THE INFORMAL SECTOR ECONOMY: FROM PROBLEM TO SOLUTION Jan Breman The argument that poverty is mainly a question

of insufficient or inadequate economic activity whether voluntary or imposed has become less convincing since the 1970s, when case studies on what became known as the informal sector in various parts of the world began to reveal the highly active existence of men, women and children crowding at the bottom of the urban economy in Third World countries. A stream of empirical micro-studies, initially undertaken by anthropologists in urban locations within the Third World, has expanded our knowledge of how workers succeed in living on the fruits of their labours outside the formal sector of the economy. The formal-informal dichotomy can be regarded as a new variation on the dualism theories of the past. In the colonial era a contrast was constructed between an invasive Western capitalist sector and an opposing Eastern non-capitalist peoples economy. In post-colonial development theory the concept of dualism was applied to the dichotomy of traditional and modern. According to this view, the rural agricultural order was still predominantly pre-capitalist while the urban-based industrial economy was described as capitalist. In the most recent phase of the dualism doctrine capitalism is the label of only the advanced segment of the urban milieu: the formal sector. The modes of production in the lower economic terrain, rather questionably labelled as non-capitalist, are characterized as the informal sector.

In operationalizing these variations on dualism, the contrasts are more significant than the specific characteristics of each segment. For instance, it is entirely normal to describe the informal sector by summing up the absence of elements found in the formal sector. In the absence of a more analytical definition, the landscape of the informal sector becomes synonymous with the kaleidoscope of unregulated, poorly skilled and low-paid workers. Highlighting this chaotic assortment Keith Hart coined the term informal economy in his famous paper of 1971, based on fieldwork in the city of Accra, Ghana.

Sometimes the term refers to the modality of employment, and sometimes it refers to the organisation of economic activity as a whole. The first definition refers to the income from work, performed either on ones own account and at ones own risk or as waged

labour, for which no explicit written or oral contract stipulating the rights and obligations of the parties has been agreed; where there is no legal protection for the conditions of employment, and the activities are only summarily recorded in the governments accounts, if at all. Focusing on the organisation of activity emphasizes characteristics like the small scale of enterprises, the predominance of familial employment and property, low capital intensity and simple technology, fluctuating production, easy entry to and exit from the lower echelons of the economy, the preponderance of local markets and the lack of government recognition and support. In the former case the dualism is attributed to the nature of employment and labour relations, while in the latter the economy is split into two circuits, each with its own method of production. The assumption that these are parallel dichotomies is incorrect. The criteria do not produce a clear and consistent classification. The resulting confusion stems from the tendency to incorporate elements of both definitions in the analysis. The hybrid often chosen seems to arise from the fact that informality is frequently associated with self-employment. This was also how Hart initially described it (Hart 1973, p. 66).

Despite the ambiguous and overlapping criteria, the dichotomy of the urban order is explained in both definitions with reference to the nature of government intervention. The rules applying in the formal sector refer to both the proper use of labour and set quality standards that the goods and services offered must meet. The informal sector is less burdened by public regulation. Partly because of the authorities inability to get a grip on the wide range of activities through conditions and licensing, and partly as a result of the way in which economic actors resist registration, inspection and taxation by the government.

Since the introduction of the informal sector concept, opinion has been divided as to its socio-economic impact. Some authors, inclined to a more positive assessment, have pointed to the accelerated shift in livelihood patterns away from agriculture and villages to cities and towns in the Third World since the mid-twentieth century. Even if the masses of migrants flooding into urban areas were fortunate enough to establish a foothold, the vast majority of them could gain no access to the formal sector. It was still

too small to cope with the continuous influx of newcomers. Under the circumstances the informal sector acted as a catchment reservoir for jobseekers who had been forced out of their rural agricultural existence. In this explanation, the emphasis is on the stamina, the flexibility, the will to adapt, the ingenuity and the attempts made for upward mobility of the footloose workforce flooding into Third World cities. The more integrated they became in their new milieu of work and life and the more skills they acquired, the better qualified they would be for the formal sector of the economy. In making this leap forward they would form trade unions to strengthen their bargaining power vis--vis both employers and government.

The more critical analysis of researchers who have observed that the formal sector remained inaccessible for reasons other than the inferior quality of the new urbanites labour, and their other defects, rejects such an optimistic view. The failure of the newcomers efforts to find stable, decently paid and dignified work is in this alternative perception due mainly to a development strategy that, in the face of excess supply, seeks to keep the price of labour as low as possible, allows no room for collective action to reduce these peoples vulnerability and refuses to provide this footloose workforce with public representation. In short, the lack of registration, organisation and protection does not have its origin in the free play of social forces, but is the product of economic interests that benefit from the state of informality in which a wide range of activities in all branches of the economy are kept, systematically and on a large scale, through evasion of labour laws and taxation.

Indeed, the informal sector is not a separate and closed circuit of work and labour. To fully understand the mechanisms at work we must focus on the interaction between the formal and informal sectors, and particularly on the dependence of the latter on the former, and its subordination to it. My own analysis refutes in the first place the longheld idea that the informal sector is a specificic feature of urban economic activity. To the extent that there is a duality, the tendency to split into two sectors manifests itself in a way that transcends the nature of the urban economy. By drawing the same distinction in the rural economy, it is possible to identify the ties between formal and informal

segments in town and hinterland manifested in the circulation of both labour and capital and include them in an understanding of the economic order as a whole.

