Paste your esCHAPTER 2: THEORETICAL FRAMEWORK
1. Introduction:
The informal phenomenon is multifaceted in local, national, regional, and international contexts. Its logic and internal workings is complex, making it difficult to understand it. This then leads to most of the studies on informality focusing mostly on its characteristics and consequences. This has led to the narrow comparison to illegality, as the activities, workers and enterprises are not recognised, regulated or protected by existing legal or regulatory frameworks (ILO, 2002). This has the led to formalisation being about regularisation, exemptions and incentives to transition the informal into the formal. However, history has shown that these exemptions and incentives are not enough, as the processes informing rise and growth of informality still exist for new participants, while the costs for those coerced to be enjoined in the formal economy are unsustainable, (de Soto H. , 1989).
The objective of this chapter is to develop a theoretical framework based on processes illustrating;
i. That the systematic exclusion of marginalized groups is the main cause of the rise and growth of the informal economy.
ii. The 4 key thematic areas of exclusion
iii. Formalisation as a continuous strategic ‘process’ rather than a ‘product’ of inclusion.
This framework is critical in understanding the internal logic of how the informal economy, produces, reinforces and reproduces itself into a dominant feature of urban areas. This will then inform how, what and the scale of responses required for formalisation to take place.
2. The concept of “informality economy”
The understanding of ‘the informal economy’ ‘the second economy’ ‘the shadow economy’ ‘system d’ or the ‘the grey economy’ is dependent on the types of components and variables that are considered. Studies of informality have evolved considerably over the years starting from economic discourses, moving into development and political agendas, and social justice discourses. Within them, there have been multiple interpretations, conceptual differences and academic discrepancies from the academics, international agencies, and social and labor organizations. (TOKMAN, 2007) This is attributable to the fluidity, continuum, size, trends, actors, activities, products and processes within the informal economy.
Boeke in 1953 conceptualised the formal-informal economy as a duality embedded in social marginality, of an urban market economy and a traditional rural subsistence economy. (Gërxhani). In 1954, Arthur Lewis, theorized that this duality would decline as labour was gainfully absorbed in the modern industries in the urban areas. This would continue until the “Lewis Turning Point”, where wages would rise above the subsistence level due to shortage of labour. However, by the 1960s, persistent, widespread unemployment and under-employment in countries with thriving economies led Hans Singer in 1970 to conclude there were no signs of the “Lewis Turning Point” due to technological advances and mechanisation that created lim¬ited jobs yet the labour force continued to grow (Chen, 2012).
However the first comprehensive conceptualisation of ‘informality’ was by Keith Hart , in his 1971 study of activities among unskilled migrants from Northern Ghana to the capital city, Accra. He maintained the dual classification of the informal sector as “the sum of the self-employed, unremunerated family workers and domestic servants” with the formal sector as “wage-earning employment.” He outlined the cause of informality as an imbalance, between the rapidly growing labour force and a more slowly growing number of job opportunities who ended up participating in marginal and residual activities for a living. (Hart K. , 1973)
This was then followed by a series of multi-disci¬plinary “employment missions” by the International Labour Organisation to various developing countries. The first was to Kenya in 1972, and led by Hans Singer and Richard Jolly (Chen, 2012). The direction of the informality changed discourse as the mission found the informal sector to include profitable and efficient enterprises among the marginal activities that were largely ignored, rarely supported, and frequently actively discouraged by the Government. They also identified under employment and unemployment, as the main reasons for the growth of the informal sector. This resulted in “the working poor" who were formally employed with low incomes and would engage in informal activities to be able to cope with increased living expenses. (ILO, 1972)
Hernando De Soto’s experience in Latin America from the late 1980’s up to 2000, led him to author two books that form the starting point of this study. In “The Other Path” and “The Mystery of Capital”, he describes the informal sector as heroic and dynamic entrepreneurship initiative by the marginalized communities in the face of excessive regulation and government failure to provide basic services. This is echoed by (Neuwirth, 2011) that the informal economy, with or without permission finds a way to provide an income while meeting a need that the government it unable to service. Their catch word has been self-development.
There is a diverse body of literature that documents the thoughts and conceptualisation around informality. It is neither necessary nor possible to review this important but large body of literature but the summation tabulated below adopted from (Chen, 2012) aptly captures the evolutionary journey through the various schools of thought that the concept of the informal has been through the years
School of thought General view and focus Causal roots of informal economy Proponents
Dualist • Informal economy comprises of marginal activities distinct from and not related to the formal sector
• The activities provide income and a safety net for the poor in times of crisis • The Informal economy operators are excluded from economic opportunities
• This is due to imbalances between the population growth and of modern industrial employment
• Also caused by a mismatch between skills and the structure of modern economic opportunities. • Hart 1973
• ILO 1972;
• Tokman 1978
Structuralist • The informal economy is about subordinated micro-enterprises and workers that serve to reduce costs and, thereby, increase the competitiveness of large capitalist firms • Capitalist growth leading to increased global competition
• The attempts by formal firms to reduce costs and increase competitiveness
• Reaction of formal firms to the power of organized labour leading to off-shore industries and subcontracting chains
• State regulation of the economy (taxes and social legislation) • Castells & Portes, 1989;
• Moser, 1978
Legalist • the informal sector is about ” micro-entrepreneurs who choose to operate informally in order to avoid the costs, time and effort of formalisation • Excessive state regulation.
