The Memory Bank

The urban informal economy in retrospect

June 8, 2007 by Keith Hart

The term ‘informal sector’ (later ‘informal economy’ and now often just ‘informality’) arose almost four decades ago to describe the unregulated activities of the Third World urban poor. But the problem of proliferating urban masses, supporting themselves in invisible ways and at some perceived risk to public safety, is an older one.

In the eighteenth century, Scottish economists wrote about the ‘riffraff’ of Glasgow and Edinburgh. Later, the inhabitants of English city slums were called ‘the dangerous classes’. A journalist, Henry Mayhew documented the economic ingenuity of London’s poor in great detail. But Martin Scorsese’s film, Gangs of New York shows how criminal gangs and political corruption were rampant there in the mid-nineteenth century.

The flood of migrants into Third World cities provoked alarmist reports of mass unemployment there around 1970. It was also generally agreed then that only the state could effectively promote and manage development. Where were all the jobs going to come from? Policy-makers at both national and international levels were anxious to head off urban riots and worse.

In a paper presented to a 1971 conference on ‘Urban unemployment in Africa’, based on fieldwork in the slums of Ghana’s capital city, Accra, I argued that the urban poor were not ‘unemployed’. They were working, although often for low and erratic returns. ‘Informal’ incomes, unregulated by law and invisible to bureaucracy, were a significant part of urban economies that had grown up largely without official knowledge or control.

Soon afterwards the International Labor Office published a report on Incomes, Employment and Equality in Kenya featuring ‘the informal sector’ as a potentially major contributor to the national economy, one moreover that reduced the impression of inequality given by formal-sector unemployment statistics.

If my paper was an attempt to impress development economists with an ethnographic account of formal and informal economy in the lives of Ghana’s urban poor, the ILO report enabled ‘the informal sector’ to organize research and planning across a wide range of initiatives. The concept’s birth thus had a double provenance that has led to some confusion over authorship since.

Although I had been reluctant to claim that informal activities might make a big difference to the development prospects of countries like Ghana, others were less restrained. In the 1970s, the informal sector was often promoted as a source of employment creation capable of lifting a poor economy by the bootstraps. It was still assumed that this was primarily the state’s responsibility.

Things changed in the 1980s, with the arrival of neo-liberal regimes in the USA, Britain and elsewhere. The World Bank and IMF embarked on a radical program of ‘structural adjustment’ whose chief effect was to open up poor countries to international capital flows and to scale down public expenditures there. Now the engine of development was ‘the market’ and the informal economy was encouraged as one of its instruments.

If governments lacked the funds to provide public services on the scale to which people were accustomed, the latter would have to supply their own needs for health, education, transport and utilities informally. These services would be paid for directly and thus constituted a major boost for the free market — free because largely unregulated.

After the millennium, the attitude of the international agencies changed again. Now ‘informality’ is seen as a threat to ‘private sector development’. Business corporations are undercut by informal operators who pay no taxes, evade costly regulations and take advantage of numerous devices, legal and illegal, to reduce their prices.

Accordingly, whereas the informal economy was once seen as a positive factor in development, it is now more likely to be represented as an obstacle in an update of its former designation as ‘the dangerous classes’. Today, however, the model of success is the highly bureaucratic type of economy achieved by Western countries only in the second half of the twentieth century.

Hernando de Soto, a Peruvian economist, has drawn attention to this issue in two books, The Other Path and The Mystery of Capital. Bureaucratic red tape in countries like Peru makes it very difficult for migrants to the cities to set up new businesses, get loans or establish formal property rights in their possessions.

Although this was at first an effect of local elites jealously holding onto inherited privileges, it is now reinforced by the international system of bureaucracy controlled by the USA and Europe. The irony is that these regions took full advantage of the flexibility afforded by informal arrangements in their own drive for development a century or two ago, but deny it to those who would develop from behind today.

The original application of the informal economy concept was to the self-employed urban poor in developing countries. But it has since come to describe a much wider range of economic activities in rich and poor countries alike. If the term addresses whatever is invisible to normal bureaucracy, then it surely should include informality at the top as well as the bottom of society, not to mention crime on any scale wherever it happens.

Rules can never specify fully what people should do to carry them out. The counterpart of every invariant form is its variable content. Thus, a contract between union and management may lay down the rules of work, but a ‘work-to-rule’ quickly brings production to a halt, since it eliminates all the informal procedures that make shop-floor organization more efficient.

It has never been resolved whether the informal economy refers to casual labor in formal enterprises or not. This has become more pressing in the context of widespread privatization of public services, leading to low pay and precarious rights, and of outsourcing by businesses, often to unregulated workers on the other side of the world.

Some informality, however, is simply illegal, the negation of the rules. When the state’s writ is weak, other social forms (themselves invisible to the bureaucratic gaze) fill the void. Sometimes these are relatively benign, such as religious organizations, but more often order is imposed by criminal violence. This makes it hard to promote informality as a good thing, since the line between the lawful and the illegal is often blurred.

There is a gender component to the informal economy in that men have a disproportionate share of formal positions and women’s work is predominantly informal. This has led activist groups, such as ‘Women in informal employment: globalizing and organizing’ (WIEGO) and the Self Employed Women’s Association (SEWA), to use the concept as an umbrella term drawing attention to discrimination worldwide.

Neo-liberal economic policies since the1980s have fostered massive growth in the ‘informal’ portion of global or national economies, by reducing state controls and promoting the gigantic money flows known simply as ‘the markets’. The informal sector is thought to account for 70-90% of the economy in most African countries. War-zone economies in Afghanistan and the Congo are almost wholly informal.

This extension of the scope of the concept — to embrace rich and poor countries, government and business, casual labor and the se
lf-employed, corruption and crime –when taken with the wholesale devolution of central bureaucracies compared with forty years ago, leaves a question-mark over its continuing usefulness today.

The label ‘informal’ may be popular because it is both positive and negative. To act informally is to be free and flexible; but it also refers to what people are not doing – not wearing conventional dress, not being regulated by the state. The ‘informal economy’ allows academics and bureaucrats to incorporate the teeming street life of exotic cities into their abstract models without having to know what people are really up to.

We are living through humanity’s rapid disengagement from the soil as the chief object of labor and matrix of social life. The hectic growth of cities over the last two centuries could not be organized immediately as ruling elites would like. The informal economy is one way of pointing to how people devised their own means of survival and sometimes of prosperity in the urban markets that spring up spontaneously to meet their needs.

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