Research Handbook on Development and the Informal Economy 1788972791, 9781788972796

Table of contents :
Front Matter
Copyright
Contents
Figures
Tables
Boxes
Contributors
Abbreviations
1. Why and how should the informal economy be revisited after 50 years?
PART I CONCEPTS AND DEFINITIONS, METHODS OF MEASUREMENT AND ESTIMATION, MAGNITUDE AND CHARACTERISTICS, AND GLOBAL CONCEPTION OF STRATEGIES
2. The success story of a loose but useful concept: origins, development, magnitude and trends of the informal economy
3. The Non-Observed Economy vs. the Shadow Economy in the European Union: concepts, measurements methods and estimates revisited
4. Informality and development in Africa
5. Facing informal economy practices and institutions: the challenge of formalisation policies in Africa
PART II RECONSIDERING THE MARGINS AND FRONTIERS OF THE INFORMAL ECONOMY
6. Informal employment and non-market work
7. Assessing the figures of sex work throughout non-transition and transition European countries: magnitude, premium on earnings and informal employment
8. Kinship groups and informal trade in West and Central Africa
PART III GIVING VISIBILITY AND VOICE TO THE MOST VULNERABLE: OBSERVING, PARTICIPATING, SUPPORTING AND ORGANISING
9. Street vendors in Tunisia: encountering the informal economy
10. Formalisation from the ground: the case of waste pickers’ cooperatives
11. Collective bargaining by informal workers in the global South: where and how it takes place
12. Knowledge co-production with and for organisations of informal workers: building democratic capacity for social change
PART IV SKILLS, INNOVATION AND IMPACT OF TECHNOLOGICAL CHANGE IN THE INFORMAL ECONOMY
13. Skills development and the informal sector: a review of reports and commitments of the international institutions
14. Informality and innovation: an avenue towards bottom-up industrialisation for Africa?
15. Innovation in refugee economies: supporting intermediaries that embrace informality
16. Women in the informal economy and the impact of technological change
Index

Citation preview

JOBNAME: EE1 Charmes PAGE: 1 SESS: 2 OUTPUT: Thu Aug 20 15:08:38 2020

RESEARCH HANDBOOK ON DEVELOPMENT AND THE INFORMAL ECONOMY

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Research Handbook on Development and the Informal Economy

Edited by

Jacques Charmes Emeritus Researcher, Institut de Recherche pour le Développement, Centre Population et Développement (Ceped), University Paris Descartes, France

Cheltenham, UK + Northampton, MA, USA

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© Jacques Charmes 2020 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Control Number: 2020942848 This book is available electronically in the Social and Political Science subject collection http://dx.doi.org/10.4337/9781788972802

ISBN 978 1 78897 279 6 (cased) ISBN 978 1 78897 280 2 (eBook) Typeset by Columns Design XML Ltd, Reading

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Contents

List of figures List of tables List of boxes List of contributors List of abbreviations

viii ix xi xii xix

1 Why and how should the informal economy be revisited after 50 years? Jacques Charmes PART I

CONCEPTS AND DEFINITIONS, METHODS OF MEASUREMENT AND ESTIMATION, MAGNITUDE AND CHARACTERISTICS, AND GLOBAL CONCEPTION OF STRATEGIES

2 The success story of a loose but useful concept: origins, development, magnitude and trends of the informal economy Jacques Charmes 3 The Non-Observed Economy vs. the Shadow Economy in the European Union: concepts, measurements methods and estimates revisited Philippe Adair 4 Informality and development in Africa Dorothy McCormick, Erick Manga, Radha Upadhyaya, Paul Kamau, Herbert Wamalwa and Samuel Ngigi 5 Facing informal economy practices and institutions: the challenge of formalisation policies in Africa Frédéric Lapeyre PART II

1

19

45 79

116

RECONSIDERING THE MARGINS AND FRONTIERS OF THE INFORMAL ECONOMY

6 Informal employment and non-market work Nancy Folbre

147

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Research handbook on development and the informal economy

7 Assessing the figures of sex work throughout non-transition and transition European countries: magnitude, premium on earnings and informal employment Philippe Adair and Oksana Nezhyvenko 8 Kinship groups and informal trade in West and Central Africa Stephen S. Golub and Mirayda Martinez PART III

210

GIVING VISIBILITY AND VOICE TO THE MOST VULNERABLE: OBSERVING, PARTICIPATING, SUPPORTING AND ORGANISING

9 Street vendors in Tunisia: encountering the informal economy Laurence Michalak

240

10 Formalisation from the ground: the case of waste pickers’ cooperatives Sonia Maria Dias and Lucía Fernández

263

11 Collective bargaining by informal workers in the global South: where and how it takes place Françoise Carré, Pat Horn and Chris Bonner

285

12 Knowledge co-production with and for organisations of informal workers: building democratic capacity for social change Ana Carolina Ogando and Jenna Harvey PART IV

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SKILLS, INNOVATION AND IMPACT OF TECHNOLOGICAL CHANGE IN THE INFORMAL ECONOMY

13 Skills development and the informal sector: a review of reports and commitments of the international institutions Kenneth King

347

14 Informality and innovation: an avenue towards bottom-up industrialisation for Africa? Erika Kraemer-Mbula and Lorenza Monaco

363

15 Innovation in refugee economies: supporting intermediaries that embrace informality Jeremy de Beer and Nicole Tumaine

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Contents vii 16 Women in the informal economy and the impact of technological change Jacques Charmes

410

Index

435

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Figures

3.1 Estimates (% of GVA) from Labour Input Method and DYMIMIC 8.1 Selected kinship groups in West Africa 8.2 Selected kinship groups in Central Africa 12.1 WIEGO’s approach to co-production 16.1 Share of non-agricultural informal employment by sex and regions 16.2 Relative shares of informal sector employment and informal employment outside the informal sector (in the formal sector and in households) 16.3 Time spent in unpaid work, in paid work and in total work: world estimates 16.4 Time spent in unpaid work, in paid work and in total work by income group regions 16.5 Ratio women to men of unpaid care work, paid work and total work by regions

68 212 212 323 413 414 415 416 417

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Tables

2.1

Components of employment in the informal sector and of informal employment outside the informal sector 2.2 Components of informal sector, informal employment and employment in the informal economy by institutional sectors in the System of National Accounts 2.3 Synthesis of the positions of the informal economy components in the various institutional sectors and in various industries 2.4 SNA Eurostat tabular approach of seven types of non-exhaustiveness 2.5 Share of the informal economy in non-agricultural employment and its composition (most recent year, later than 2012) 2.6 Contribution of the informal economy to non-agricultural GDP (most recent year) 3.1 NOE categories and types 3.2 Share (%) of NOE in GDP according to national accounts adjustments in early and late 2000s 3.3 Expenditure on non-declared goods and services (demand) and undeclared work (supply) in the EU (2007 and 2013) 3.4 Share (%) of Undeclared Work and GVA according to the Labour Input Method in the EU (2013) 3.5 Ranking of EU countries according to the size of the Shadow Economy (% of GDP) 3.6 Macro estimates: approaches and Non-Observed Economy coverage 3.7 The Non-Observed Economy vs. the Shadow Economy 3A.1 Illegal production (N2) in the EU countries 3A.2 Tax gaps in the EU (% of GDP) 4.1 Main approaches to development in Africa and other developing regions, 1960s onward 4.2 Key messages from different schools of thoughts on informality 4.3 Review of government policies related to the informal sector 4.4 Key national development documents since independence

26 28 29 30 34 36 48 50 54 61 65 70 71 77 78 80 92 100 104

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Research handbook on development and the informal economy 6.1 6.2 6.3

7.1 7.2 7.3 7.4 7.5a 7.5b 7.6 7.7 7.8 7.9 7.10 7A.1 11A.1 12.1 15.1 16.1 16.2

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Current System of National Accounts (SNA) and International Conference of Labour Statisticians (ICLS) accounting framework for employment A simpler and more consistent accounting framework Average time devoted to unpaid, paid and total work in surveys conducted between the 1990s and the present (in minutes per day) and GDP per capita (at purchasing power parity) Share of men from the European countries reporting having paid for commercial sex in the past 12 months Estimates of female sex workers from HIV prevalence (2010 and early 2000s) Sex workers circa 2010: Estimates 2A and 2B from NGOs and miscellaneous sources Victims of sexual exploitation (both males and females) and prevalence in Europe as for year 2010 Testing the estimates as for 39 countries: the OLS model, whole sample Testing the estimates as for 39 countries: the OLS model (subdivided sample) Testing the estimates as for 39 countries: ordered probit model (whole sample) Marginal effects from the ordered probit model (Estimate 1A) Share (in %) of female sex workers to total female labour force according to five estimates as of 2010 Illegal production and prostitution contributing to GDP in EU-28 as of 2010 Estimates of FSW as a share of female workforce in services in the EU-28 as of 2010 Countries ranking by the share of prostitutes to female labour force according to Estimates as of 2010 Different types of negotiation platforms Inclusive Cities project partners Enablers and constraints for refugee innovation Distribution of female and male informal employment by main components of the informal economy Time spent by women (in minutes per day) in water fetching and firewood/fuel collecting in four countries

156 158

160 173 176 180 185 189 191 192 193 194 196 201 208 315 329 398 415 420

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Boxes

2.1 Tools by which national accountants indirectly estimate the contribution of the informal economy 3.1 The Rockwool Foundation pilot survey on undeclared work 5.1 Giving a voice to workers in the informal economy 5.2 Expanding social protection to informal workers 7.1 The Palermo Protocol 7.2 The capture–recapture estimate from the ILO 7.3 Prices for sex trade and earnings premium 15.1 Research methodology 15.2 Characteristics of innovation in the informal economy 15.3 Barriers to innovation in the informal sector 15.4 Barriers to innovation and entrepreneurship to refugee economies in the informal sector

31 53 129 138 182 183 198 392 395 399 400

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Contributors

Philippe Adair, PhD in Economics and in Sociology, Professor at the Faculty of Economics and Management, University of Paris-Est, Créteil, France. He is a researcher at the ERUDITE Laboratory (Research Team on the Use of Individual Data in Relation to Economic Theory) and a member of the Centre national de la recherche scientifique (CNRS) TEPP federation (Labour, Employment and Public Policies). His research interests include development economics and labour economics (informal employment in developed, developing and transition countries), as well as financial analysis (micro-finance and SMEs), forming the subject of many publications (articles, books, reports and conference proceedings). He is Vice-president of the Third World Association, which publishes the academic journal Mondes en développement, and he is an expert at the Ministry of Higher Education. Chris Bonner is the former Director of Women in Informal Employment: Globalizing and Organizing (WIEGO)’s Organization and Representation Programme and is currently Programme Advisor. Her specialisations include collective bargaining, worker education and global worker networking. She has played a significant role in the formation of global networks of domestic workers and waste pickers. Françoise Carré is Research Director at the Center for Social Policy, McCormack Graduate School of Policy and Global Studies, University of Massachusetts Boston and WIEGO’s Statistics Programme Director. She serves on the International Labour Organization (ILO) Working Group on the Revision of the International Classification of Status in Employment (ICSE-93) and on the UN Economic Commission for Europe Expert Group on Measuring the Quality of Employment. She received her PhD in Urban and Regional Studies from the Massachusetts Institute of Technology (MIT). Jacques Charmes is Emeritus Research Director at the Institute of Research for Development (IRD), Centre for Population and Development (Ceped, Paris Descartes University); he was previously Director of the Department of Social and Health Sciences at IRD, and Professor of Economics at the University of Versailles and at Sciences Po in Paris. His main fields of research focus on informality, labour markets, unpaid xii

