Shengjian Wu Matrikelnummer: 3808209 Seminar: GEO 81. Global Environmental Change Docent: Prof. Dr.

Olaf Schnur Status: 28. January 2013

Blessing or Curse: Informal Sector in Urban Communities of Developing Countries

An evaluation essay on the role of Informal Economics in urbanization

Rethink about the Misfortune of Informality with economic implications The term informal sector was invented by the famous economist Lewis William who tried to provide an appropriate framework for studying the economic development in his work The Theory of Economic Growth in 1955. In the year before, Lewis just published his most influential development economics article, Economic Development with Unlimited Supplies of Labor and introduced the Dual Sector model, or more commonly used as the Lewis Model, which concentrates mostly on the relations of labor and capital during the economic upgrading reconstruction. The terminological background of informal sector indicates that its emergence is rather a periodic economic phenomenon. Based on the close correlation between urbanization and industrialization in human history, we can boldly suggest that the reason why the informal sector in developing countries nowadays, become more eye-appealing even than that of postindustrial age in western countries from mid 1970s on, is probably out of the local unbalance of relatively stagnating industrialization and accelerating urbanization. A quantitative prove of this unbalance is the disparity1 of the overall GDP growth and regional urban expansion there, in which the globalization has played as extern catalyzer that urged the developing countries to fulfill and match the global production networks within short time, other than their western counterparts who were urbanized with adequate industrialization pace since late 19 th century. By forcing the unready economic actors to join in the ongoing capitalistic globalization, capitalistic mechanism itself has greatly contributed to the emergence of informal sector. On one hand, the globalization of developing economic entities incorporated the most domestic traditional sectors into global value system and meanwhile marginalized these sectors in accordance to its inefficient production process. It expresses out the informality in the sense of outdated productivity or
1

A retrospect of the disparity: over the period of 1965-1999, the average annual growth rate of GDP per capital among low-income countries is around 1.8%, while their population growth rate is at 2.3%, urbanization rate even higher. (Beyond the economic growth, The World Bank Group, 2004)

lagging behind in capital accumulation at the vertical level. On the other hand, the globalization also crushed the self-sufficient mechanisms of the former peripheral actors by enforcing its highly standardized workflows, which was often supported by local authorities for the interest of technology transfer or social capital2 gains. It reveals the informality through the less skilled labor or unregulated labor market at the horizontal level. The spatial presence of informal sectors signifies the injustice of labor distribution, while their temporal existence show us the different grades of market maturity in developing countries. The multi-dimensional expression and multi-laminate influence of informal sectors The rapid pace of rural-urban migration has broken the borderline between modern industrialized and traditional sectors under weak governance. Suburban areas in developing countries, among which the slums often came into being, were a miniature of tension between local labor market and labor migration. The national poverty and the livelihood opportunities for the working poor labor would be highlighted in the slums or informally formed settlements. The immigrating population - to an extent as complementary inflow of labor force - has been recognized as the main contributor of the wild urbanization in developing countries. First of all, since they were unqualified or also enabled to blend in the formal modern sectors in urban areas. Secondly, the formal sectors in developing countries were incapable to create enough formal jobs in their economic activities to absorb all newcomers either. But if we observe this slop-over effect of formal sectors from a liberal market-oriented perspective, the redundant informal labor is not merely an inaccurate supply-demand accommodation of immature local labor market itself, but also a spontaneous struggle of these marginalized economic actors who long for a reposition in developing markets. Their interaction is neither forced nor freewheeling. The two opposite conception about origins of informal sectors in urban areas reflect the conundrum of finding a proper beginning point to solve the whole problem. At macroeconomic scale, the core problem can be poverty, uneven regional implement, or the inability of the industrial sector to absorb labor of all kinds. But on the positive side, some liberal economists argued that the informal sectors were performing well with its flexibility of market rolls and the informal actors can even support the local formal actors to release their productivity potential3. Especially the own-account workers who were employed in their own informal sector enterprises have contributed indeed a lot to form new
2

Social capital here refers more closely to its sociological usage that is expected collective or economic benefits derived from the preferential treatment and cooperation between individuals and groups. The core idea of social capital is that social networks have value, in which the term value is also apparently defined more widely than its monetary implications. 3 Prof. Sugata Marjit of Michigan University published the paper Labor Productivity, Growth, Informal Wage and Capital Mobility: A General Equilibrium Analysis on April 2007, in which he applied a three sector model to prove how the labor productivity growth in the skilled sector influence the informal workers negatively, while in reverse the informal benefit the formal sectors.

