Working in the Shadows: What Have We Learned About Informality?

In the average developing country, most people work outside the law -- they have no contract, are not registered, carry no license, pay no tax or make no pension contribution. They get no social benefits or labor protection either. They are "informal."

Think of the small farmer toiling on her tiny plot, the neighborhood's handyman working out of his toolbox, the lady cleaning houses for cash, the youngster peddling fake watches at the traffic light, the sweatshop operating in a basement and the contractor that, literally, picks up day-laborers on the street corner. These kinds of micro and small "enterprises" actually provide most of the world's employment. No wonder they have been the object of much attention by politicians, academics, multilaterals, NGOs and virtually everyone else who has an interest in economic development.

Until very recently, our understanding of informality went more or less like this. To escape poverty, an individual starts a business. Happy with the initial results, she hires a helper or two. But soon she is faced with the government's taxmen, registrars and inspectors. To her eyes, they want a piece of her income, in the form of taxes, fees and bribes. To hide from them, she keeps her trade minute, deals only in cash and serves the kind of clients who don't ask for receipts. With those credentials, no bank wants to lend to her and no big company wants to train her as a supplier -- she is cut off from both finance and technology. This forever condemns her to smallness, low-productivity and, very likely, poverty. The remedy? Lighten her tax burden, make registration and licensing painless, give her basic training and help her access "micro-credit." For decades, this formula has been followed by policy-makers and charities alike to usher people out of informality.