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Contributors xiii work, women’s economic participation and empowerment, and time use. He has been involved in the drafting of the new international definition of the informal sector adopted in 1993 (15th International Conference of Labour Statisticians, ICLS), and of informal employment (17th ICLS, 2003), in addition to the ILO manual Measuring Informality: A Statistical Manual for the Measurement of Informal Sector and Informal Employment (2013) as well as the Organisation for Economic Co-operation and Development (OECD) handbook on measurement of the non-observed economy (2002), and various ILO or United Nations (UN) world compilations on the informal economy, women’s empowerment and time use. His most recent book is Dimensions of Resilience in Developing Countries: Informality, Solidarities, Unpaid Care Work (Springer, 2019). Jeremy de Beer creates and shapes ideas about innovation, intellectual property, and international trade and development. He is an award-winning law professor at the University of Ottawa’s Faculty of Law and a member of the Centre for Law, Technology and Society. He is a co-founding director of the Open African Innovation Research (OpenAIR) network (www.openair.africa), Senior Fellow at the Centre for International Governance Innovation (CIGI) and Senior Research Associate at the University of Cape Town. Professor de Beer has authored over one hundred refereed journal articles, book chapters and other publications, and is an author and editor of several books, including Innovation and Intellectual Property: Collaborative Dynamics in Africa. Sonia Maria Dias is a sociologist by training and specialises in solid waste management. She has been active in the field in Brazil since 1985, with a focus on promoting the integration of social inclusion into the technical planning of waste collection and recycling. She holds a master’s degree in Human Geography and a PhD in Political Science from the Federal University of Minas Gerais. She is WIEGO’s waste specialist. Lucía Fernández is an international specialist on informal recycling with 15 years’ experience in more than twenty countries. She holds an MA in Architecture focusing on recycling dynamics in Montevideo and Paris during the nineteenth century from the École d’Architecture de Grenoble, and an MA in Ethics and Sustainable Development from the Faculté de Philosophie de Lyon. She is currently pursuing a PhD in her native Uruguay. She works for WIEGO as Global Wastepicker Coordinator. Nancy Folbre is Professor Emerita of Economics and Director of the Program on Gender and Care Work at the Political Economy Research Institute at the University of Massachusetts Amherst, and Senior Fellow of the Levy Economics Institute at Bard College. Her research explores

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xiv Research handbook on development and the informal economy the interface between political economy and feminist theory, with a particular emphasis on the value of unpaid care work. In addition to numerous articles published in academic journals, she is the editor of For Love and Money: Care Work in the U.S. (Russell Sage, 2012), and the author of Greed, Lust, and Gender: A History of Economic Ideas (Oxford University Press, 2009), Valuing Children: Rethinking the Economics of the Family (Harvard University Press, 2008) and The Invisible Heart: Economics and Family Values (New Press, 2001). She has also written widely for a popular audience, including contributions to the New York Times Economix blog, The Nation and the American Prospect. Stephen S. Golub is Franklin and Betty Barr Professor of Economics at Swarthmore College and Adjunct Professor at the Wharton School of the University of Pennsylvania. He has been a visiting professor at Columbia, Yale, Berkeley and Cheikh Anta Diop University of Dakar. He has written numerous articles on international economics and development, and co-authored Money Credit and Capital with James Tobin (McGrawHill, 1997). He has served as a consultant to the UN, the World Bank, the International Monetary Fund (IMF), the OECD, and the Federal Reserve banks of San Francisco and Philadelphia. Jenna Harvey is WIEGO’s Global Focal Cities Coordinator. Her specific interests are participatory planning, critical education and inclusive models of urban economic development. She has a bachelor’s degree in Global Studies and a master’s degree in City Planning from MIT. Pat Horn is Senior Advisor for StreetNet International, after holding the position of International Coordinator from its founding in 2002 until 31 May 2019. She has served the workers’ movement since the 1970s and holds an honorary doctorate from the University of the Witwatersrand in Johannesburg, South Africa. Paul Kamau is Senior Research Fellow at the Institute for Development Studies (IDS), University of Nairobi. He holds a PhD in Development Studies. He teaches and conducts research in the areas of industrialisation, entrepreneurship, regional integration, trade, employment and political economy of development. He has recently published papers and book chapters on the implications of Chinese ascendancy in Africa, focusing on trade, investment, aid and migration, productive employment in the agriculture sector, market diversification among the foodprocessing firms in Kenya, youth unemployment in Africa, women in the informal sector in Kenya and state–business relations in Africa. Kenneth King was Director of the Centre of African Studies and Professor of International and Comparative Education at Edinburgh

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Contributors xv University for many years. He is now Emeritus Professor in the university’s schools of Education and of Social and Political Studies. His research has focused on the politics and history of international education, aid policy and skills development, especially in the informal sector. He edited NORRAG News for 30 years until 2017. Since 2006, among other research, he has analysed China’s educational aid to Africa, and published China’s Aid and Soft Power in Africa (Boydell & Brewer, 2013). From 2016 he has begun to research India’s development cooperation with Africa, with a focus on skills and human resource development. He has written widely on education and the informal sector, especially in Kenya. His most recent book is Education, Skills and International Cooperation: Comparative and Historical Perspectives (Springer, 2019). Erika Kraemer-Mbula is Professor of Economics at the College of Business and Economics, University of Johannesburg, South Africa. She heads the DST/NRF/Newton Fund Trilateral Chair in Transformative Innovation, the Fourth Industrial Revolution and Sustainable Development. She holds a master’s degree in Science and Technology Policy from the Science and Policy Research Unit (University of Sussex), and a doctorate in Development Studies from the University of Oxford. She specialises in Science, Technology and Innovation Policy analysis and innovation systems in connection to equitable and sustainable development. She is a Steering Committee member of the Open African Innovation Research (OpenAIR) network where she leads the theme on ‘Informal sector innovation’, and is a Vice-president of the Global Network for Economics of Learning, Innovation, and Competence Building Systems (Globelics). Frédéric Lapeyre is Head of the Informal Economy Unit and Senior Coordinator for Transition to Formality Employment at the Policy Department of the ILO. He holds a PhD in Development Studies. He also served as Professor at the Catholic University of Louvain, Chairman of the Belgium Post-Graduate School for Development Studies and Fulbright Post-Doctoral Fellow at Brown University (Watson Institute for International Studies). His work focuses on development-related issues, in particular the informal economy, employment creation, decent work promotion and job-rich/inclusive patterns of growth with a strong focus on Africa and fragile and conflict-affected countries. His main recent published works include: The Contributions of the United Nations to Development Theory and Practices (Indiana University Press, 2004), Poverty and Exclusion in a Global World (Palgrave, 2004), Growth, Employment and Decent Work in Namibia: A Situation Analysis, WP no.

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81 (ILO, 2012), Securing Livelihoods: Informal Economy Practices and Institutions (Oxford University Press, 2013), ‘Securing Livelihoods in Africa: Towards Multi-scalar Policy Frameworks’, European Journal of Development Research (no. 25, 2013) and Les politiques publiques face aux pratiques de l’économie informelle en Afrique Sub-saharienne (Academia-L’Harmattan, 2014). Erick Manga is currently a research associate at the Institute for Development Studies (IDS), University of Nairobi and independent consultant on international development. His current research interests include informal institutions, public transport, education, development partnership, conflict and peace building. He has also been teaching development practice, and governance and development at the Institute since 2015 under the Masters of Development Studies programme. He also has wide experience in development programming, monitoring and evaluation, and community service. Mirayda Martinez is a student in Economics and Computer Science at Swarthmore College. In the coming year, she will be a software engineer at Facebook, working on building tools that improve the social impact of the company. Dorothy McCormick is Research Professor (retired) at the IDS, University of Nairobi. In her 30 years at IDS, she has focused her research on industrialisation and enterprise development in Africa. Her research, which includes general and sectoral studies, has covered firms of all sizes, but with particular emphasis on micro- and small enterprises. Her work is multidisciplinary, combining economic, political and social perspectives in studies spanning manufacturing, trade and transport enterprises. Laurence Michalak is a cultural anthropologist and specialist in the Arab world, especially Tunisia, where he has lived and worked for a total of 12 years between 1964 and the present. He knows English, French, Arabic and Spanish, and has visited most of the Middle East and selected countries in other world regions. His BA is from Stanford (1964), his MA from the University of London (1970) and his PhD from the University of California at Berkeley (1983). He taught and was Vice Chair at the Centre for Middle Eastern Studies at UC Berkeley from 1979 to 2002 and was Director of the Centre for Maghrib Studies in Tunis (CEMAT) from 2006 to 2010. He has publications on diverse topics such as social legislation, international migration, alcohol and religion, Arabs in cinema, Orientalist painting, and revolution and

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Contributors xvii democracy in Tunisia. He is currently working on a book about informal economy in Tunisia. Lorenza Monaco holds a PhD in Development Studies from SOAS, University of London, where she was also a Teaching Fellow in Political Economy of Development. She is currently Senior Lecturer in the School of Economics, UN/UJ Institute for Economic Development and Planning (UN-IDEP), University of Johannesburg. In South Africa, she also worked as a senior researcher for the UJ/DTI Industrial Development Think Tank. Her expertise focuses on industrial development and policy, labour within global production, and emerging economies. She has conducted extensive field research in India, South Africa and recently in Thailand. She is currently the lead researcher for an IndustriALL/FES project on investment, decent jobs and the role of trade unions in the auto industry in Sub-Saharan Africa. Oksana Nezhyvenko, PhD in Economics (University Paris-Est Créteil, 2018) is a member of the ERUDITE research team (University Paris-Est Créteil) and the Laboratory for Finance and Economic Research (National University of Kyiv-Mohyla Academy). Her research topics are labour economics (informal employment) and economics of development. Her area of expertise focuses on Ukraine and the transition economies, in particular the European Union (EU). Since 2015, she has published a chapter in a book, articles in academic journals, a conference paper and four reports (ILO and UNDP). Samuel Ngigi is Lecturer at the School of Journalism and Mass Communication, University of Nairobi. He is a researcher, trainer and consultant in Development Practice, M & E, Leadership Development and Development Communication. He is also a trainer at African Medical and Research Foundation (AMREF) International Training Centre, School for International Training, and Institute for Climate Change and Adaptation (UoN), University of Nairobi Institute of Tropical and Infectious Diseases (UNITID) and Strathmore University. He is in his final year pursuing a PhD in Development Studies at the IDS, University of Nairobi. Samuel holds a master’s degree in Development Studies and a Bachelor of Arts degree in Sociology and Communication, both from the University of Nairobi. Ana Carolina Ogando is Research Associate for WIEGO’s Urban Policies Programme. She currently provides research support to programmes on qualitative and participatory methodologies, gender, and waste and urban-related issues. She holds a PhD in Political Science from

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xviii Research handbook on development and the informal economy the Federal University of Minas Gerais, specialising in gender, feminist theories and social movements. Nicole Tumaine is Research Fellow with the OpenAIR network. She holds a B.Soc. in International Development, with a minor in Life Sciences, from the University of Ottawa. Tumaine is pursuing her JD at the University of Ottawa at the same time as her MA at the Norman Patterson School of International Affairs (NPSIA) at Carleton University, with a concentration on Conflict Analysis and Conflict Resolution. Using her experiences from living as a refugee in Uganda for six years, Nicole contributes to OpenAIR’s research into refugee innovation in African nations. Radha Upadhyaya is Research Fellow at the IDS, University of Nairobi. Radha has over fourteen years of teaching experience, with a particular focus on heterodox research methods, microeconomics, and finance and development. She has written on the Kenyan banking sector, banking regulation in East Africa, African firms and African entrepreneurs. Herbert Wamalwa is a PhD student at the IDS, University of Nairobi. He is researching innovation among food-processing firms in Kenya and is interested in how firms in developing countries build their capabilities in their quest to be innovative and successful. He holds a master’s degree in Development Studies and a Bachelor of Education degree, both from the University of Nairobi.

