has fine tuned its services to sector specific needs. Many of these solutions appear adaptable to other countries as well.
The Self Employed Women's Association (SEWA)
Women in Informal Employment: Globalizing and Organizing (WIEGO)
Bhatt, Elaben, Lessons Learnt (sic), SEWA Bank, sewabank.org : accessed 11/15/2005
Becker, Kristina, The Informal Economy, Swedish International Development Cooperation Agency (SIDA), Department of Infrastructure and Economic Cooperation, March 2004
Carr, Marilyn, and Chen, Martha, Globalization and the Informal Economy: How Global Trade and Investment Impact on the Working Poor, Women in Informal Employment Globalizing & Organizing (WIEGO), May 2001
Chen, Martha, Rethinking the Informal Economy: Linkages with the Formal Economy and the Formal Regulatory Environment, United Nations University , EGDI, WIDER, September 2004
Chen, Marty, et al, The Investment Climate for Female Informal Businesses: A Case Study from Urban and Rural India, September 2003
Chen, Martha, et al, Supporting Workers in the Informal Economy: A policy Framework, International Labor Office (ILO), February 2002
Lund, Frances and Skinner, Caroline, Local Government Innovations for the Informal Economy Creating a Positive Investment Climate, World Bank Institute, Development Outreach, March 2005 issue.
World Bank Group, Local Economic Development (LED) The Informal Economy and Local Economic Development" : accessed 11/15/2005
International Labor Office (ILO), Decent Work and the Informal Economy , International Labour Conference, 90 th Session, 2002