In the second place, I reject the view that informality refers largely or exclusively to selfemployment. What often appears to be own-account work is in fact a disguised form of wage labour, for orders sourced out through intermediaries such as (sub)contractors or jobbers. Both in small-scale enterprises and in the chain of dependency made up of brokers and ending with home workers, wages are paid not time-rated, but calculated on the basis of piecework. To record this as self-employment is to overlook the fact that such labouring modalities actually bear the hallmark of an employer-employee relationship expressed in the form of wage payment.

The different views on the informal sector did not stop most studies focusing, until recently, on its time-bound nature. Whatever the school of thought authors adhered to, they almost always felt they could assume that informality was a temporary phenomenon born of the slow expansion of the formal sector economy. The acceleration that would inevitably happen would lead to a simultaneous shrinking of the informal sector. Underlying this prognosis was the assumption of parallel development whereby the process of transformation seen in the Third World from the second half of the twentieth century onwards would essentially follow the same path already travelled by developed societies. The formalization of industrial activity was bound to lead to technological modernisation and scale expansion, while labour productivity would also increase as capital was added. This transformation was meant to be accompanied by growing state involvement designed to increase public control over the use of capital, labour and other resources. The informal sector workers would gain a voice in society by taking collective action to represent their own interests. These analyses, made in the 1970s, seem to have lost more and more of their currency over the years.

The fact that the informal sector has continued to grow rather than declining in magnitude and significance is undoubtedly the most obvious indication of this reverse trend. The earlier estimates that less than half the working population lived on the proceeds of the

informal sector have since been revised to include at least three-quarters or even fourfifths of all those who are gainfully employed. A complex of economic and social mechanisms has led to a rapid fall in the volume of labour in agriculture. Transfer to other areas of economic activity in both urban and rural areas has occurred under conditions characteristic of work in the informal sector, can be summarised as ongoing circular migration, no stable but casual employment, often mediated by contractors, and piecework rather than time-rate work. The growing pressure in the bottom layers of the economy outside agriculture has not been relieved by the expansion of formal sector employment. There are in fact signs that this segment has shrunk over the past few decades. The recognition of this unexpected dynamic has led to a reconsideration of the view that the process of economic growth in the Third World is essentially a delayed repetition of the industrialisation and urbanisation scenario that laid the foundations for the Western welfare state in the early twentieth century. This critical review of the initial notion of an evolutionary trajectory based on the Western model has major policy implications. The new political correctness is to state that efforts should no longer focus on formalising the labour system. In a major deviation from the previous route to development, the suggestion now is that the privileges enjoyed by an exceedingly small proportion of the working population must end. The legal protection claimed by an aristocracy within the workforce who in Third World countries represent no more than a tenth of the total population living on the yield of its labour power is detrimental, according to this argument, to the efforts of the vast majority to improve the conditions in which they live. This unfair competition could be avoided by abolishing security of employment, minimum wages and maximum working hours, and secondary labour rights which used to apply in the formal sector. But should we not then worry that things will get even worse for the quality of the labouring existence? No, those who call for flexibility to give employers a free hand to hire and fire as they please suggest that this approach would actually lead to more, and better work, and a rise in wages in real terms. The idea that efforts should no longer be focused on increasing formalisation of the labour system seems to have become the received wisdom in the milieu of policy makers. In The Informal Sector is Here to Stay (1991), for instance, H. Lubell insists on the benign effects of this dynamic. Analyses focusing on the positive side of the regime of

economic informality are designed to refute the idea that anyone leaving the formal sector and joining the informal sector will automatically experience a deterioration in their standard of living. Such a view often tends to culminate in an ode to the virtues of micro-enterprise. The World Bank has been a leading proponent of the policy of informalisation, which goes together with the erosion of the rights of formal sector workers. This was the basic message of the World Development Report 1995, which discusses the position of labour in the globalised economy.

The erosion of the welfare state in western societies, as well as its halting development where it had only just begun to become into sight, can be seen as confirmation of a trend in which the slowly advancing emancipation of labour in recent decades appears as if it is being reversed into its opposite subordination and growing insecurity. The progressive polarisation of social classes accompanying these dynamics has given rise to a debate that concentrates on the inclusion-exclusion contrast. It seems to mark the return of the old dualism concept in yet another form. References Breman, J. (1976), A dualistic labour system; critique of the informal sector concept, reprinted in: Wage hunters and gatherers; search for work in the urban and rural economy of south Gujarat. Oxford University Press 1994. Breman, J. (1995) Labour get lost: a late-capitalist manifesto, reprinted in: The labouring poor in India. Oxford University Press, New Delhi 2003. Breman, J. (1996) Footloose labour; working in Indias informal economy. Cambridge University Press. Cambridge. Breman, J. (2003) The making and unmaking of an industrial working class in India. Oxford University Press/Amsterdam University Press. New Delhi/Amsterdam 2003. Hart, K. (1973) Informal income opportunities and urban employment in Ghana, in: Jolly, R., E. De Kadt, H. Singer & F. Wilson (eds.) Third world employment: problems and strategy. Penguin. Harmondsworth: pp. 66-70. Lubell, H. (1991) The informal sector in the 1980s and 1990s. Development Centre of the Organisation for Economic Cooperation and Development. Paris. World Bank, (1995), World Development Report: Workers in an integrating world, Oxford University Press, Oxford.