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Abbreviations AI

Artificial Intelligence

AR ARB

Action Research Asociación Cooperativa de Recicladores de Bogotá (Association of Waste Pickers of Bogota, Colombia) Caisse Nationale de Sécurité Sociale des Non-Salariés (National Social Security Fund for Non-wage Earners, Algeria) Chief Executive Officer Inter-ministerial Committee of Social Inclusion of Waste Pickers (Brazil) Caisse Nationale d’Assurance Maladie (National Health Insurance Fund, Tunisia) Caisse Nationale de Retraite et de Prévoyance Sociale (National Pension and Social Protection Fund, Tunisia) Caisse Nationale de Sécurité Sociale (National Social Security Fund, Tunisia) Confédération Nationale des Travailleurs du Sénégal (National Confederation of Workers of Senegal) Classification of Individual Consumption According to Purpose Comprehensive Refugee Response Framework Development Assistance for Refugees Dynamic General Equilibrium Do ItYourself Development through Local Integration Department of Micro and Small Enterprise Development Doing, Using and Interacting (modes of learning) Dynamic multiple indicators–multiple causes European Commission European Centre for Disease Prevention and Control European Economic Community Education For All

CASNOS

CEO CIISC CNAM CNRPS CNSS CNTS COICOP CRRF DAR DGE DIY DLI DMSED DUI DYMIMIC EC ECDC EEC EFA

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ERS ESA EU Eurostat FEPTIWUL FES FSW GDI GDP GEM GMR GSMA GVA HBW HNP HNT IC ICBT ICD ICLS ICROP ICT IDPs IDS IEMS IFC ILC ILO IMF INS INSEA

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Economic Recovery Strategy European System of Accounts European Union European Union Statistical Office Federation of Petty Traders’ and Informal Workers’ Unions of Liberia Family Expenditure Survey Female Sex Workers Gender Development Index Gross Domestic Product Gender Empowerment Measure Global Monitoring Report (UNESCO) Global System for Mobile communications Association Gross Value Added Home-Based Workers HomeNet Pakistan HomeNet Thailand Inclusive Cities Informal cross-border trade Internal Container Depot International Conference of Labour Statisticians Integrated Community Registration Outreach Programmes (South Africa) Information and Communication Technology Internally Displaced Persons Institute of Development Studies Informal Economy Monitoring Study (WIEGO) International Finance Corporation International Labour Conference International Labour Organization (or Office) International Monetary Fund Institute National de la Statistique (Tunisia) Institute Nenuca de Desenvolvimento Sustentável (Nenuca Institute of Sustainable Development, Brazil)

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Abbreviations xxi ISCO ITU IUF

IW JSTOR KANU KENASVIT KKPKP LIMs MBOs MCC MDGs MIMIC MNCR

MNCs MOU MPESA MSE MSMEs NAPETUL NARC NASVI NEDLAC NEM NEPEM NGOs NIE NOE

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International Standard Classification of Occupations International Telecommunications Union International Union of Food, Agricultural, Hotel, Restaurant, Catering, Tobacco and Allied Workers’ Associations Informal Workers Journal Storage Kenya African National Union Kenya National Alliance of Street Vendors and Informal Traders Kagad Kach Patra Kashkatari Panchayat Labour Input Methods (or Matrices) Membership-Based Organisations Monrovia City Corporation Millennium Development Goals multiple indicators–multiple causes Movimento Nacional dos Catadores de Materiais Recicláveis (Brazil’s National Movement of Waste Pickers) Multinational Corporations Memorandum of Understanding Mobile PESA (money in Swahili) (Kenya) Multiple Systems Estimation Micro, Small and Medium Enterprises National Petty Traders’Association of Liberia National Rainbow Coalition (Kenya) National Association of Street Vendors of India National Economic Development and Labour Council (South Africa) New Encounter Module Núcleo de Estudos e Pesquisas sobre a Mulher (Centre for Women’s Studies and Research, Brazil) Non-Governmental Organisations New Institutional Economics Non-Observed Economy

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xxii Research handbook on development and the informal economy NORRAG

OECD OLS Open AIR PAR PAS PIEA PIIGS PMC PPP PSWM R&D ReHoPE RPL RSM SAPs SCOPUS SDGs SE SEWA SEWU SIM SMEs SNA SRS SSE SSL SSN STA STEM

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Network for international policies and cooperation in education and training (formerly, Northern Research Review and Advisory Group) Organisation for Economic Co-operation and Development Ordinary Least Squares Open African Innovation Research Participatory Action Research Proficient Acquired Skills Participatory Informal Economy Appraisal Portugal, Italy, Ireland, Greece and Spain Pune Municipal Corporation (India) Purchasing power parity Participatory and Sustainable Waste Management Research and Development Refugee and Host Community Empowerment strategy Recognition of Prior Learning Rural Sourcing Manager Structural Adjustment Programmes Abstract and citation database of peer-reviewed literature (Elsevier) Sustainable Development Goals Shadow Economy Self-Employed Women’s Association (India) Self-Employed Women’s Union (South Africa) Subscriber Identity Module Small and Medium-sized Enterprises System of National Accounts Self-Reliance Strategy (Uganda) Social and Solidarity Economy Shea Star Ltd (Ghana) Shea Star Network (Ghana) Settlement Transformation Agenda Science, Technology, Engineering and Mathematics

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Abbreviations xxiii STEP SUTs SW SWaCH TAC TAMPEP TAMSS TILI TREE TVET UDW UGTT UK UN UNAIDS UNDP UNECE UNESCO UNHCR UNODC UNRISD USA UTT VAPUE VAT VIF VTCs WDR WGDAW

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Skills Towards Employability and Productivity (World Bank) Supply and Use Tables Solid Waste Solid Waste Collection and Handling (India) Technical Advisory Committee (WIEGO) European Network for the Promotion of Rights and Health Among Migrant Sex Workers Tunisian Association for Management and Social Stability Tunisia Inclusive Labour Initiative Training for Rural Economic Empowerment (ILO) Technical and Vocational Education and Training Undeclared Work Union Générale des Travailleurs Tunisiens (General Union of Tunisian Workers) United Kingdom United Nations Joint United Nations Programme on HIV/AIDS United Nations Development Programme United Nations Economic Commission for Europe United Nations Education, Science and Culture Organization United Nations High Commissioner for Refugees (UN refugee agency) United Nations Office on Drugs and Crime United Nations Research Institute for Social Development United States of America Union des Travailleurs Tunisiens (Union of Tunisian Workers) Value added per unit of employment Value Added Tax Variance inflation factor Vocational and Training Centres World Development Report Working Group on Discrimination Against Women

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xxiv Research handbook on development and the informal economy WIEGO YARID ZCIEA ZCTU

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Women in Informal Employment: Globalizing and Organizing Young African Refugees for Integral Development Zimbabwe Chamber of Informal Economy Associations Zimbabwe Congress of Trade Unions

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1. Why and how should the informal economy be revisited after 50 years? Jacques Charmes

Much has been written about the informal economy since the early times, when the concept was coined at the turn of the 1970s, and several revisiting exercises have been conducted since then, in particular by the OECD, in 1990 (Turnham, Salomé & Schwarz, 1990) and in 2009 (Jütting & de Laiglesia, 2009). So why would it be necessary to revisit once more an abundant literature? Several reasons make the case for such an exercise. A first reason is that, despite the progress and the expansion of internationally agreed definitions, the confusion between the informal economy and the illegal economy is still widespread, and the concept of the informal economy is often used as a synonym for the shadow economy. It is therefore important to clarify the terms used in debates and to understand why the concept of the shadow economy as coined for describing the situation of developed economies eventually spread to the rest of the world. Furthermore, far from being confined to economic approaches, informality needs to be addressed, surveyed and understood from the points of view of other social sciences as well as of activists involved in the support of vulnerable populations who are dependent on the informal economy today. A second reason to revisit is that it has been proposed that informality is the new normal, given the magnitude and trends of the informal economy within total employment and to a lesser extent in Gross Domestic Product (GDP). What does this say about economic development, contemporary capitalisms and contemporary societies, as well as about the social contracts that bind citizens to the states and the variety of their modes of government? A third reason is that the boundaries of informality are shifting, not only because some previously illegal activities can become legal or tolerated – and, in any event, provide income (prostitution, for example) –, but also because the notion of work and employment is progressively changing, returning to the origins, when the provision of services for own consumption by households was considered as work. The initial concept of the informal economy, confined to production for the market, has been 1

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extended to production of goods for own final use (the so-called subsistence economy), and now – with the adoption of new concepts of work and employment by the 2013 International Conference of Labour Statisticians – the question has been raised as to whether it should be extended to production of services for own final use (the so-called care economy). A fourth reason is that, with the adoption of Recommendation 204 on the transition from the informal to the formal economy by the International Labour Conference in 2015 (ILO, 2015), policies and strategies for promoting and supporting such a transition are on the agendas of governments. And in this regard, given the relation between the actors of the informal economy and the state, the role of associations and civil societies may prevail, so that a better knowledge of the actors and operators within the informal economy needs to emerge – and has emerged – at grassroots levels, originating from these actors of the social and solidarity economy for their own use and not only for use by official policy makers for public regulation. This Research Handbook comprises four parts. Part I addresses the concepts and definitions, the methods of measurement and estimation, and the magnitude and characteristics of the informal economy phenomenon and of its components, as well as the global conception of strategies in relation to the concept and its various meanings. Special emphasis is placed on the changing scope and understanding of the phenomenon over time and across regions, and especially the related confusion with the shadow economy and the resulting misconceptions and misunderstandings. These changes are also examined in the light of development theories and thinking. Part II discusses the margins or frontiers of the concept and explains to what extent some specific phenomena can be considered as components of the informal economy, both in their scope (unpaid care work, prostitution) and in their approach (cross-border trade and ethnic or religious networks). Part III, entitled ‘Giving Visibility and Voice to the Most Vulnerable: Observing, Participating, Supporting and Organising’, deals with the dialectics of observation and action concerning three vulnerable groups of workers in the informal economy, from the most visible because of working in the open sun yet also the least known – the street vendors – to the equally visible but the least regarded – the waste pickers – and finally to the most invisible and equally ignored – the home-based workers. Part IV, on skills, innovation and technological change in the informal economy, addresses issues such as the recognition of skills acquired in the informal sector, the role of apprenticeship and innovation as a

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Why and how should the informal economy be revisited after 50 years? 3 potential step towards bottom-up industrialisation or as a means for self-reliance in refugee economies. It also attempts to assess the impact of technological change on the alleviation of women’s burden of unpaid domestic and care work, or as a means for widening the benefits or loosening the clamps of the poor informal workers at the bottom of global supply chains, or also concerning the transformation of homebased piece workers into even more fragmented task- or click workers throughout the digitisation process.

1.1 PART I: THE INFORMAL ECONOMY: CONCEPTS AND DEFINITIONS, METHODS OF MEASUREMENT AND ESTIMATION, MAGNITUDE AND CHARACTERISTICS, AND GLOBAL CONCEPTION OF STRATEGIES Part I comprises four chapters. The first two chapters deal with definitions, methods and estimates with regard not only to the informal economy, but also to the non-observed economy and the shadow economy, trying to disentangle the subtleties of these concepts, often mistakenly presented as synonymous. The two further chapters strive to position the approach of the informal economy across the spectrum of development theories and strategies since the early 1960s, to show how it has shaped current national policies in Kenya on the one hand, and current and still-in-process thinking about the informal economy in an international institution such as the International Labour Organization (ILO) on the other hand. In Chapter 2, Jacques Charmes, the editor of this Handbook, recalls the origin of the concept of informality defined in relation to the state; reaching a unique and uniform definition was not achieved at speed, due to the variety of forms of government. This is why flexibility was an inherent characteristic of the concept, allowing for variations across countries and over time, without inhibiting data collection and international comparisons. Data are today available for more than a hundred developing and transition countries and for various periods since the 1970s, and an increasing number of works and studies attempt to identify and assess the determinants of informality. Still, many loopholes remain that are as many domains for future research, two of them being particularly emphasised: pluri-activity and patterns of growth (especially the absence of an intermediate sector, the so-called ‘missing middle’).

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The debate – still ongoing – about illegal and legitimate activities in the informal economy explains the dichotomy of the concepts used in developing countries and in developed countries, the transition countries remaining in between as a space where both conceptions are in use. In Chapter 3, Philippe Adair discusses the concepts of the ‘nonobserved’ economy (NOE) and the ‘shadow’ economy (SE), which may have obscured the understanding of the informal economy in that this term has often been used as synonymous for the ‘shadow’ economy, all the more so as macro-modelling has made it possible to provide estimates of the shadow economy for almost all countries in the world. A wide spectrum of estimation methods (direct, such as tax audits, family expenditures or labour force surveys, as well as indirect such as the cash/deposit and currency demand ratio, labour inputs, electricity consumption and the structural modelling method) and estimates derived from the latter method are reviewed, and the derived estimates are compared with the measures of the NOE by national accounts for the European Union countries, based on the tabular approach recommended by Eurostat. Chapter 4 is, for authors Dorothy McCormick, Paul Kamau and a team from the Institute for Development Studies in Nairobi (an institute that played a major role in the first-ever coined definition of the informal sector at the beginning of the 1970s), an opportunity to review development and growth theories and strategies applied, in the context of the newly independent economies, by scholars and policy makers: from the modernisation and dependency theories, the basic needs, sustainable livelihoods and human development approaches, to the current neoliberal strategies. The chapter explores how the linkages between informality and national development have evolved over time through the national policy lenses, the manifestation of informality and its contribution to national development. Grasping with the practical issues of the regulation and the enhancement of a burgeoning and spontaneous sector, policy makers attempted to design appropriate policies. It is important to see what place and role were given to informality in development studies’ thinking and policy designs, and what impacts the emergence of the concept has had. Kenya, the country where the concept of the informal sector was born, has developed, since the origin, successive policy papers dedicated to this sector without – significantly and strangely – naming it as such, preferring to refer to Micro, Small and Medium Enterprises (MSMEs), a widely shared behaviour among policy makers in Africa and elsewhere. The result is that government actions, coming from different perspectives, make coherent policy difficult to achieve.

