Institute of Development Studies

Formalisation of an Informal Economy?

22 April 2010

IDS Research Fellow Neil McCulloch recently attended a conference hosted by the Donor Committee for Enterprise Development (DCED) on 'How Business Environment Reform can Promote Formalisation - Learning from our Experiences' in Cape Town, South Africa.

The DCED promotes enterprise development - particularly for small enterprises - in developing countries. The organisation, based in Cape Town, endeavours to learn from a broad range of experience through a forum made up of member agencies exchanging information about their programmes and lessons learnt. This conference focussed on practice and programme interventions that improve the business environment in order to enhance the opportunities for informal enterprises.

Focus on the benefits of formalising economies

Recently, there has been an increased transition from the informal economy to formal processes in the business environment. Dr. Simon White, an independent consultant at the conference, explained that 'informality may not be a bad thing, but whose interest does it serve?', on this note he continued 'goods and services are often cheaper; governments are often not keen to encourage formalisation because it creates more pressures on them to deliver and it simply doesn't exist because it meets the preferences of poorer communities.' He questioned how it would be possible to make the functions of the informal economy more effective and making those within it less vulnerable and operate more safely.

Neil McCulloch said that 'there is a need for more focus on the benefits of formality', adding that 'it may well be that formalisation per se buys you rather little. The key policy message should be to ensure that formality actually has benefits. So far the agenda has focused heavily on reducing the costs of formalisation, but it may be more important to ensure that being formal gives rise to real benefits (access to credit, government contracts/services etc).'

The DCED report on the outcome of the conference notes that 'donor and development agencies should support reforms and interventions that appear to be working, design indicators that can be used to regularly monitor changes in the informal economy and to assess the impact of reforms.'

Dr McCulloch questions whether the process is so simple, as the focus on what formalisation should achieve remains unclear, 'The debate of growth versus survivalist enterprises suggests that this could be a losing battle. Some argue that the overall agenda is to promote growth and create employment (implying a broad focus on measures to improve growth of which regulatory reforms may only be one small part) but others focus explicitly on marginalised/survivalist enterprises. There appears to be a somewhat romantic belief that the informal sector holds great growth potential and that by removing barriers, it can make a major contribution to growth. The reality however, may well be that the formal sector is the engine of growth.'

The elephant in the room

'Because of the business orientated nature of the audience the conference lacked a focus on rights for informal workers and politics. Little thought was given to how one might influence domestic political processes to try and influence reform, e.g. through facilitating coalitions of interested parties supporting reform. This is a sensitive area and was definitely the unacknowledged 'elephant in the room'.

The conference helped Dr McCulloch to identify some key areas for research, 'One important research agenda might be to explore how private and state actors managed to construct effective coalitions for reform in some cases, but not in others. There is also space to research how to reconcile rights-based and growth agendas. What are the most effective ways of balancing these agendas to allow structural change in a way that respects the dignity and the livelihoods of the poor?'

Neil McCulloch is a Research Fellow in the Globalisation Research team, IDS