• a hostile legal system • de Soto, 1989;
• de Soto, 2000
Voluntarist • the informal sector is about ” micro-entrepreneurs and workers who deliberately seek to avoid regu¬lations and taxation • Efforts to avoid taxation and costly regulation in the formal economy. • (Levenson & Maloney, 1998;
• Maloney, 2004)
Source: (Chen, 2012)
Geographically, the informality sector was initially characterised as a feature of urban areas in ‘developing countries’. But when characteristics of informality started appearing in the rural areas and the ‘developed’ Eastern European socialist countries, the scale and definition of the informal sector need to be expanded to capture the geographical variance. This led to the 15th International Conference of Labour Statisticians (ICLS) in 1993 to adopt “economic and production units” that were “small unincorporated or unregistered enterprises with less than five employees”, as the basis of statistically mapping the informal sector. However with the exponential growth and universality of the informal sector, the 90th International Labour Conference (ILC) in 2002 expanded the statistical range and scope of informality by replacing the “infor¬mal sector” with the “informal economy” to encompass both enterprises and the nature of employment both inside and outside informal enterprises (ILO, 2013) (Chen, 2012). The key observation in the above discussion is that there is still a lot of ambiguity as relates to the causes, development and consequences of the informality. However the common denominator is the extra-legal processes, activities and substitutes that are driven by disenfranchised populations.
3. Reasons For The Growth Of Informality
Literature reviewed during the course of this study points to the rise of informal economy as directly and proportionally linked to advances of capitalism. With the growth, expansion, adjustments and transformations of economies, capitalism has systematically dispossessed and marginalised sections of society, thereby creating islands and pools of disenfranchised communities that can be exploited at a later moment in time. This systematic process of dispossession has resulted in dynamic and alternative forms of relations, organization, work and exchange by the marginalised communities to be able to survive. This has seen the informal economy grow exponentially, at both the local and international scale, engulfing both the developed and the developing countries to become a major source of livelihood for the urban poor. (Chant & Pedwel, 2008) .
Other reasons that have led to the exponential growth of the informal economy are;
1. Cross-border and rural-urban migration: cross border and rural-urban migration has seen immigrants move in search of better opportunities, without being gainfully absorbed, both in employment and housing, thereby creating “quarters of poverty, filth, unemployment and crime”. (Yiftachel(a), 2000). They therefore turn to the informal economy to eke out a living, all the while transforming their quarters and workplaces into a locus for the informal economy.
2. Excessive, inadequate and heavy regulations that introduce “paper wall” barriers for business and livelihoods. (de Soto H. , 2000), argues that as a result, the poor having no means to meet these costs, resort to an alternative way of doing things parallel to the formal and recognised way. Literature reviewed shows the costs of operating in the informal sector are low in the short term, but exorbitant in the long run with many hidden costs of corruption and imposing order by coercion or violence
3. The erratic nature of the local economies which have forced entrepreneurs and workers into informal ways of conducting business. The 1972 ILO Kenya Mission observed that the internal logic of efficiency, innovativeness, resilience, market correction mechanisms and openness of mind within the informal sector was necessary to counter the employment problem (ILO, 1972). This allowed for quick and autonomous business decisions (to start, close, and scale up or down), flexibility of business operations, freedom and creativity to create and develop niches and quick adaptation to counter to market distortions created by the regulatory systems. (Portes & Böröcz, The Informal Sector under Capitalism and State Socialism: A Preliminary Comparison., 1988) (Chant & Pedwel, 2008)
4. Economic restructuring and transitions. The structural adjustment programmes in Africa, the economic transition in the former Soviet Union, Central and Eastern Europe and the Asian economic crisis in the 1980’s and 1990’s caused the public sector to cut employment opportunities and provision of social services.(Tokman 1984) (ILO, 2002). This created a vacuum where heroic entrepreneurs were then sucked in to offer the services and employment opportunities without commensurate social protection leading to informalisation of the workforce. (Lee 1998) (de Soto H. , 1989). In addition erosion of workers’ wages, led to the workers engaging informal activities to supplement their formal-sector incomes.
