Poverty is the consequence and not the cause of informal entrepreneurship, and vulnerable populations must be supported rather than repressed in their efforts to escape poverty and low-quality work, writes Pablo Navarrete (LSE Geography and Environment).
The informal economy accounts for around two-fifths of global GDP and approximately two in every three jobs worldwide, playing a major role in economic growth and job creation, particularly in the developing world. Contrary to earlier predictions, rather than decreasing in line with economic development, it has in fact remained stable in Africa and expanded in Latin America and Asia.
Despite these contributions, the informal economy is often perceived as a block on economic progress, particularly in terms of decent employment.
First, it has traditionally been associated with low levels of capitalisation and skills, thereby implying poor productivity potential for boosting growth. Second, its lack of regulation and standards lead to it being seen as a hindrance to achieving decent work.
These negative perceptions have fuelled four decades of development policies that have tolerated or neglected these activities (sometimes fostering formalisation), or even actively repressed them. Yet, displacing informal entrepreneurs and confiscating their products threatens the livelihoods of vulnerable populations. Neither are these efforts especially successful, as most academics and policymakers now recognise that the informal economy is here to stay.
This failure to reduce employment generation within the informal economy, combined with an urgent need to promote decent work in line with the eighth of the United Nations 2030 Sustainable Development Goals, will require new and effective policy innovations.
My own research analyses policy approaches in Santiago de Chile that support a diversity of informal activities, evaluating also their potential for improving working conditions amongst vulnerable populations. This work has led me to conclude that given the informal economy’s tendency towards expansion and permanence, the best way to provide decent work is not through repressing the informal sector but through enhancing the quality of the work that it creates.
Why support the informal economy?
Supportive policy approaches from local governments target social inclusion of vulnerable populations rather than promotion of economic growth. These local governments recognise that informal enterprises are mostly small-scale production enterprises involving a few workers or family members and representing a vital source of household income. Clearly, from a social-inclusion perspective, the growth of these enterprises can translate into quality-of-life improvements for the vulnerable households that they support.
Supportive governments have also started to recognise that informal entrepreneurship in developing countries may provide better working conditions than low-skilled formal alternatives. Since reforms in the 1980s led to increased labour flexibility, low-end formal employment slipped ever further away from access to decent salaries, economic progression, job security, freedom of association, and social-protection guarantees.
But the informal economy has since become more competitive in these areas. My research found that between 85% and 95% of informal entrepreneurs would not abandon their current informal enterprise in favour of minimum-wage formal employment, because their current status brings higher monetary and non-monetary returns. In Santiago de Chile, informal employment offers average salaries two to four times higher than the minimum wage, implies a much shorter working day, and offers greater flexibility and independence.
Furthermore, local governments consider that the right types of productivity-focused policies can accelerate growth of informal enterprises, resulting in better informal jobs. Even if often preferable to formal employment, informal entrepreneurship alone does not necessarily provide a secure path to decent employment. Thus, many informal entrepreneurs endure precarious workplaces, minimal job security, and restricted access to social protections. Many informal entrepreneurs also find themselves in “poverty traps”, with their vulnerability tied up with low levels of human capital, physical capital, financial access, market access, and organisation.
Supportive local governments understand that without favourable policy interventions, the evolutionary curve of informal enterprises is essentially flat: workers remain in conditions of poverty for many years, learning through trial and error, transforming small savings into capital and products, establishing few contacts, and only slowly building enough trust amongst peers to establish larger organisations. Public policy can provide the support requirement to speed up this process and foster improvements in productivity, economic growth, and working conditions.
Promoting decent work within the informal economy
To promote decent work, governments must first distance themselves from repressive or tolerant policy approaches and adopt a purely supportive policy environment. A number of progressive municipalities in Santiago de Chile (La Reina, Peñalolén, Santiago, Macúl, and Lo Prado) are following this approach.
By bringing informal entrepreneurs to the policy table, these municipalities have designed comprehensive policy packages to overcome poverty traps in a number of ways:
- offering training programs (vocational and managerial)
- providing capital (large- and small-scale)
- advising on strategies to expand market bases
- strengthening organisation (typically via unions or cooperatives)
- boosting productivity and bargaining power
La Reina and Peñalolén, for instance, have integrated waste-pickers into their municipal waste management systems, organizing them into cooperatives and providing motorised vehicles to aid with waste collection.
La Reina has also provided waste-pickers with a recycling centre, allowing them to sell in higher quantities to large recycling companies and at better prices.
Macúl has invested in street vendors by building covered, electrified, and self-managed street markets. Not only do these markets provide work security and improved physical workspaces, attract more clients, and allow entrepreneurs to diversify into profitable products requiring refrigeration.
Santiago municipality has supported home-based enterprises, providing a zero-interest credit scheme that facilitates entrepreneurs’ investment in products, machinery and infrastructure.
Lo Prado has established a micro-enterprise market with production spaces in its city centre, allowing home-based enterprises to access a new client base and break the low-demand trap of businesses located in poor neighbourhoods.
As supported informal enterprises grow, their employees are able to overcome poverty more quickly, increase their productivity and income, reduce working hours, prevent workplace accidents, and minimise child labour. Thus, vulnerable households move closer to the standards of decent work.
Policymakers in Santiago have come to an important realisation: poverty is the consequence and not the cause of informal entrepreneurship, and vulnerable populations must be supported rather than repressed in their efforts to escape poverty and low-quality work.
• The views expressed here are of the authors and do not reflect the position of the Centre or of the LSE
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Pablo Navarrete – LSE Geography and Environment
Pablo Navarrete is a PhD candidate in Regional and Urban Planning at the LSE. He holds an Architecture Degree from the Universidad de Chile and a double MSc in Urban Policy from Sciences-Po (Paris) and LSE. He has worked as an architect for Chile’s Ministry of Housing and Urban Development and at the Atelier Jean Nouvel in Paris, as chief town planner at La Cisterna Council in the Santiago Metropolitan Region, and as a senior planner for the Chilean Ministry of Transport.