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Why and how should the informal economy be revisited after 50 years? 5 Similarly, but in a broader perspective, Frédéric Lapeyre, who is coordinating the transition to formality at the ILO, reviews, in Chapter 5, the various and successive ways of thinking and proposed strategies, designed and supported by the ILO, which is the main international actor in the field. In this respect, the chapter complements Chapter 4 in that it gives room for broader generalisation. From this perspective, the chapter attempts to show that public policies aiming at facilitating transitions towards the formal economy should be a means to establish inclusive development and not an end in itself with the intention of increasing fiscal space or better controlling the informal economy. It targets the adaptive capacities of informal economy actors, describing how these actors systematically reposition themselves vis-à-vis the state, markets, and international and national policies to secure their livelihoods, and explains how this triggers a need to reformulate questions relating to policy intervention based on a more thorough understanding of the perspective of the informal economy actors. Recalling the origins and the evolution of thinking about informality, and the transition to formality through the various programmes of the ILO and the variety of mainstream development theories, until and since the adoption of Recommendation 204 on the transition from the informal to the formal economy by the International Labour Conference in 2015, the chapter suggests that these changes have led to a democratic ‘new deal’, in short the rewriting of the social contract between the people and the state. This includes consolidating local associative movements (see chapters 10, 11 and 12) and creating an inclusive state that guarantees collective freedoms, social justice and the construction of territories where ‘sustainable good life’ is possible. The chapter concludes by reflecting on the importance of a better understanding of everyday grassroots practices and initiatives of actors in the informal economy to give rise to a ‘reinvention of being and doing together’ and on the impossibility of a universal framework for intervention. Diverse responses are possible; these are currently work in progress or likely to emerge.

1.2 PART II: RECONSIDERING THE MARGINS AND FRONTIERS OF THE INFORMAL ECONOMY Part II is made up of three chapters. The first discusses the ongoing and probably ineluctable enlargement process of what is considered as the economic activity as applied to the invisible unpaid care work mainly performed by women and not even considered as informal, that is,

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worthy of consideration in the measurement of economic performances. Each of the two other chapters addresses a phenomenon that is indeed at the opposite end of the spectrum within the scope of this Handbook: on the one hand, the so-called ‘oldest profession in the world’, prostitution, which lies in between legality and illegality, and, on the other hand, activities that mirror multinational corporate firms in the informal economy yet the mirror makes them invisible – that is, the ethnic or religious networks of trade entrepreneurs in Western and Central Africa. In Chapter 6, Nancy Folbre notes that far more attention has been paid to upward linkages between the informal economy and the formal economy than to downward linkages with the unpaid care economy of non-market family services, and she stresses the impact that such a change in perspective could have in terms of the size and dynamics of informal employment as a whole. She explores the changes – between innovation and resistance – that have intervened in representations and categorisations of work and employment (especially housekeepers and family workers) over the nineteenth and twentieth centuries, across various schools of thought and among authors, as an introduction to the more contemporaneous and currently ongoing discussions and interactions between the System of National Accounts (SNA) and the international concepts of work and employment, two frameworks that have so huge an impact on our interpretations and understanding of the economy. The fuzziness of the distinction made by national accountants and labour statisticians between productive/non-productive, economic/noneconomic, market/non-market or SNA/non-SNA activities is emphasised and scrutinised through the constant retroaction between the concepts of national accounting on the one hand and the concepts of labour force, work and employment on the other hand. Encouraging readers to rethink these binaries, which result in concealing an immense part of women’s contribution to the economy and to general well-being, and in order to better understand the challenges at stake, Nancy Folbre takes an illustrative example: milking a cow is – theoretically – taken into account in the GDP as a good produced for own final consumption, whereas breastfeeding – an unpaid care service – is not. As a matter of fact, whereas the SNA has early introduced the production of goods for own final consumption by households within the boundaries of GDP measurement, and has constantly kept the provision of services for own final consumption outside these boundaries, the recent evolution in the concepts of work and employment coined by labour statisticians may have opened the door to a broader conception

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Why and how should the informal economy be revisited after 50 years? 7 including unpaid care work as a form of work, but restricting employment to work for pay or profit. Will the SNA follow with the enlargement of its framework to include unpaid care work, or with the shrinkage of that framework to employment for pay or profit? The story is not yet told. Chapter 7, by Philippe Adair and Oksana Nezhyvenko, examines the case of prostitution, which is, paradoxically, not recognised as a profession in the framework of labour force concepts, but is recommended to be taken into account in the compilation of GDP by Eurostat. It is therefore interesting to focus on an activity that is on the edge of both concepts of informality and illegality, provided that it can be legal or illegal and difficult to disentangle from sexual exploitation and human trafficking, depending on national legislations, and most often undeclared. Moreover, as recalled by the authors, contemporaneous legislations and policies originate in the works of three classical economists, Mandeville, Malthus and Stuart Mill, which inspired the various regimes that can be observed today across countries and allow for studying the phenomenon on crosssectional data: prohibition, regulation and abolition. The chapter is a good example of how to tackle such an invisible and coerced as well as non-coerced activity, by using multiple approaches and sources (on the demand side, and on the supply side) for 39 European countries and disentangling them. These sources are tested through econometric techniques and checked against national accounts estimates. Among the findings, epidemiological data on HIV prevalence are revealed to be the most reliable, and the magnitude of female sex workers, which is highly dependent on the prostitution regime, shows an asymmetry between richer non-transition countries and poorer transition countries. In a completely different context and with a different scientific apparatus, at the opposite of the spectrum, in Chapter 8, Stephen Golub and Mirayda Martinez convene the historical approach to throw light on the powerful networks innervating an activity that is also on the edge of the concepts of informality and illegality, that is, cross-border trade that flirts with, or tests the limits of, smuggling and corruption. Noting that the informal sector may be highly organised whereas the official institutions are dysfunctional with a high prevalence of corruption and a lack of protection of property rights, the authors stress that, in such contexts, kinship groups provide their members with social capital that serves to enforce binding agreements, minimising trade transaction costs, optimising market information, and facilitating credit and business creation as well as an informal social protection system.

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Focusing on the Mourides of Senegal, the Yoruba of Nigeria, Benin and Togo, the Haoussa of Northern Nigeria and the Igbos of Southeastern Nigeria, the chapter traces the constitution of these kinships’ networks back to the precolonial and colonial periods, to explain what they have become and the strength they have acquired. Over time, these networks achieved settling in trade towns across regions and countries, transcending national borders, venturing up to Europe, North America and even China, opening and strengthening major trade routes through a large diaspora able to supply brokers, temporary lodging, access to local markets, and various facilities and services at different points on these routes. It is, however, doubtful, according to the authors, that these successes led to industrial development and integration in the global economy as it occurred in East Asia. It is easy to see that the usual analytical tools of economists fail to capture the complexity of such networks, of such global value chains, most often limited to trade, and whose opacity makes it difficult to find out the overall turnover, value added, profit and number of jobs mobilised, from the smallest street vendors to the highest-earning CEOs.

1.3 PART III: GIVING VISIBILITY AND VOICE TO THE MOST VULNERABLE: OBSERVING, PARTICIPATING, SUPPORTING AND ORGANISING This part consists of four chapters that showcase the profiles of three professions. All the professions’ omnipresence and their role reveal them as major actors in the functioning of cities in developing countries: two are extremely visible – street vendors and waste pickers – and one is invisible – the home-based workers. While the first chapter is based on ground-level observation of street vendors in Tunisia by an anthropologist, the three subsequent chapters express and attempt to design the type of responses needed for supporting the smooth transition of the most vulnerable to the formal economy or at least towards an improvement of their working and living conditions. These responses are far from the macro-policies and global measures usually implemented by the state; far from the incentives or the coercive measures designed by government actors. The chapters illustrate the principles and findings of the action research approaches privileged by WIEGO (Women in Informal Employment: Globalizing and Organizing), the international network of researchers and activists dedicated to the support of women informal workers across the world, and especially focus on the three vulnerable groups of

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Why and how should the informal economy be revisited after 50 years? 9 informal workers using a gender lens, as women are even more vulnerable among these groups of workers. As a matter of fact, policies addressing informality require bottom-up approaches, rather than macro top-down strategies. In this sense, this part of the Handbook highlights the other side of, and is complementary to, the global strategies that are emphasised in parts I and II. In Chapter 9, Laurence Michalak privileges an anthropological approach of five very concrete types of street vendor in Tunis, namely a pine tar vendor, a breadstick vendor, a vendor of Libyan goods, a beggar woman and a contraband cigarettes vendor. The approach is entirely qualitative and based on quasi-daily or frequent (daily or weekly) encounters with the persons over a long enough period of time and through short questionings or talks. The result leads the reader to emerge in the concreteness of a universe that perhaps was only grasped up to this point through generalisations or rather abstract theorisations. Of course, the representativeness of these observations is not ensured, but that is not the point insofar as this kind of knowledge is shown to be essential for better understanding of the everyday life of the tiny mob that constitutes the fringes of the invisible workforce, engaged in petty activities to earn a living. The chapter also provides the opportunity to discuss some common assertions or debates about the informal economy, such as competition and cooperation between actors, unfair competition and the non-payment of taxes, subsistence and multiple jobs holding, legality and illegality. Policy measures and government attitudes are also discussed. Furthermore, the chapter provides the opportunity to discuss the pros and cons of the variety of methodologies that are required for capturing the reality of informal activities and the variety of studies and surveys conducted in Tunisia with this aim in mind. In Chapter 10, Sonia Maria Dias and Lucía Fernández, drawing on three experiences of waste pickers’ cooperatives in Pune (India), Bogota (Colombia) and Belo Horizonte (Brazil), highlight processes of formalisation from the ground. They review the literature on cooperation models with special emphasis on co-production and participatory governance, in which Membership-Based Organisations (MBOs) are rooted. At the crossroads of the debates on social capital, governance and formal/ informal linkages, these reflections lead the authors to envision a complete re-conceptualisation of service provision (in this case, waste collection and recycling) as a process of social construction in which rules, norms and institutional frameworks are negotiated by or with MBOs, rather than taken as given by the authorities. Drawing on ILO/WIEGO research on cooperatives, WIEGO’s rights-based approach to securing livelihoods and decent jobs is then presented, which intends

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to shape alternative routes to formalisation. Organising is a key pillar of the approach and cooperatives are an adequate means for that, allowing acknowledgement of the key role of waste pickers in urban metabolism as service providers, beneficiaries of integration to public schemes or procurement contracts, and finally full integration in the global value chain of recycling, leading to the socio-economic inclusion of the informal workers. In Belo Horizonte, the cooperatives of waste pickers struggled for the acknowledgement of the rights to the city for their members and a strong integration (‘embeddedness’) was achieved between MBOs and local authorities that provided infrastructure for operations, such as recycling warehouses and equipment, as well as capacity building and educational campaigns, through which waste pickers improve their self-esteem and gain social visibility. These successes have survived changes in government, though continuous struggles remain necessary, and for the most recent period there have been impacts of cuts in national funding lines and closing of participatory democracy spaces. The Bogota case is a tale of the continuous struggle of waste pickers’ MBOs, whose livelihoods had been threatened by the privatisation of public waste collection, in which exclusive contracts were granted to private formal companies. The legal campaign launched by MBOs for their rights to collect and recycle waste culminated in the Constitutional Court ruling that the municipal government’s tendering process had violated the basic rights of the waste-picking community. MBOs were consequently allowed to prepare, with the support of WIEGO, a bid for contract – and they eventually won the bid. But vested interests never ceased, and on the occasion of mayoral elections and public campaigns it was claimed that the arrangements were undermining free competition and were therefore illegal. Lastly, Pune is another case where the municipality entered into contractual agreements with the community of waste pickers organised in cooperatives to ensure waste segregation, door-to-door collection and the processing of recyclable materials: informal workers are paid with users’ fees, the municipality covers health insurance, and social inclusion is pursued through various accompanying strategies such as credit provision, education and group life insurance, among others. In the three cases, a common feature emerges, which is the claim for the rights to the city, the rights to access the urban commons that are waste resources, carving the legal framework in an enabling environment for the activities of the working poor. In Chapter 11, and further to Chapter 10, Françoise Carré, Pat Horn and Chris Bonner remind us that informal workers, especially the