5. Unfair bilateral and multilateral trading policies and practices have exposed the local economies to unfair competition and manipulation. The 1972 ILO mission noted that, although Kenya was the recipient of “numerous international aid and private foreign investment, such support has been limited and its gains have often been undercut and outweighed by biases in technology, restrictions in export markets and worsening terms of trade, strings to aid, and transfer payments abroad”. (ILO, 1972).this is well illustrated in dead aid by (Moyo, 2009) , which chronicles examples of how aid to developing countries is tied to conditions, which wipe out the expected gains of alleviating poverty in the developed countries.
6. Globalisation has helped generate new jobs and open up new markets, but the jobs have not been “good” jobs and the new markets have been inaccessible to the small-scale enterprises. This has led to the enterprises hiring workers under informal terms and outsourcing production and processes to locations with cheap mass labour and weak regulatory and enforcement agencies. This helps them maintain their competitiveness by lowering the costs associated with formal labour contracts while reaping the benefits of operating at scale and ability to respond erratic business environment to (Tokman, 2007) (Kanbur & Sinha, 2012)( (Rodrik, 1997).
4. Relationship between informal and formal economy
Initially, the informal sector was viewed as de-linked and opposite of the formal economy, both geographically and economically. This duality was based on compliance with the existing official regulatory framework.
This has since changed with increased recognition that the informal and formal economies are not disaggregated dichotomous units, but rather intimately and integrally linked, with each having its fair share of contribution to the overall economy. (Chant & Pedwel, 2008) (Chen, 2012)In fact they are considered to operate in equilibrium of internal dynamics shaped by contextual issues of state-power and social structures (gender, social norms, social networks, education) and this explains why neither of them gets fully absorbed into the other.
This equilibrium features waves of rise of the informal economy, with every failure of the state, business networks and international markets to deliver employment, public goods and services efficiently and cost effectively. (ILO, 2013). The unregistered informal enterprises and workers are mostly on the receiving end, with fewer means of coping with crises especially those generated in jurisdictions out of their reach e. g forex restrictions, recessions and inflation, while the state and the big formal enterprises employ their capacity and position to enforce laws that deepen the crisis rather than alleviate the suffering of the informal sector. (Rachmawati, 2014) (ILO, 2013) (Kanbur & Sinha, 2012).
5. Actors within the informal economy
The actors in the informal economy can be classified into three, the workers, the enterprises and the state agencies. The actors are never static, but metamorphosise and transition within the three categories. The inclusion of actors in this study is to highlight the power play of political and economic interests that underlines the transitions between the formal and the informal economy, determining how, when and who gets excluded and included in either the informal or formal economy.
i. Workers: This category involves all individuals involved in the informal economy either as employees, middle-men or entrepreneurs. They are further disaggregated into 4 groups ; the domestic workers, the home-based worker, the street vendors, and waste pickers (ILO, 2013)
ii. The Enterprises: these are enterprises and industries entities that are involved in the informal employment of workers and in informal production and processing of goods and services. They facilitate economic activities and range from micro enterprises to multinational factories and businesses.
iii. State agencies: these include the departments, commissions, boards and local authorities that are part of and represent the machinery of the various executive, legislative and judicial branches of a government. They are either permanent or semi-permanent institutions created by the constitution or statutes, and responsible for the oversight, administration, implementation and enforcement of plans, laws and regulations.
6. Informality as an exclusion process
(Yiftachel, 2009), in his study of the geography of urban areas in Israel outlines that, beneath the informal economy, lie structural forces that produce ‘urban apartheid’. The ‘unseen forces’ create spaces, activities and situations that systematically segregate and exclude specific urban communities. These structural forces are generated by the actors and expressed through laws, regulations, codes and activities. The result is the creation and reproduction of ‘white spaces’ that are legal and approved, and ‘gray spaces’ that are in the continuum and ‘black spaces’ of illegality, eviction, destruction and death.
These unrealistic, inappropriate and unenforceable codes and regulations produce, reproduce and reinforce the informal economy, with the hardest hit being the urban poor as they have, limited skills, resources, networks, and representation to either conform to the regulatory framework or champion for a change of the regulations. ( Brown & McGranahan , 2015).As Hart (2006) observes informality then becomes a reflection of this gap between the ‘white areas’ the bureaucratic systems want to have, and the realities of the ‘black and gray areas’ of its inhabitants.
In light of this continuous process of marginalization and exclusion, the urban poor, resort to alternative avenues of organizing their physical, social and economic relationships. These ‘alternative avenues’ were initially personal and localized but have since become bold revolutionary statements of alternate ways of seeing and being in the world. (Millar)
This systemic marginalisation and exclusion happens in 4 key thematic areas;
i. Spatial exclusion
ii. Economic exclusion
iii. Social Exclusion
iv. Legal exclusion
It is important to note that the structural forces create, recreate and reinforce themselves across all four thematic areas, and this will demonstrated in the below analysis of the exclusion process.
say in here…