The Informal Economy
A selection of readings prepared by John Conroy is presented here. Most of these materials have been written with Papua New Guinea in mind, though they have wider relevance, especially in the island Pacific region. In many of the countries with which FDC is concerned the informal economy consists primarily of household enterprises (often called ‘micro’ or ‘survival’ enterprises). These enable the poor to ‘get by’ when the ‘modern’ economy is slow in creating enough ‘formal’ jobs. The informal economy is relevant to FDC’s broader concerns – particularly in relation to financial inclusion – because access to appropriate financial services assists poor households to finance their economic activities and to smooth their consumption spending in the face of variable income streams. Livelihoods from cash-crop farming, trading and other services, and petty manufactures, contribute to supporting the majority of households in low-income developing countries. Such activities are the forgotten grassroots element in the private sectors of those countries, and ‘pro-poor’ development strategies must take them into account.
FDC’s first publication (Banking with the Poor, 1992) argued the case for the importance of the informal economy in poverty alleviation. In it, John Conroy wrote, ‘Where poverty rules, open unemployment is rare, but many people are trapped in low productivity activities, both within and outside agriculture. Observers, noticing relatively low labour intensities associated with many such activities, may describe those so occupied as "underemployed". But it is more relevant to note the low returns yielded to workers who engage in them, and more helpful to most of these people to conceive of solutions to their poverty as lying in income-generation, rather than in "employment"-creation. Most are self-employed, or members of family working units, and efforts to increase the productivity of their labour are necessary if surpluses generated by growth in agriculture and industry are to "trickle down" to them. The "informal" economy in which they operate may be, at one extreme, a dynamic sector in which innovation, rising incomes and capital accumulation occur, or at the other extreme it may be simply a statistical category, a residual sponge into which growing numbers of landless and other poor are absorbed, with little hope of improvement in the material conditions of their lives. Interventions aimed at increasing the productivity of economic activity among the self-employed in the informal sector may assist in releasing the potential for dynamism that exists there. This is an argument for increasing people's capacity for self-help; strategies of industrialisation and formal sector employment-creation are largely irrelevant to the condition of the very poor’.
Source: Banking with the Poor (FDC, 1992, p.12)
Please contact John Conroy or FDC or further information or comments.
Click on the titles below to read the publications.
Enterprises in the informal economy in PNG can be classed as either Submarines or Survivors. ‘Submarines’ should probably be paying tax, but have the ability to submerge when they want to escape the attention of taxation or labour authorities. ‘Survivors’ are micro-enterprises, the ‘survival’ enterprises of the poor. Taxation and labour authorities should leave them alone to get on with the business of sustaining low-income people.
Sadly, it’s a waste of time worrying about the shortage of ‘jobs’ in PNG because the modern economy will lag behind for many years in creating formal employment for its rapidly growing population. PNG needs more sources of self-employment; it needs a wider range of activities which enable people to earn money. In other words, it needs a larger and more productive informal economy.
The World Development Report 2013 discussed the subject of ‘Jobs’. The World Bank has decided to embrace the idea of economic informality, deciding that ‘ informal is normal’ and may even be ‘transformative’. PNG is still an agrarian economy and it is necessary for it to create non-agricultural ‘jobs’ (meaning opportunities for self-employment) in rural areas, adding value to agricultural produce and providing the services for which demand grows as agricultural incomes rise.
Towards the end of 2010, the PNG government approved a National Informal Economy Policy. This was necessary because of concern that the benefits of increasing economic activity in the resource-extraction sector will not flow efficiently or equitably to the grassroots population. A better functioning informal economy is seen as necessary to increase the efficiency of linkages between isolated mineral enclaves and the broader population.
Why should PNG encourage the growth of its informal economy when most governments are trying to reduce the size of their ‘informal’ sectors? In PNG, however, the informal economy is too small, not too large. It is still too limited in scale, scope and contribution to national output. Further growth is a necessary step towards the emergence of a class of vigorous national entrepreneurs in the small and medium enterprise (SME) sector, which is still pitifully underdeveloped. And the informal economy is still too weak to perform the task of transmitting the developmental impulses flowing from mining and gas revenues. This is a major policy challenge, if equitable sharing of the benefits of the resource boom is to occur.
In just 10 years, from 1963 to 1973, the sleepy Dutch/Melanesian town of Hollandia became a busy Asian town called Jayapura. Almost overnight a thriving informal economy emerged, where none had existed before. Melanesians were largely frozen out of this economy, and remain predominantly village-based. To understand how this happened you have to go back at least 500 years ….
In recent years numerous observers of North Korea have drawn attention to the emergence of an informal economy in the DPRK, and have offered explanations based on circumstances specific to that country. Beyond the specifics of the North Korean case, however, informal economic activity should be seen as a systematically observable phenomenon, for ‘informality’ is found in a diversity of economic systems.
The idea that services become more important as economies develop, while first agriculture and then manufacturing diminish in relative terms, dates back to the seventeenth century. The ‘service sector’ has both formal and informal elements and informal services can be surprisingly important at early stages in the development process. This piece considers the role of informal services in two developing economies, Vietnam and PNG. Vietnam would benefit from improved productivity by progressively ‘formalizing’ its large informal service sector. But since PNG is at an earlier stage of development, it would benefit from an increase in the size of its informal service economy.
PNG adopted a national policy designed to support a thriving informal economy in 2010. This document sets out the rationale for the policy and explains the measures which need to be taken to encourage informal economic activity.
Plans to create an ‘Informal Economy’ branch within PNG’s Ministry for Community Development suggest that the Government’s official policy to facilitate the informal economy may begin to gain some traction. New legislation will be necessary to make this possible.
Changes of Minister and in the senior bureaucracy have contributed to stasis in action on PNG’s national informal economy policy. A new Minister, Departmental Secretary, Informal Economy branch and review of the Medium Term Development Program gives hope that the national policy can gain traction.
This vignette from PNG’s largely unwritten economic history tells how in 1973 the informal economy came to be, briefly and unsuccessfully, at the centre of nationalist aspirations for the reduction of social and economic inequality and the creation of a self-sufficient economy.
These are more formal papers and include discussions of the origins of the idea in Dickensian London and 1960s Ghana, its application in Papua New Guinea, and what a rural informal economy looks like. There is also a full-length discussion of the Melanesia/Monsoon Asia question.