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Why and how should the informal economy be revisited after 50 years? 11 self-employed and among them street vendors and home-based workers, do not have the power to withhold labour and to strike, even if waste pickers and transport workers, for example, can disrupt city life. Their actions and associations can take their roots in the formal trade union tradition, or in broad social movements, or also in the cooperative and social and solidarity economy. Moreover, these workers are confronted with a multiplicity of actors: public (municipalities and other levels of government), collective associations (regulating local markets) and private suppliers of the goods they sell in the case of street vendors, or contractors in the case of home-based workers (outworkers). Thereupon collective negotiations have neither the same meaning nor the same forms as they have for formal employees. The chapter, drawing on first-hand and empirical materials originating in WIEGO’s experiences and access to direct players in the field, attempts to set up a typology of negotiations (day to day, ad hoc, consultations, roundtables/policy dialogues, regular, statutory) in combination with: who or what triggers, how (advocacy or representation) and whether the negotiation is bilateral or multilateral. Disentangling the contradictions between national and local legislation, as well as constitutional rights and international commitments with ratified conventions, informal worker organisations gain legitimation in conducting negotiations in local and national settings including jurisdictional courts, and also in international fora, such as the international labour conferences, where they can make their voice and their case heard and so eventually transform norms and practices. Some illustrative examples are provided for each identified type of negotiation, with their ups and downs: for street vendors in Liberia and Senegal, Lesotho and Kenya. In Peru, where the right to trade may be guaranteed by the constitution, but not respected at the local level, Lima’s City Council passed an ordinance to govern how individuals are authorised to sell in public spaces, but this is vulnerable to government change and requires constant mobilisation. In India, where the 2014 Street Vendors Act guarantees statutory negotiations, its bypass by the municipality of Delhi led the town’s vending committees to bring the municipality to court, which ended in the obligation for the municipality to reinstate the evicted vendors at their original vending sites. Other examples concern home-based workers, for instance the bidi (traditional cigarettes) rollers in Gujarat (India), whose associations, supported by the Self Employed Women’s Association (SEWA), negotiated a minimum piece rate/wage with contractors as well as contributions to a welfare fund. In Chapter 12, Ana Carolina Ogando and Jenna Harvey emphasise the principles and objectives of action research (AR) and participatory action

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research (PAR) guiding researchers involved in the co-production of knowledge aimed at improving directly the living and working conditions of the vulnerable workers in the informal economy. Besides eliciting external credibility from among their peers, action researchers have also to gain trust and credibility from those in charge of taking action and those for whom the action is intended. Social change is their objective and it must be defined, as well as the approach to achieve it, in connection with the target groups and with their participation, the ultimate objective being the ownership of the research results by the subjects themselves. Hence the co-production of knowledge that characterises WIEGO’s approach and requires the building of individual but also collective capacities, and the systematic collection and construction of data for action in local and global advocacy processes. Grassroots groups and movements, and membership-based organisations, are strengthened, building alliances and solidarity in order to shape strategies and be enabled to engage in discussions and negotiations with the state. Various examples are provided and analysed, such as the Informal Economy Monitoring Study (IEMS) designed and conducted by the WIEGO network in ten cities of developing countries, along the above principles, which helped the associations of informal workers to push their demands with state actors, or to factually de-construct some myths about informality such as ‘unfair competition’ and non-payment of taxes by street vendors, in the case of Ghana for example, or to enable the cooperatives of recyclers of Bogota to claim for their rights and be allowed and able to bid for the market of waste collection and recycling.

1.4 PART IV: SKILLS, INNOVATION AND IMPACT OF TECHNOLOGICAL CHANGE IN THE INFORMAL ECONOMY Part IV deals with two characteristics that seem antinomic of informality: skills and innovation. For most policy makers the informal economy is in need of more skills, but it is rarely envisaged as a source of provision of skills that would deserve to be strengthened, complemented, supported and recognised. Similarly, innovation is rarely sought after in this sector of the economy, whereas an identification and a better account of this potential reserve of innovations could be an opportunity to unleash such a potential. The first chapter focuses on skills and apprenticeship in the informal sector, the next two chapters examine the status of innovation in the informal economy in Africa and in refugee economies, and the final

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Why and how should the informal economy be revisited after 50 years? 13 chapter attempts to measure or predict the impacts of technological change on the livelihoods of women in the informal economy. Chapter 13 is dedicated to skills development and the informal sector, and appears to offer an encouragement to examine in more depth the range of approaches to, and connections between, these two major concepts. Kenneth King first relates the long history of interrelationships between skills training and the informal sector: informally acquired skills through traditional apprenticeship in particular, and non-formal education and training, had attracted the attention of researchers even before the concept of the informal sector appeared, and it was a long time before they were formally recognised. Skills training is a concept that encompasses the formal system of Technical and Vocational Education and Training (TVET) and includes non-formal modes of skills acquisition that may occur in various environments and even within the formal sector itself. The chapter goes through and analyses the literature on these topics, especially the main world reports of international institutions that punctuated the last decade: the World Bank reports and one of its major programmes in the field, the UN 2030 agenda for sustainable development, and, above all, the UNESCO reports and recommendations. The most recent World Development reports by the World Bank that focus on education and jobs leave little room for non-formal education and training, unless negatively, and do not attribute any interest in them nor any return to work, contrary to an earlier report also published by the World Bank in 2013. In contrast, the UNESCO reports monitoring the international commitments on Education for All, place greater emphasis on the role of non-formal education and training. They focus on unleashing the potential of TVET, and in particular apprenticeship that can be strengthened through the improvement of skills among masters or mistresses operating in the various crafts of the informal sector, a pillar of formalisation strategies. Recognition of prior learning can also be a means of such a process, but it is not realistic to assume that it can lead by itself to formal-sector jobs. The chapter concludes that more research would be needed concerning the relevance of primary, secondary and college education in the informal economies that prevail in so many countries. Furthermore, there is an urgent need to know more about the varieties of skill acquisition outside formal TVET, especially in traditional apprenticeships, but also in the informal ways of acquisition within the formal sector, and to understand to what extent these systems are changing and accommodating, in particular those associated with social media.

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This leads us to the next chapters, on innovation. In Chapter 14 Erika Kraemer-Mbula and Lorenza Monaco seek to rediscover the potential of the informal economy for triggering an industrialisation process that has been continuously and idly struggling for decades to reach uncertain achievements. To fulfil this aim, it is necessary to adopt an approach in terms of systems rather than individual firms and to think of industrialisation as a bottom-up process: the informal economy can be seen as an incubator and innovation as also being generated by grassroots economic activities and micro- and small enterprises that need to be supported. In other words, bottom-up industrialisation could be an alternative path to valorise local resources and capabilities. Such an approach thus requires rethinking informality as well as innovation. Rethinking informality means acknowledging the multiplicity and complexity of its causes and determinants, and recognising it as a functional part of the formal economy itself and as an incubator of creative practices. Rethinking innovation means recognising that firms’ ability to identify new ideas and transform them into new or improved products, services or processes also exists in informal enterprises, for example adaptation of machinery, or changes in product design and packaging, or problem solving too. It also means a broader understanding of the processes involved, in particular the underlying learning processes associated with innovation and the role of informal networking for building trust and cooperation. Whereas technological innovations require skills and capital, non-technological innovations (such as new organisational or marketing methods) also exist in the informal enterprises and they may be even more important and more inclusive than the former in that they better address the needs of communities excluded from formal markets. After reviewing the limited but growing literature connecting entrepreneurship, informality and innovation, the chapter provides several examples of industrialisation from below, extracted from the archives of the Open African Innovation Research (OpenAIR) network, which collects the creative practices emerging ‘out of necessity, vulnerability and scarcity’. Emphasised are the collaborative platforms where small entrepreneurs can share tools, knowledge, experiences and workspace, resulting in skills development through learning by doing, knowledge sharing and cooperation, as first steps towards scaling up. These types of clustering are also emphasised in Chapter 15 by Jeremy de Beer and Nicole Tumaine; this chapter aims at highlighting the role of refugees within innovation ecosystems, especially in the informal sector. In this perspective, the authors bring together three disconnected fields of research – informal sector, innovation and refugee economies – in order

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Why and how should the informal economy be revisited after 50 years? 15 to show that, far from being a drain, refugees are contributing to their hosts’ economies. The refugee economies, often characterised by confinement and the legal inability to work, own property or access capital through banking systems, do not offer any other opportunity than to engage with informal activities. In these contexts, innovation is defined as the adaptation process through which refugees maximise opportunities and mitigate constraints in the face of extreme market distortions. The chapter draws on the activities of two networks: OpenAIR and the Refugee Economies research project. It emphasises the role of grassroots intermediary organisations that help innovators in refugee economies to overcome the obstacles typical of the informal economy and to reach a certain degree of self-reliance by nurturing entrepreneurial and innovative spirits. In this sense, innovation lies in the services provided by these intermediary institutions/associations and in their organisation itself: intermediaries serve as platforms to find community-based solutions to the problems of the community that remain unaddressed by humanitarian agencies in charge of the camps. However, some of these solutions can be technical, such as the fabrication of simple solar power chargers for mobile phones, for instance. The chapter showcases five examples of such intermediaries that belong to the social and solidarity economy: three in Uganda (a textbook case, as it is known for its more permissive policies towards refugees and the diversity of nationalities and activities in urban and camp settings), one in South Sudan and one in Canada (in relation to Syrian refugees). Finally, in Chapter 16, Jacques Charmes analyses the impact of technological change on the situation of women in the informal economy. Across the world and over time, female labour force participation rates are lower than male rates, even as the gender gap seems downward oriented in the recent period. The burden of unpaid domestic and care work rests mainly on women’s shoulders, and the socio-cultural or familial necessity to perform their productive work at home considerably restricts opportunities for employment. As a consequence, the risk of being bound to work informally, especially as home-based workers, is much higher for women than for men. The chapter recalls some statistical evidences on these matters. Technological changes can have an impact on women’s working and living conditions in various ways. In developing countries, mitigating the burden of domestic tasks remains limited, but opportunities for time saving exist in unpaid activities such as water and wood/fuel fetching through the introduction of various improved and adapted technologies. ICTs, and especially mobile phones, are also important means within reach of informal micro-businesses or even income-generating activities.

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The chapter provides illustrative examples of poor women shea nuts gatherers and shea butter processors in Northern Ghana who were able to widen their place at the bottom of the global value chain, and of informal workers benefiting from a platform of services in Mozambique. Lastly, digitisation, robotisation and the economy of platforms, far from being unrelated to the development of the informal economy, are revealed to be new sources of informalisation in various industries, including femaledominated industries, all the more so as working from home still remains essential for vulnerable working women such as single mothers. Click workers who are more likely to be home based thus replace the former task workers and the seeds of labour-informalisation processes remain perennial at the heart of the new industrial revolution.

1.5 IN CONCLUSION This Research Handbook does not pretend to cover all topics and issues related to the informal economy. The scientific editor’s choice has been to provide a wide and diversified range of approaches likely to make scholars and researchers aware of the issues to be tackled and the challenges at stake within this rather recent field of knowledge in economics and the social sciences at large. The Handbook offers historical, theoretical, political and practical entries into a still-burgeoning and debated field of research. It provides some indications or orientations towards domains that still require more in-depth investigations for a better understanding of a phenomenon concerning a majority of the labour force at world level, making it possible for the working poor to earn a living, providing a number of them – in particular women – with new opportunities. Such approaches pave the way for an improvement of the living and working conditions of informal workers and a renewed discussion about the social contract between the ‘excluded’ and the state. Among the suggested innovations, it proposes an inclusive approach broadening the scope of research to encompass unpaid domestic and care work in order to better understand and grasp the obstacles and disadvantages faced by women towards their empowerment.

REFERENCES ILO (2015), Recommendation 204 – Recommendation on the Transition from the Informal to the Formal Economy, adopted by the ILC at its 104th session, Geneva, 12 June.

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Why and how should the informal economy be revisited after 50 years? 17 Jütting, J.P. & de Laiglesia, J.R. (eds) (2009), Is Informal Normal? Towards More and Better Jobs in Developing Countries, Paris: OECD. Turnham, D., Salomé, B. & Schwartz, A. (eds) (1990), The Informal Sector Revisited, Paris: OECD.

