Managing Informality. The Informal Sector Role in Development

Hausarbeit, 2018

5 Seiten, Note: A-



The informal sector is defined as a sector which include all enterprises which are not officially regulated and which operate outside the incentive system offered by the state and its institutions. In contrast, enterprises which enjoy official recognition, protection and support are defined as formal sector. No such support or protection is available to informal sector enterprises. At the empirical level, the informal sector is defined to comprise those economic enterprises which employ less than 10 persons (including the owner) per unit and which operate in open spaces; housed in a temporary or semi-permanent structure; does not operate from spaces assigned by government, municipality or private organizers of officially recognized market places; it operate from residences or backyard; and it is not recognized (Amin, 1982, p. 40-41). Similarly, Feige as cited in Haller and Portes (2005, p. 404) defined informal sector as a sector which encompasses “those actions of economic agents that fail to adhere to the established institutional rules or are denied their protection”. According to Amin (1992, p. 40) informal enterprises are tolerated, but the norm is to subject their operators to routine harassment or pursue overt and covert policy with the aim of reducing or eliminating these “unauthorized economic entities” altogether.

The Role of Informal Sectors in Development

Scholars who study the origin, dynamics and persistence of the informal economy divide theoretical approaches to informal economy in a number of ways, and most like Bhowmik, 2010a; Chen, 2006; Perry and Maloney, 2007; and others distinguish only three approaches i.e., Dualist (ILO position), Structuralist (Neo-Marxist) and Legalist (Neoliberal) approach (Wilson, 2011, p. 205). Those informal economy approaches argue about origin and determination of the informal economy from different but also shared point of view. To our argument concerning the role of informal sectors in development we prefer to follow the structuralist approach. According to Wilson (2011, p. 206) the structuralists focus on the linkages between the formal and informal economies and emphasize that the informal economy is included and exploited by the formal one. They tend to focus on informal wage workers whose employers avoid paying or following legislated labor laws. These wage workers are often subcontracted or otherwise hired informally by formal enterprises. Bromley as cited in Wilson (2011) points out that many of the self-employed in petty commerce are commission sellers or dependent workers who have linkages with formalized large-, medium- or small-sized businesses or even multinational firms whose products they vend.

As indicated in the above paragraph mostly but not always the informal economy is highly attached to the formal economy in such a way that the formal enterprise owners hire a considerable number of waged workers or take sub contract with the self-employed informal vendors for the provision of various good and services. For instance, an authorized and licensed contractor may hire daily or waged laborer most of the time rural immigrant or he/she might take sub-contract to unauthorized and unlicensed contractor to run and finish the whole construction process. With this respect, Amin (1987, p. 613) outlined that the informal actors may engage in earth digging, brick-breaking (hammering old or broken bricks into small pieces for use as aggregate in making concrete), work as masonry assistant, carpentry, painting, masonry and plumbing in a construction site which is taken by authorized construction entity. This linkage between formal and informal economy creates a wide employment opportunity for a large number of workforce especially for those rural-urban migrant who do not have special knowledge and skill that is required to get hired in different governmental and non-governmental organizations. And this is obvious in Addis Ababa.

Bohme and Thiele (2012, p. 5) stated that there is a forward and backward linkage between formal and informal economic sector. Forward linkages is the use of an enterprise’s output as an input in other productive activities, while backward linkages comprise the enterprise’s purchases of intermediate inputs. On the same token, Multi-Donor Trust Fund (2014) agreed that the linkages between formal and informal markets can be divided into production and consumption linkages. In relation to this, Portes and Haller (2005, p. 403) argued that the phenomenon of the informal economy is deceivingly simple and extraordinarily complex, and we encounter it in our daily life. The clothing we wear, the restaurant meals we eat, and even the laptop computers we regularly use have something to do with the informal economy. The ways in which informal labor and goods enter into production and distribution chains of the formal economy underlie on both their lower cost and their ready availability. Fernández-Kelly and Garcia; Gereffi as cited in Portes and Haller (2005) illustrated that the garment industry that produces the clothing items we buy and use is commonly anchored by unregulated or poorly regulated sweatshops and home workers sewing, stitching, and packing for a piece rate at the other end of the production chain. Similarly, Chavez as cited in Portes and Haller (2005) articulated that the “back of the house” staff that does much of the cleaning and food preparation in many restaurants is composed of immigrants, frequently recently arrived and undocumented, who are paid in cash and are not covered by labor contracts. Moreover, the computer industry that produces laptops is known for subcontracting assembly of circuit boards and other components to small, often unregulated shops and even home workers.

