The informal sector isn’t well-understood

It is widely accepted that the Post Covid world will not be the same. The disruptions in economies have been so severe that it cannot be. Moreover, because the social inequities the pandemic has exposed are so glaring, it will be morally unacceptable to recover economies in the same form.

Dominant theories in economics must be changed. The celebratory drumbeat of globalization to which all countries were marching since the 1990s has been silenced. It had already become a discordant beat before Covid, with the trade war between the US and China, the break-up of the EU with Brexit, and the collapse of the WTO. To the political walls that were rising, lockdowns everywhere, to prevent the spread of the virus, have added physical walls disrupting global supply chains. Even the internet is breaking up into data islands as nations seek to protect themselves from online viruses. For many reasons therefore, the new world, post Covid, will be politically, economically, and even technologically more local and less global.

Globalization had already become a discordant beat before Covid, with the trade war between the US and China, the break-up of the EU with Brexit, and the collapse of the WTO.

The Covid pandemic has revealed the weakness of India’s economic model. India’s economic bus was moving; GDP was growing. The few people inside the bus were comfortable. When the bus suddenly braked the crowds of people crammed on its roof and clinging to its sides, because there was little place inside, were thrown off onto the road. The moral tragedy was that the people inside the bus did not know that so many people were travelling outside so precariously. They were out of their sight, and even out of mind.

The vast majority of the people precariously clinging onto the GDP growth bus were employed in India’s informal sector. The problem of the Indian economy, according to most mainstream economists, is the preponderance of the informal sector in which, according to their estimates, over 95% of Indians are engaged. The lives of Indians will not be improved, and the Indian economy will not be able to compete with the rest of the world, they say, until this vast informal sector is formalised. Well-wishers of India’s economy must step back to understand the form of the informal sector before devising new policies to engage with it because their efforts so far to formalise it have failed.

The problem of the Indian economy is the preponderance of the informal sector in which over 95% of Indians are engaged.

In their recent book, The Informal Economy: Examining the Past, Envisioning the Future, Martha Chen and Francoise Carre point out: “Informal workers, their livelihoods and their contributions are not well understood or valued but, rather, tend to be misunderstood, undervalued and often stigmatised”. They highlight that 90% of workers in developing countries are informally employed. Therefore, India is not alone. Only in well developed countries is the proportion of those informally employed less than 20%. And there too informalisation of the formal is becoming the trend in a ‘new economy’, with platform companies such as Uber, and the growth of the ‘gig economy’.

Nobel laureate W. Arthur Lewis had forecasted a unidirectional structural transformation of economies in his seminal essay in 1954. Labor flows out of agriculture into industries, and from informal enterprises into formal enterprises—with formality defined by secure contracts between employers and workers. The pattern has changed. Now labor is flowing out of industries into services; and even large industrial enterprises are loosening their formal bonds with workers. It will be foolish for India’s policymakers to continue, post Covid, to force informal enterprises to adopt forms of enterprises that must change. Rather, they must observe the real forms of small enterprises, and listen to their needs more deeply, to devise policies that support them, and not surgically distort their shapes.  

India’s policymakers must observe the real forms of small enterprises, and listen to their needs more deeply, to devise policies that support them, and not surgically distort their shapes.  

The State needs to impose a form on all who it governs, as James C. Scott explained in Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed. The State must be able to identify and categorise all its citizens, including corporate citizens, so that it can tax them appropriately. It also needs to plug its service delivery hoses into enterprises. Therefore, it compels enterprises to change their forms to receive state assistance efficiently and reduce its own costs of delivery. (Even private sector banks find ‘last mile costs’ too high when they serve small informal enterprises, and so they avoid serving them.) Therefore, policies imposed by the State (with support from large players in the private sector) compel the small to change their forms to suit the large, rather than the large adjusting their form to fit the small.

Experts in the formal sector design ladders for enterprises to climb and grow which suit enterprises who are already formal. Whereas, informal enterprises who would like to improve their performance, must begin from their starting points in the ‘informal’ economy. Which are far from the bottom rungs of the formal ladders in the economy.

 Solutions for the formal economy do not hold true for the informal sector. An example here is the issue of ‘labour flexibility’

The informal sector is not only very large, it is also very diverse. Policymakers must listen to what the challenges of informal enterprises are, not imagine what they might be. For example, the presumption that the rigidity of labor laws for downsizing, which is a problem for some large formal enterprises, is also a constraint on growth of small and informal enterprises is fallacious. Because a large portion of the informal sector is self-employed workers. Global estimates of informal employment, summarised by social statistician Joann Vanek, indicate that the informal self-employed who hire other workers represent only 3 percent of all informal enterprises globally. They have many other difficulties in doing business, such as safe spaces to operate, access to finance and markets, etc.

Informal enterprises become converted into numbers to make it easy for economists and policy makers to count them. The numbers can reveal the size of the sector—which is huge in India and in all developing economies. However, their formal lenses cannot reveal the forms of enterprises in the heterogenous informal sector. Therefore, it is imperative that they get out of the bus and get to the ground to listen to real people. Then only will they be able to design policy ladders for making life easier for people in the informal sector, which they must.

 (The writer, a former member of the Planning Commission and former chairman of BCG India, is Chair of HelpAge International. His latest book is ‘Transforming systems: Why the world needs a new ethical toolkit’)