economic networks among less normalized sectors, although they themselves were often loosely organized. At the microeconomic scale, the main troubles may often be demonstrated through insufficiency social security, minimum wage, and lack of social rights as actors that unprotected by laws. But the informal employees themselves wondered whether they could get rid of such kind of sadness without the present imperfect job. If the skeptics on human rights pay more attention to the socioeconomic framework of the referred developing countries, they might realize that the informal sectors are primarily set to maintain the existence right of disadvantaged economic actors, which is perhaps a more vital fundament of further social mobility. Ameliorate the effects of informal sectors with regard for socio-spatial tension The most fashionable strategies towards informal sectors nowadays are bottom-up model solutions. In the case of Indian Micro Lending, which was aimed originally at advancing the informal actors directly with cheaper loans and enabling the local informal service providers to rebuild a more unprejudiced capital-labor relation, has turned out to be infeasible. Household laundry service providers in slums of Mumbai could hardly convert their labor relations merely with corresponding financial resources. In other words, Money alone cant repair all the social capital that absent from the informal sectors. The reason why the poor tend to fall into informal economy is rather the incompetency of being rich than the status of being poor. The geographic mobility from rural to urban areas can be simple and convenient, while the social mobility from lower onto middle or upper class would be quite difficult. Informal Sector is neither blessing nor curse. Its outcomes depend fully on the working conditions at individual level and the degree of social mobility at collective level. Based on the clarification of essential aporia, I would like to advocate a top-down strategy that ameliorates the effects of informal sectors more pragmatically. The top-down model is concerning the improvement of individual capacity to achieve a better prospect by embodying a more promising framework. We have categorized the jobs of informal sectors above; additionally we need to further our insight by learning the characteristics of these informal employees. Generally, the informal workers are vulnerable, as most of them are unprotected by labor laws, just for low tax-free earnings. Typical faces among them are children, the young and women. Child labor in urban areas of developing countries depicts that the joint sufferings of physical immaturity and failure in social integration. The adults and social rule makers, namely the state government and international society in the market should be more involved to spread the awareness

of personal growth for young citizens, which makes up their capital of upward social mobility in the future. In this sense, the governors are not required to detect all the undermined informal sectors and regulate them with labor law enforcement, but more obligatory to ensure the basic social rights of the young in education, in the know-how capital gains. Unregistered companies or family businesses are suggested to receive more positive stimuli particularly the free staff training- other than ruling it out completely, so that these actors may slowly blend in the formalized markets. Young informal workers can therefore also enjoy the freedom of association and collective bargaining. Besides, women in the developing world are more likely to be employed informally. Around two third women of nonagricultural workers in the developing world are informally employed. Their cultural conditions and traditional family roles may constrain their positions in labor market. For them, informal sectors are often the only imperfect option to combine their household responsibilities with income contribution. The gender relations in rural areas in developing countries can be worse interpreted than in urban areas. From the perspective of Feminist Geography, spatial constraints on womens potential would be comforted in urban areas, where the gender identity of women can be reconstructed through the modern natures of city spaces. Women, even those in informal sectors are encouraged to change their traditional subordinate social positions. The local governments can encourage the home-based informal jobs by transferring more available simple technology to less developed communities. Moreover, politicians shall invest more resources in building more public facilities like libraries, nurseries, part-time jobs agencies, what means more noneconomic opportunities for unemployed women. Conclusion Informal Sector is neither blessing nor curse, neither compelling nor naturally formed, neither hopeless nor speculative. No nation can elude the route of expanding urbanization with ongoing occurrence of informal sectors. The issue in developing countries is just a quick replay of human history of industrialization, but what worthy of being cautious is that the top-down approach of local governments and global players to maintain the justice and equal opportunity might be misused to produce an unjust market order. Otherwise the less advantaged actors in informal economies couldnt expect a promising way towards urban integration. Overall, the uneven geographic economics and Region Imbalance will not automatically hinder the informal actors or harden the social mobility.

Reference:
Amin, N.: The Informal Sector in Asia from Decent Work Perspective, Asian Institute of Technology, Bangkok, ILO, 2002 Kristina Flodman Becker: The Informal Economy, Fact finding study of Sida, Department for Infrastructure and Economic Cooperation, March. 2004 Michael G., Jann L.: Franois R., Julia V., Informal Sector Dynamics In Times Of Fragile Growth, Document de Travail, October. 2011 Schneider, F.: Measurement of the Informal Economy in 110 Countries Around the World, World Bank, 2002