IFIs such as the World Bank and the IMF have traditionally recommended that governments reduce informality in the labour force by streamlining regulations to make it easier for businesses to enter the formal economy. The UN Sustainable Development Goals, too, mention the need to prioritize the ‘formalization and growth of micro, small- and medium-sized enterprises through access to financial services’. The central idea behind these suggestions is that once businesses are on the government’s books, they can be taxed and their workers will, presumably, be recognized. But there are other reasons for this agenda as well, including its potential to increase productivity and labour market stability.
These monocausal arguments, and the narrow policy prescriptions that flow from them, have long informed international and national programmes to address informality in the workforce; but they have missed the mark. A key problem is that such views stem in large part from the seminal work in the late 1980s and 1990s of Peruvian economist Hernando de Soto, who saw the informal sector as evidence of an aspiring entrepreneurial, business-owning class that had been forced underground by onerous state regulations and taxes. That interpretation fit neatly into the predominant neoliberal economic model at the time, and led to the standard recipe of reducing state regulations and bureaucracy. The World Bank’s Doing Business report is the most famous example of a tool that was intended to incentivize these reforms. Perhaps not coincidentally, such analysis and the identification of root causes of informality also meshed neatly with the interests of a powerful constituency: investors and large, formal, private sector enterprises.
But according to the ILO, 45 per cent of people in the informal sector are not entrepreneurs but ‘own-account workers’ – workers who are self-employed and have no employees – while 16 per cent contribute to a family business. Many informal workers also participate in more structured enterprises, with about 36 per cent operating as employees rather than as owners or aspiring owners of their own businesses. In other words, the issue is not so much one of entrepreneurs struggling to shake off the shackles of the state, but that the bulk of the informal sector consists simply of workers labouring away in unfair conditions without recognition or protections. While the informal sector’s growth may be linked in a broad sense to too much regulation on business, most informal workers themselves suffer from too little regulation on labour: too few rules requiring businesses to hire workers on the books; too few requirements for businesses or the government to provide social safety nets; and too few programmes to register, catalogue and understand the dimensions and needs of these labourers.
As a result, as World Bank economist Norman Loayza argues, ‘policies to address informality should also vary country by country’. Addressing informality should focus not just on rolling back laws and regulations to unburden aspiring entrepreneurs, but also on state efficiency and labour protections. Indeed, recent research in Italy, the UK and the US discovered that, far from voluntarily entering self-employment, one-third of those surveyed would opt for regularized, full-time employment if given the choice rather than remaining self employed.