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PART I CONCEPTS AND DEFINITIONS, METHODS OF MEASUREMENT AND ESTIMATION, MAGNITUDE AND CHARACTERISTICS, AND GLOBAL CONCEPTION OF STRATEGIES

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2. The success story of a loose but useful concept: origins, development, magnitude and trends of the informal economy Jacques Charmes

Due to its embeddedness in relation to the state, the informal economy is by nature a ‘loose’ concept: the various forms of the state, democratic or not, and the variety of forms of capitalism make it difficult to reach a uniform and unique definition of what is called the informal economy. Since its very origins, the concept has been criticised for two contradictory defects that would vitiate its operationality: dualism on the one hand, and looseness on the other hand, some researchers going so far as to pretend it does not exist and comparing it with a unicorn, a mythical animal. However, this fuzziness or flexibility has given rise to fruitful debates, the richness of which can be seen as a source of either satisfaction or concern. Until now, many scholars have discussed the concept using their own unique personal understanding and definition, forgetting that the data they quote from other sources have, notwithstanding their flexibility, a real meaning and a robust comparability. In this chapter, we briefly recall in the first section what is lying behind the relation between informality and the state; in the second section we detail the origins and the definitions of the concept as well as its changes and interpretations over time and across regions, in terms of employment and national accounts. The third section discusses the debate concerning illegal and legitimate activities that still feeds the confusion between the informal economy and the shadow economy. The fourth section describes the main methods of data collection and estimation, and the fifth section provides the main global estimates and characteristics of the informal economy by world region. The chapter ends with a sixth section outlining two shortcomings or pitfalls of the informal economy: pluri-activity and the so-called ‘missing middle’. This brings into question the weak potential of growth in the informal economy and illustrates in what way the flexibility of the concept amounts to a pledge for a better understanding of the real economy of the people.

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2.1 INFORMALITY AND THE STATE Informality is linked to the state, and this is why it is so difficult to disentangle informality and illegality. Informality exists because the state fails to ensure that the rules of law it enacts are practised. The modern state has been the instrument of the expansion of capitalism and the free market since the other forms of production progressively faded away, whether it be the institutionalised collective modes of production of former socialist economies or the traditional pre-capitalist modes of production and exchange that prevailed in the agrarian societies of old nations as well as in the young developing nations formerly colonised and now independent. In this sense, one can consider that informal activities pre-exist and then co-exist with the modern state to the extent that the state is unable and even unwilling to make its rules apply to these forms of activities and finally tolerate them, with the result that over time they disappear by themselves. However, such a notion of co-existence as a consequence of pre-existence is no longer pertinent for understanding contemporary societies when new informal petty enterprises are created by new entrants into the labour market, disrespectful of the rules of law. Why, then, should these activities be qualified as ‘informal’ rather than ‘illegal’? One reason is that the social contract by which citizens submit to the state comprises a balance of rights and duties, yet informal workers and operators do not often benefit from the rights involved; one might wonder why they should have duties towards a state that is unable to provide them with education and health services, or other basic services such as water, electricity, means of communication, and even security and protection against corruption. In such cases, the disrespect of the rule is not ‘deliberate’ but rather ‘irrelevant’ in the absence of any counterpart (that is, a right in return for a duty). It has therefore been suggested that informality has resulted from being beside, or aside from, the law rather than outside the law. In some circumstances, informality is even a manifestation of political or religious contestation or protestation against a state not recognised as legitimate. Whatever the situation, it is no longer tolerance but rather eradication that characterises policies and strategies promoted by the state, and a military vocabulary is more commonly used by the state in terms of fighting against illegal activities that provoke unfair competition with formal enterprises, squeeze budget revenues and/or clutter up the sidewalks, to pick up on just a few of the arguments against the free development of informal activities. In this regard, the

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Origins, development, magnitude and trends of the informal economy 21 recent ILO Recommendation 204, adopted by the International Labour Conference in 2015, reflects the necessary balance between incentives and sanctions or penalties to be applied in the design of policies dealing with such a complex and diverse phenomenon (ILO, 2015). As a matter of fact, informality is a multifaceted phenomenon that can be associated with a variety of modes of production as well as, using a more contemporary terminology, a variety of forms of governance. It can be suggested that we are facing conflicts of singular and historical formalities. In that regard, the magnitude or specific features of informality could be associated with varieties of capitalism identified on the one hand by institutionalist economists on a scale ranging from liberal market-coordinated economies to those that are strategically coordinated by the state. On the other hand, liberal economists are tempted to examine the relationship between the extent of informality and the degree of regulations (see, for instance, the models using variables extracted from the Doing Business Survey of the World Bank, via doingbusiness.org). Subsistence farmers (producers of agricultural/primary goods for own final use by households in the terminology of the System of National Accounts, SNA), for example, belong to a mode of production preexisting the modern state and are a component of the informal economy. However, the question may be raised whether this category still exists, given that these subsistence farmers have to market a part if not all of their production to satisfy their basic needs or even to pay the taxes for which they are liable, and then to buy back their livelihood from the market. Similarly, the crafts guilds represent a kind of prior formality that can either enter into conflict or co-exist with the formality of the modern state, which can exempt these operators from the formal rules or make adaptations to the traditional rules commonly applied in their own organisations. As to newly created microenterprises, these emerge spontaneously with the most immediate goal of generating income and profit, rather than worrying about the payment of taxes and social contributions. Incidentally, where the state decides to support and promote the newly born microenterprises, its first policy measure is to exempt them from the payment of taxes and contributions (or reduce their levels) for the first years of existence of these economic units. Moreover, beyond the apparently and maybe originally dualistic character of informality, the recognition of its gradual continuum prevailed early on. There are not two separate sectors, informal and formal, without any linkages interrelating their respective functioning. It

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is true that the original conception of informality took its roots in Lewis’s model of ‘economic development with unlimited supply of labour’ (Lewis, 1954), soon refined by Todaro’s model of rural–urban migration (Todaro, 1969). For Lewis, the underemployment prevailing in the traditional agricultural sector provides the nascent industries with the required manpower at low price. Todaro adds to the model the role of urban unemployment as an intermediate stage before accessing to the modern (formal) sector. As open unemployment does not give the right to allowances in developing countries, the way was paved for the invention of a third sector: the informal sector. A lower tier and an upper tier were early distinguished among informal activities (Fields, 1990), or also a survivalist component as opposed to a dynamic growth-oriented/transitional component (Hugon, 1980), and later on the discernment of informality by necessity or by choice (Perry et al., 2007). Beyond these varieties of sub-divisions, degrees of informality can be distinguished that shape a continuum between informality and formality: formal firms can behave informally as regards some rules that they partially apply, or not at all, whereas informal firms can comply with some formal rules but not all; and both types of firms can interact under sub-contracting arrangements, for example. Even the street vendors installed in the vicinity of street-front stores may happen to be piece sellers of these respected stores. To capture such diversity and heterogeneity, defining a sharp and precise concept would have led to a dead end. This is why a flexible multi-pronged concept has progressively emerged. Such a ‘fuzzy’ concept, it has been argued (Peattie, 1987), may have been useful, but ultimately counterproductive due to obscuring the analysis of central issues in development theory. For Peattie, the wide use achieved by the concept resulted from a convergence of interests between those scholars and policy makers dealing with growth planning, poverty alleviation, economic accounting and also Marxist structuralists. This was true, but the author’s theory that it should have doomed the concept to be just a flash in the pan proved incorrect. Thirty-three years later, informality has become an even more widely used concept, and its ‘fuzzy’ or preferably ‘flexible’ character explains this lasting success. Admittedly, today the concept of informality or informal economy continues to arouse many debates and generate controversies. It is useful to recall its origins.

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Origins, development, magnitude and trends of the informal economy 23

2.2 ORIGINS OF THE CONCEPT AND DEFINITIONS Researchers generally agree that the notion of informality was first described by Keith Hart in a paper presented at a conference on urban unemployment in Africa, held at the Institute of Development Studies (IDS) at the University of Sussex in 1971 (Hart, 1973), in which he listed formal income opportunities and informal income opportunities: legitimate on the one hand and illegitimate on the other. Among the legitimate: small farmers, self-employed artisans and manufacturers, petty trade and street hawkers, dealers and middlemen, other petty services including ritual services, magic and medicine, and also rentier activities or transfer activities including borrowing and begging. And among the illegitimate: theft, gambling, prostitution, smuggling, bribery, and so on. Hart did not propose any definition, referring to the dichotomy organised/unorganised, and parallels with the latter such as the reserve army of the underemployed and the unemployed, or the self-employed in small enterprises. This same year, 1971, the World Employment Programme of the ILO initiated a mission to Kenya, conducted by a team of distinguished economists from the IDS in Sussex as well as from the eponymous institute in Nairobi (see the contribution of researchers from IDS Nairobi in Chapter 4 of this Handbook). The report of the Kenya mission (ILO, 1972) drafted, in its introduction, the very first and well-known definition of what it called the informal sector: informal sector activities ‘are the way of doing things, characterised by: a) ease of entry; b) reliance on indigenous resources; c) family ownership of operation; d) small scale of operation; e) labour-intensive and adapted technology; f) skills acquired outside the formal school system; and g) unregulated and competitive markets’, the formal sector activities being defined by the exactly obverse characteristics. In a footnote to this definition, the authors of the ILO report indicated their indebtedness to the IDS Nairobi researchers: We should record here that the thinking of the mission on these matters has been greatly influenced and helped by a number of sociologists, economists and other social scientists in the Institute of Development Studies at the University of Nairobi. One begins to sense that a new school of analysis may be emerging, drawing on work in East and West Africa and using the formal–informal distinction to gain insights into a wide variety of situations. (ILO, 1972, p. 6, footnote 1)

Therefore, from the very beginning, the notion was meant to be flexible: a list of activities or professions that could be extended as desired, and a list of criteria to be treated likewise; moreover, not all the criteria needed to be compiled at the same time, nor for ever. For instance, the criterion

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of skills acquired outside the formal education system was meant to be partially removed with the progress of literacy and enrolment rates and the rise in unemployment rates that led more and more graduates to engage in informal activities. In its first attempt to draft an international definition of ‘employment in the informal sector’ (ILO, 1993a, b and c), the International Conference of Labour Statisticians (ICLS1) gathered under the auspices of the ILO relied on the multicriteria definition of the 1972 Kenya report: the substantive definition recalled that the informal sector may be broadly characterised as consisting of units engaged in the production of goods or services with the primary objective of generating employment and incomes to the persons concerned. These units typically operate at a low level of organisation, with little or no division between labour and capital as factors of production and on a small scale. Labour relations – where they exist – are based mostly on casual employment, kinship or personal and social relations rather than contractual arrangements with formal guarantees. (ILO, 1993c)

In addition, these units share the characteristics of household enterprises. In the background report for the conference (ILO, 1993a), the proposed operational definition is viewed as an ‘umbrella’ concept designed for data collection purposes: The term is used in different contexts with different meanings and users of statistics may wish to define the sector for different analytical purposes. Statistical definitions should therefore generally be broad to accommodate the needs of various data users and allow for flexibility in data analysis and should specify the scope of a survey for data collection purposes. […] This broadness is essential to an international statistical definition of the informal sector, which has to encompass the different ways in which the informal sector manifests itself in different countries and provide flexibility in the adoption of more specific definitions at the national level. (p. 25, para. 87)

The 1993 ICLS finally adopted a statistical definition of the informal sector (ILO, 1993c) as consisting of, (a) informal own-account enterprises (not employing permanent paid employees) that may comprise, depending on national circumstances, either all own-account enterprises or only those that are not registered under specific forms of national legislation, and (b) enterprises of informal employers in reference to the characteristics of the economic units in which the persons work: the legal status (individual unincorporated enterprises of the household sector), the non-registration of the economic unit or the non-registration of its employees or a size below a specified level of employment (later on set

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Origins, development, magnitude and trends of the informal economy 25 at five permanent paid employees), and at least some production for the market. The definition clearly places an emphasis on ‘national circumstances’ that do not require non-registration as a binding criterion, leaves open the type of registration to be referred to and suggests alternatives (registration of the unit or of the employees, or the size). Such flexibility recognises that the informal sector does not exist in a uniform way in all countries and it greatly helped the subsequent generalisation of data collection in developing countries. This establishment-based definition of the informal sector left aside other categories of informal workers, who were revealed to become more and more numerous at further stages of the globalisation process: informal workers in medium and large enterprises within the formal sector and more generally in all the other sectors outside the household sector; financial and non-financial corporations; and also government and non-profit institutions. And in 2003 the 17th ICLS (ILO, 2003a and b) adopted a job-based definition of informal employment aiming at covering all situations deserving to be qualified as informal, in the informal sector of course, but also in the formal sector and more generally outside the informal sector, extending the definition to all workers who exclusively produce goods for own final use by their household (a category that was excluded in the 1993 definition of informal sector). The 2003 guidelines of the ILO define informal employment as comprising all jobs carried out by workers, whatever the characteristics and the type of the economic unit in which they work, whose employment relationship is, in law or in practice, not subject to national labour legislation, income taxation, social protection or entitlement to certain employment benefits (advance notice of dismissal, severance pay, paid annual or sick leave […]) because of non-declaration of the jobs or the employees, casual or short duration jobs, jobs with hours or wages below a specified threshold […], place of work outside premises of employer’s enterprise (outworkers), jobs for which labour regulations are not applied, not enforced, or not complied with for any other reason. (ILO, 2003b)

In practice, the statistical definition used for data collection is the absence of written contract (but this criterion is not applicable to the self-employed) or – preferably – the absence of social contribution. Here again, flexibility has been the rule; and depending on national circumstances and practices, social protection was approached through employers’ contributions, or workers’ benefits such as medical coverage, annual paid leave, sick leave, or also pensions, and so on.