Amin (1987, p. 613-614) divide the employment status of informal sector in to four categories. These are self-employed, employer, hired labour and family labour. This employment opportunity has a great role for economic and social development since it enables a significant number of people to generate income and afford their living cost. And this in turn has an enormous input for poverty reduction. Milti-Donor Trust Fund (2014) stated that the interdependence of formal and informal economic actors plays an important role in the dynamics of economic development. The underlying assumption is that if all firms do not buy intermediate goods from independent suppliers but rather produce their inputs themselves, benefits from specialization and economies of scale are reduced, ultimately constraining dispersion of technical innovation and growth. In this respect the informal economy is no different than its formal counterpart. Productivity and growth depend on the vertical linkages of an enterprise especially if production involves several intermediate steps and products. Moreover, at the end of the production chain, the sales are determined by the ultimate demand and distribution of the goods, which may be formal or informal in nature. A significant amount of formal products including imports can be marketed through informal distribution channels.

Our first hand observation in Addis Ababa showed that a very large number of people including women, children and youths are currently engaged in the informal economy in the form of street vendors, informal market suppliers in various open market areas like Merkato, Akaki market, Kera market, Shero Meda, Atikelt Tera and others, and home based production. In our Addis Ababa a large number of people engaged in home based production including traditional beverages like Tella, Teje, Arekey and Borde. On the other instance, a legally established and registered hotels, restaurants and banquets take a contract with the informal home based producers for the provision of food items like enjera, bread, milk, fruits and vegetables. In addition to food and beverage, people produce and pack detergents and cosmos at their home and distribute it to the registered and authorized traders like shops, supermarkets and malls, and even overseas. Besides, the formal traders also hire wage or commission marketers to sell their products in the informal market. And this is also obvious in the various street of Addis Ababa like Megenagna, Piassa, Arat Killo, Mexico, Kera, Saris, Jemo and so many other places. This indicate a considerable number of people make their living from informal trading and its consumption and production linkage with the formal one.

On the other hand, of course the nature of linkage between the informal and formal economic actors can be criticized as exploitative since the formal actors take the advantage of low cost labour resources who are unprotected and who involuntarily eke out a subsistence wage as explained by Portes and Schauffler as cited in Kay (2011, p. 13) as well as the provision of low cost goods and services over the informal actors. However, the formal sector does not have a formal position for the ever increasing labor supply which is created and accelerated by rural-to-urban migration. So what choice those migrants, unemployed and poor people left? Should they take a seat and wait for the government to create job opportunity for them? And they know that will never gonna happen. Therefore, the only and best choice that is left for them is joining the informal economy. Because working more and getting something is always better than sitting down and having nothing. When the time comes up they start to improve their skill; they will improve their capital accumulation, and finally they will be an entrepreneur in the world of formal economy. And that is how it works.


In conclusion, the informal economy constitutes a valuable effort to combat unemployment in the long term. Even if these informal activities seems to have a great impact on the government revenue since those informal sectors do not report their revenue to the revenue authority and pay tax accordingly, its contribution to the creation of job opportunity for a huge amount of work force is remarkable Most of the government of developing countries like Sub Saharan African governments are failed to create adequate employment opportunities and growth for the whole community especially for those rural-urban migrants. And those informal sectors are playing a great role in reducing the burden of creating job for the ever increasing workforce from the government’s shoulder. Besides, the informal market and its linkage with the formal economy make a wealth distribution from the haves to the have-nots, or create a possibility of “helping the poor without any major threat to the rich” as described by Bromley (1978:1036). This in turn paves the way for social and economic development. So, it makes good socio-economic sense to promote the informal sector as a significant source of employment. Therefore, government's strategy should be to help the informal sector generate a level of employment above the marginal and survival instead of to extinct or vanish the informal economy. No one wants to stay informal just like for forever, and when the times come that means when those informal actors reach at the peak or boom where they generate more and more income, the system itself bring them to the formal economic system.


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Managing Informality. The Informal Sector Role in Development
Ethiopian Civil Service University  (College of Urban Development and Engineering)
Managing Informality
ISBN (eBook)
development, informal, informality, managing, role, sector
Arbeit zitieren
Emebet Hailemichael (Autor), 2018, Managing Informality. The Informal Sector Role in Development, München, GRIN Verlag,


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