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The Informal Sector

"Formalizing" the Informal Sector:
Lessons from Penang, Bandung and Bangkok

Hari Srinivas
Case Study Series E-108. March 2020.

For many local and national governments in developing countries, the goals of poverty alleviation coupled with job creation and skills development remain a key for overall social ad economic development. These goals have taken on an added significance with the Sustainable Development Goals (SDGs) which the governments have promised to achieve before 2030.

But these challenges are exacerbated by an increasing proportion of its population that are migrating to cities and urbanized areas, fleeing the vulnerabilities of the agricultural sector and other "push" factors.

Amid a lack of abilities and capacities for positive action from governments, the urban informal sector (used here interchangeably with the 'informal economy') thrives for precisely the same reason - to alleviate poverty and create jobs. Taken together, the different sectors of the informal economy - manufacture ring, trade, housing, services, finance etc. - play a critical role in ensuring that these newcomers not only get the services that they need to establish a foothold in the city, but also participate and engage in the formal urban economy.

But negative attitudes and approaches towards low-income migrants and the informal economy at large still continue (See 10 Myths about the Informal Sector).

How can we change our attitudes to the informal sector and understand its true contribution to the developmental processes?

There is a love-hate relationship between government agencies and the informal sector (See document, "Yes, but ... " - Local Government Attitudes towards the Informal Sector) and any steps in "supporting" the informal sector is anathema to them. As with squatter settlements and slums, the most common approach is driving the informal sector away to the outskirts of the city, and clearing the city center.

But the realization that more than 60 to 90 percent of urban economic activity, particularly in cities in developing countries, are in fact informal, has led to a rethinking of this approach and a move towards more reconciliatory and inclusive policies. Job creation and skill development policies for poverty reduction have also driven this rethink.

The key to a supportive and inclusive approach is a process of "formalizing" of the informal sector, which retains the inherent advantages of the very features of "informality" that defines the sector. These features include, for example:

  • Ease of entry into the sector, enabling quick setup and entry.
  • low initial investment and low resource-base startup of informal enterprises
  • predominant family ownership
  • Manufacturing or trade focus that is essentially small in scale
  • Manufacturing/trade activities that are labour intensive and use adapted/local technologies
  • Enterprises that are unregulated and do not pay taxes, but nonetheless operate in competitive markets - in most cases forming supply chains that support the formal sector
  • Informal processes of acquiring knowledge, skills and capacities
  • Provision of wage labour and on-the-job apprenticeship

The lessons are there - with forward-looking local governments that have taken positive steps in implementing inclusive economic growth policies, taking into account the contributions and advantages of the informal sector.

Penang, Malaysia

Take the example of Penang in Malaysia. Instead of clearing away and scattering mobile food hawkers in its old Georgetown area, the local government "repackaged" them as an essential feature of the town fabric. This was done by including them in its heritage and tourism programmes.

The city organized the hawkers into groups and provided training on basic hygiene and etiquette aspects of food management. The city designated and designed hawker centers where food hawkers could congregate with their mobile stalls. These centers were equipped with common services facilities and eating areas, provided lighting and other urban services, and many other enhancements. Such steps drew the hawkers into the larger fabric of the city's character, without destroying the essential (informal) character of the hawkers themselves.

Bandung, Indonesia

The case of Bandung in Indonesia is similar. A large number of informal stalls operated, selling a myriad of daily necessities around the city center.

Without driving them away or clearing off the area, the city designated an area where the stalls could be set up by informal enterprises. The designated area had marked off stalls and had a large roof covering it. It was regularly cleaned and provided with water, electricity and other basic services.

Bangkok, Thailand

Bangkok provides similar common areas for informal sellers which are regularly cleaned up by water tankers.

Bangkok is well known for its informal sellers that crowd its sidewalks, selling to tourists and locals alike. In particularly crowded areas frequented by tourists, the city gas provided common areas where sellers can set up shop - and such areas are regularly cleaned up by water tankers and the local fire service.

Based on field visits to the three cities of Penang, Bandung and Bangkok, interviews with planning and local government officials, as well as review of official documents and literature on the theme, the following lessons emerge:

All three cities used some common strategies to better organize their informal enterprises:

  • forming groups or associations among the informal enterprises to articulate their views and to facilitate better communication

  • training and capacity building on fundamental health, sanitation and other critical issues including financial management, microfinance etc. to work in the informal sector.

  • provision of common facilities for groups of enterprises (especially when they were organized into groups or associations) such as seating areas, sanitation facilities electricity and water.

  • enabling of payments for better urban services/utilities, including rent of spaces for businesses

  • working with informal enterprises to remove criminal, corrupt and other exploitative elements in the sector.

The middle ground achieved by the above strategies and examples have two key complementary policies - (1) maintaining the essential benefits of informal enterprises and (2) providing basic urban services and utilities for these enterprises to benefit the overall population.

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