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The 2003 definition of informal employment did not render obsolete the 1993 definition of the informal sector, and the informal economy is a combination of the two concepts. In summary, employment in the informal economy comprises: (a) employment in informal microenterprises belonging to the household sector (unincorporated and not holding a complete set of accounts, and not registered or not registering their employees or under a certain size threshold); (b) domestic workers not covered by social security; (c) employment in production of goods exclusively for own use by the household; and (d) informal employment (not covered by some form of social security) in the formal sector. Table 2.1 summarises the definition in terms of employment. Table 2.1 Components of employment in the informal sector and of informal employment outside the informal sector Individuals/Jobs/Employment Economic units / enterprises

Households

Sources:

Informal

Formal

Informal sector

(1)

(2)

Formal sector

(3)

(4)

Paid domestic workers

(5)

(6)

Production of goods for own final use

(7)

–

Charmes (2013 and 2019).

There may be some formal jobs in the informal sector when, for instance, an employer registers one of his employees because of his seniority, but not all, or when the informal sector is defined only by the size threshold. For economists it is important to identify informality in terms of national accounts and contribution to Gross Domestic Product (GDP). In fact, ever since the third revision of the System of National Accounts in 1968 (Chapter IX: ‘Adaptation of the full system to the developing countries’) one can find the first mention to what was intended to become the background of the multicriteria definition coined by the ILO Kenya report in 1972. Drawing on current practices of national accountants on the field, the sector is referred to as a traditional mode of production: The kinds of activity for which it may be most useful to draw distinctions between modern and traditional modes of production are agriculture, each class of manufacturing, constructions and perhaps wholesale and retail trade

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Origins, development, magnitude and trends of the informal economy 27 and transport. The two types of establishments, differing markedly in technology, scale and organization of production, are likely to exist side-by-side in the case of other kinds of activities, practically all the establishments may be either traditional or modern in character. […] The classification of establishments according to mode of production should be based on criteria such as the resources, facilities and technology used in the activities, the manner in which production is organized and managed, and the scale of the operations. All production carried on in household premises should be classed as traditional; traditional-type establishments will often be part of unincorporated units. In the case of mining, manufacturing and construction, the use of power equipment of two horsepower or less might also be taken to indicate traditional modes of production. Little power of equipment of course indicates a lack of capital equipment and the reliance on hand labour. Though the criterion of size should vary from one kind of activity to another, the engagement of less than five persons might frequently be a suitable dividing line between the two modes of production. (United Nations, 1968: paras 9.14 and 9.17, p. 209)

Then in its fourth revision (SNA, 1993), the SNA defined the informal sector (on the grounds of the ILO definition) as a sub-sector of the household institutional sector, along with paid domestic workers and producers for own final use, and its fifth revision in 2008 dedicated a whole chapter to the subject (SNA, 2008: Chapter 25 on ‘informal aspects of the economy’). As to informal employment in the formal sector, this cuts across all other institutional sectors (government, financial and non-financial, and non-profit sectors), as summarised in Table 2.2. In some countries, the household sector may include some formal units, for instance unincorporated enterprises that hold a complete set of accounts, though such quasi-corporations should be included in the other institutional sectors. Table 2.3 synthesises the contents of tables 2.1 and 2.2 and precisely situates the various components of the informal economy vis-à-vis the institutional sectors and also some standard major components of the household sector in the compilation of national accounts, for instance water and firewood/fuel fetching that feeds the agricultural/primary sector, self-construction that can be an important component of the construction sector, and so on. It should be noted that imputed rents are the only component of the household sector, generally included in the real estate activities industry, that does not correspond to any job.

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Table 2.2 Components of informal sector, informal employment and employment in the informal economy by institutional sectors in the System of National Accounts

Enterprises / economic units / institutional sectors

Institutional sectors

Jobs

Sub-sectors

Formal

Informal

1

2

Formal

3

4

Unincorporated enterprises: informal sector

5

6

Producers of goods for own final usea

–

7

Paid domestic services

8

9

–

–

General government Non-financial corporations Financial corporations Non-profit institutions serving households Households: unincorporated enterprises

Households: others

b

Imputed rents

Employment in the informal sector = (5) + (6) Informal employment = (2) + (4) + (6) + (7) + (9) Employment in the informal economy = ((5) + (6)) + ((2) + (4) + (7) + (9)) Notes: a Producers of goods for own final use are excluded from the informal sector by definition if the production is exclusively destined to own use, but they are included in the definition of informal employment. b The ‘imputed rents’are the rents that the owners–occupiers are supposed to pay to themselves. They do not correspond to any employment and are not part of the informal economy. Sources:

Charmes (2013 and 2019).

In practice, the household sector is often used as a residual balance for all the other sectors so that the household sector can be taken as a proxy of the informal economy for national accountants.

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Origins, development, magnitude and trends of the informal economy 29 Table 2.3 Synthesis of the positions of the informal economy components in the various institutional sectors and in various industries Institutional sectors

Jobs

Sub-sectors

Formal

Informal

General government Non-financial corporations

Informal Formal employment sector in the employment formal sector

Enterprises / economic units / institutional sectors

Financial corporations Non-profit institutions serving households Unincorporated enterprises: informal sector

Informal sector employment

Subsistence agriculture

Households: unincorporated enterprises

Water and firewood/ fuel fetching Producers of goods for own final use

Processing of agricultural and food products

Producers of goods for own final use

Processing of other manufactured goods Self-construction Households: others Sources:

Paid domestic services Imputed rents

Domestic workers –

Adapted from figures 2.2 and 2.3.

2.3 ILLEGAL VERSUS LEGITIMATE The 1993 definition of the informal sector indicated that ‘activities performed by production units of the informal sector are not necessarily

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performed with the deliberate intention of evading the payment of taxes or social security contributions, or infringing labour or other legislations or administrative provisions’ (ILO, 1993c), clearly distinguishing the informal sector from the illegal and pointing out that these activities operate in the open sun rather than in the ‘moonlight’, in the ‘shadows’ or ‘underground’. Similarly, petty cross-border trade cannot be assimilated to smuggling. The 2003 definition of informal employment extends the notion of informality to the formal sector and henceforth raises the question of illegality and of the ‘deliberate intention’ of non-declaration of certain employees or certain operations by registered formal firms. This is why it is interesting to refer to the broader approach of the Non-Observed Economy (NOE) as developed by OECD (2002) and Eurostat (2014). Eurostat’s tabular approach of the NOE distinguishes seven types of non-exhaustiveness (Table 2.4) (see also Chapter 3 of this Handbook). Table 2.4 SNA Eurostat tabular approach of seven types of non-exhaustiveness I Not registered

II Not surveyed

III Misreporting

IV Other

N1 Producer deliberately not registering – underground

N4 Legal persons not surveyed

N6 Producers deliberately misreporting

N7 Other statistical deficiencies

N2 Producers deliberately not registering – illegal

N5 Registered entrepreneurs not surveyed

N3 Producers not required to register Source:

Eurostat (2012).

Although the table was conceived for developed and transition economies, it is possible to establish a correspondence with the concepts of the informal economy defined earlier: N1 is equivalent to the informal sector (although in the context of developed countries the intention not to register is described as deliberate), N3 corresponds to producers of goods for own final use, and N4 and N6 equate to informal employment in the formal sector. It should also be noted that in some countries, farmers are not required to register.

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Origins, development, magnitude and trends of the informal economy 31

2.4 METHODS OF DATA COLLECTION AND MEASUREMENT Historically it was the national accountants who were the first to attempt indirect measures of the then-called traditional sector, which became the informal sector in 1993, in view of ensuring the exhaustiveness of their compilations. This was performed through comparing statistical sources, in particular sources on production and consumption on the one hand, and on employment in households, with sources on registered employment on the other hand. Box 2.1 briefly presents the two main tools of national accountants in this regard: the Supply and Use Tables (SUTs) by product or commodity, and the Labour Input Matrices (LIMs). BOX 2.1

TOOLS BY WHICH NATIONAL ACCOUNTANTS INDIRECTLY ESTIMATE THE CONTRIBUTION OF THE INFORMAL ECONOMY

SUPPLY AND USE TABLES Production (Formal + Informal) + Imports = Final Consumption + Intermediate Consumption (Formal + Informal) + Gross Capital Formation (Formal + Informal) + Changes in inventories (Formal + Informal) + Exports P (F+I) + M = FC + IC (F+I) + GCF (F+I) + Δ S (F+I) + X In this equation, the production, the intermediate consumption, the gross capital formation and the changes in inventories are known for the formal sector (for all institutional sectors other than households), the households’ final consumption is known from the income-expenditure survey, and imports and exports are known from statistics on foreign trade (to the extent that informal cross-border trade is negligible or known through ad hoc surveys). The imbalance between the two terms of the equation can be imputed to the informal economy, either the micro-businesses of the informal sector, or the undeclared informal employees of the formal sector, or the production for own final use of households. Unless ad hoc informal sector surveys have been carried out, it is difficult to impute precisely the imbalance to these various components of the informal economy. This is why the household institutional sector is generally the sector to which the whole contribution of the informal economy is imputed.

LABOUR INPUT MATRIX National accountants conduct their estimates of production with the labour force that has generated this production. Employment in the formal sector is known from the same sources that have allowed deriving estimates of the production for

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Research handbook on development and the informal economy this sector. Where no specific information is available on employment in the informal economy (from ad hoc surveys), the residual balance between total employment (from labour force surveys) and formal employment (known from enterprise surveys and other administrative registers) constitutes employment in the informal economy (that in turn can be disaggregated between employment in the informal sector and informal employment in the formal sector).

To achieve this aim, establishment or economic censuses and enterprise surveys were – and remain – accountants’ preferred instrument of data collection. Along with the definition of the informal sector, the 1993 ILO Resolution recommended mixed surveys as the best instrument for collecting data on the informal sector, in a process that consists of two steps: firstly a sample household survey collecting information on employment in the households, and secondly an establishment survey administered to all enterprises/activities operated by households’ members for their own account (informal economic units). Compared with establishment or economic censuses that miss the activities performed within households or on a mobile basis, this type of mixed surveys presented the advantage of capturing all activities operated within households for their own account (ILO, 2013). The first phase of mixed surveys comprised the application of definitional criteria for the informal sector on one hand then for informal employment on the other hand, transforming this first phase in a labour force survey. And this method has finally prevailed in countries that did not develop the system of mixed surveys. Today, the main sources of data on employment in the informal economy are the labour force surveys and more generally the employment modules of all types of household surveys. Regarding the performances of the informal economic units and the income they generate, they are admittedly underestimated. Even the most standardised methodologies of mixed surveys adapting reference periods and taking seasonal variations into account fail to achieve an acceptable treatment of this issue and invariably end up with low income and low profit. Methodological surveys as well as qualitative approaches carried out in the beginnings of the long history of the concept of the informal sector, especially in Tunisia in the late 1970s to early 1980s, had shown, however, that real incomes of informal microentrepreneurs could reach twice the level of their direct declarations (Charmes, 1987), which explains why household consumption and expenditures data still often prevail over informal sector production and income data for the compilation of SUTs in national accounts.

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Origins, development, magnitude and trends of the informal economy 33 At world level, data on employment in the informal economy are available for more than a hundred developing and transition countries, and data on the contribution of the informal economy to GDP are available for more than fifty countries that have developed a system of accounts for the household institutional sector by industry.

2.5 MAGNITUDE, TRENDS AND MAIN FEATURES OF THE INFORMAL ECONOMY ACROSS THE WORLD According to a recent ILO publication (ILO, 2018), employment in the informal economy (including agriculture) represented 61.2 per cent of total employment at world level (or 2 billion persons), and (excluding agriculture) 51.5 per cent of total non-agricultural employment. Interesting as they are, such estimates require one to make the hypothesis that informality has the same character (and the same characteristics) in developed countries and in developing countries (an assumption that can be questioned in reference to the definitions and arguments presented earlier), and also assuming that household surveys collect the appropriate and similar indicators in all countries. The estimates also require imputing values for missing countries. For these reasons, statistics on employment in the informal economy referred to below are based on our own database, which includes 99 countries (85 developing and 14 transition countries of Eastern Europe and Central Asia) (see Charmes, 2019). And statistics on the contribution of the informal economy to GDP are based on the database we have developed from the national accounts of 58 countries (43 developing and 15 transition countries). Two important points to note are: (1) the non-agricultural informal economy is privileged in what follows because the identification of informality in the primary sector is less widespread and more uncertain in numerous countries; and (2) we preferred using the unweighted (rather than weighted) averages at regional level, in order to provide insights into the profiles of informality at such levels – weighted averages would have hampered the understanding of regional averages because of the presence (or the absence) of the most populous countries (China, India, Nigeria, for example) in a non-exhaustive database. Table 2.5 shows that non-agricultural employment in the informal economy, based on the most recent years available (later than 2012 for most of them) was culminating in Sub-Saharan Africa with almost three-quarters of total non-agricultural employment (and Western and Central Africa claiming the highest percentages, with respectively 81.5 and 78.7), followed by Southern and South-Eastern Asia (63.7 per cent),

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Latin America and the Caribbean (54.7 per cent), Western Asia and Northern Africa (respectively 48.8 per cent and 48.3 per cent), Central Asia (39.1 per cent) and transition countries (21.7 per cent). Hence the suggestion in the form of a question that formed the title of a 2009 OECD book: Is Informal Normal? (Jütting and de Laiglesia (eds), 2009). Table 2.5 Share of the informal economy in non-agricultural employment and its composition (most recent year, later than 2012) Share of Share of the informal informal sector in the economy in non-agricultural non-agricultural informal employment economy Sub-Saharan Africa

74.5

Western Africa

81.5

Central Africa

78.7

Eastern Africa

71.2

Southern Africa

63.6

Share of informal employment outside the informal sector in the nonagricultural informal economy

80.4

19.6

Southern and South-Eastern Asia

63.7

79.4

20.6

Latin America and Caribbean

54.7

64.6

35.4

Western Asia

48.8

Northern Africa

48.3

⎧ ⎨ ⎩

58.7

41.3

Central Asia

39.1

Transition countries

21.7

⎧ ⎨ ⎩

50.5

49.5

Source:

Charmes (2019).

Trends in employment in the informal economy are more difficult to assess because historical data are scarce, and furthermore the definitions and methods of data collection may have changed over the years. Based on compilations initiated in the middle of the 1970s and regularly completed and updated (especially for the OECD in 1990 and 2009, and the ILO with the support of the WIEGO2 network with the regular updates of the publication, ‘Women and men in the informal economy: a statistical picture’), the most detailed trends have been presented in Charmes (2019). An ascending trend is observed in all regions until the

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Origins, development, magnitude and trends of the informal economy 35 end of the 1990s. After a short period of stabilisation, a peak is observed at the end of the 2000s (corresponding to the 2008/09 financial crisis). Since then, the trend seems downward oriented in all regions, except in transition countries, where, as indicated by their designation, the transition from a wage economy to a more entrepreneurial economy is still ongoing. Interestingly, one can note that the higher the share of employment in the informal economy in total non-agricultural employment, the higher the share of informal sector employment (Table 2.5). Roughly speaking, this means that informal employment in the formal sector is growing with the size of the formal sector, whereas the informal sector is all the more widespread as the country is less developed. Among other features, the prevalence of tertiary activities can be emphasised: manufacturing and construction activities count for around or less than 25 per cent in Latin America (26.8 per cent), Sub-Saharan Africa (24.2 per cent), and the transition countries of Eastern Europe and Central Asia (18 per cent), and a little more than 41 per cent in Northern Africa and Western Asia, and in Southern and South-Eastern Asia. Except in Sub-Saharan Africa (51.1 per cent) and notwithstanding a widely shared belief, women do not outnumber men in the informal economy, accounting for 46.5 per cent in Latin America, 35.8 per cent in Asia, 33.2 per cent in transition countries, and only 16.4 per cent in Northern Africa and Western Asia. However, in a number of countries, the share of informal jobs in total female employment may be more significant, but not systematically: for instance, in Northern Africa, it is just the opposite where the formal jobs represent the main entry into the labour market for women. Assuming that the entire contribution of the informal economy is captured in the household institutional sector in national accounts and that the value added by the household sector is therefore – with some adjustments – a good proxy for this contribution, Table 2.6 compares the contribution of the informal economy to non-agricultural GDP with its share in non-agricultural employment. The indicator of productivity in the informal economy that results from this comparison clearly shows that, in Sub-Saharan Africa, productivity in the informal economy is – by imputation or hypothesis, if not by observation – around half (0.511) of productivity in the rest of the economy (the formal sector), a little bit higher in Western (0.550) and Central Africa (0.584), and much lower in Eastern and Southern Africa (0.407). Latin America and the Caribbean (0.484) and, above all, Southern and South-Eastern Asia (0.418) are also clearly under half, whereas at the opposite end of the scale, the other regions are above and even around two-thirds of the level of productivity

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in the rest of the economy in transition countries (0.645) and in Northern Africa (0.650) and Western Asia (0.631). Table 2.6 Contribution of the informal economy to non-agricultural GDP (most recent year) Contribution of the informal economy to non-agricultural GDP (1)

Share of the informal economy in non-agricultural employment (2)

Indicator of productivity in the informal economy (1)/(2)

Sub-Saharan Africa

38.1

74.5

0.511

Western Africa

44.8

81.5

0.550

Central Africa

46.0

78.7

0.584

Eastern Africa Southern Africa Southern and South-Eastern Asia

27.4 26.6

71.2 63.6 63.7

0.407 0.418

Latin America and Caribbean

26.5

54.7

0.484

Western Asia

30.8

48.8

0.631

Northern Africa

31.4

48.3

0.650

Central Asia

22.9

39.1

0.586

Transition countries

14.0

21.7

0.645

Source:

Based on Charmes (2019).

A reason for the higher productivity in these regions is the relative importance of informal employment in the formal sector compared with employment in the informal sector: the informal employees of the formal sector are assumed to have a productivity closer to the formal employees of the firms in which they work. Trends in contribution of the informal economy to GDP do not convey real changes as do trends in employment that directly come from the household surveys, and it is not very useful to examine such trends here. Annual variations in the contribution of the informal economy between two base years result from the hypotheses made by the national accountants that generally result in a slight and regular decrease. And comparing base years (these years when new accounts are compiled based on new data sources specially initiated for improving the exhaustiveness and the

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Origins, development, magnitude and trends of the informal economy 37 quality of the accounts) is much more difficult and often entails the comparison of two methodologies.

2.6 TWO SHORTCOMINGS OF THE RESEARCH ON INFORMALITY: PLURI-ACTIVITY AND THE ‘MISSING MIDDLE’ Pluri-activity, or multiple jobs holding, is an intrinsic characteristic of informality and of its flexibility as a concept. As to the ‘missing middle’, also called the ‘intermediary sector’, this has often been seen as a linkage or a bridge between informal and formal enterprises and it has therefore been studied independently from and outside informality as it is an invisible – or hidden – part of it. Due to the difficulties of capturing them, the literature is particularly elusive as regards these two phenomena. Concerning pluri-activity, the reason is not the lack of data collection given that most surveys on labour force or on informality collect the information, but rather the incompleteness or underestimation of the collected data, their apparent unreliability and the difficulty of their interpretation. With respect to the missing middle, the literature is defective due to lack of knowing where to look. Within the formal sector? Within the informal sector? Or somewhere in between? This is why these two dimensions of informality are part of the fuzziness of the concept and constitute unexplored or insufficiently explored research avenues. The 1993 definition of the informal sector was specified as ‘irrespective of the kind of workplace where the productive activities are carried out, the extent of fixed capital assets used, the duration of the operation of the enterprise (perennial, seasonal or casual), and its operation as a main or secondary activity of the owner’ (ILO, 1993c, p. 6, para. 6). Pluri-activity was therefore enshrined in the definition and embedded in most subsequent surveys. Measures of pluri-activity in the recent period range from 2.6 per cent in Mexico and Morocco to 46.8 per cent in Nepal and even 71.1 per cent in Madagascar (Charmes, 2019). Clearly the definition as well as the methodology and the scope of data collection have an impact on the magnitude of the phenomenon, and it is important to define what is tentatively measured under the definition of pluriactivity. With respect to the definition, several aspects must be clarified: if several activities are performed in a single economic unit, workers in this unit are not in a situation of pluri-activity. Similarly, the growing of various crops or the engagement in various types of animal husbandry, is

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not considered as pluri-activity for a farmer. And having several employers (in the case of a domestic worker, for example, or a casual worker in agriculture or in construction) cannot be included in the measure of pluri-activity. A variety of statuses in employment in a same activity, even at a same place, or a variety of occupations under the same status in employment (or not) generally characterises such a situation. For a dependent worker (employee or apprentice), working for him- or herself at times may be a recognised or unrecognised practice: what is called ‘perruque’ in French, ‘fiddling’ in English or ‘factory homers’ (with the meaning of a sneakily factory-made artefact brought back home) is to a certain extent a form of pluri-activity. A ‘homer’ is an artifact that a worker produces using company tools and materials outside normal production plans but at the workplace and during work hours (Anteby, 2003), so that the dependent paid worker is also an own-account worker. Pluri-activity therefore emerges by a simultaneity of employment statuses in a same activity/industry. Incidentally, this form of pluriactivity may be encouraged and tolerated by the employer for improving social relations within the enterprise. It is also a characteristic of apprenticeship that the master craftsman accepts that his apprentice uses raw material falls and makes artefacts for his own use to test his ability in imitating his master, generally after work hours or in the absence of the master. In the same vein, dependent workers in informal microenterprises are rarely permanent. Paid by the piece or by the task, they may be authorised by the owner to work for their own account in the workshop, when there is no order, and they will sell their production in markets near their homes, in the evenings or during the weekends. This kind of pluri-activity may be praised to the extent that it can help the young worker (apprentice or not) to gain confidence and customers together with skills on his way to becoming an own-account worker himself. In other words, it is an apprenticeship of private initiative itself. Workers engaged in ‘factory homers’ are not restricted to specific industries (such as metal and wood). They also exist in service industries and in the civil service in particular where the use of phones, of internet and other office services (such as typing, printing, etc.) can be mobilised for own-account purposes by the workers. Whereas the first type of pluri-activity can enable reaching full productivity in a context of scarce customers, this second type occurs at the expense of productivity in the main job: not only materials and services are subtracted from the main job, but also time. Italy in 1981 was the first country to systematically measure pluri-activity (Charmes, 2019), which accounted for 41 per cent of the 16 per cent reevaluation of its GDP. In the recent period, in this

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Origins, development, magnitude and trends of the informal economy 39 country, some 4.9 million workers have a second job, which is equivalent to 20 per cent of total employment in the country. Another important form of pluri-activity relates to farming. As farming is seasonal, a number of farmers engage in off-farm activities such as processing of agricultural or food products, or repairing or construction or any other handicraft. Conversely, many people living in rural areas or small towns and working in non-agricultural activities (such as civil servants, teachers, etc.) may also cultivate the land, while farmers who have migrated to cities may have kept some plots of land in a rural area and farming becomes their secondary activity. And in transition countries the family gardens are a deep-rooted tradition. The impact of secondary activities on the structure and characteristics of non-agricultural employment can be huge. We have shown (Charmes, 2019) that in Burkina Faso (in the late 1980s to early 1990s), non-agricultural main jobs were mostly urban, tertiary and masculine, but become mostly rural, manufacturing and feminine when secondary activities were taken into account, because many women occupied in agriculture were also involved in the processing of agricultural and food products. Pluri-activity can be interpreted as a sign of time-related underemployment (in the case of farmers) or income-related underemployment (where the income from the main job is not enough to earn a living – civil servants in some contexts) or overemployment (where the worker is engaged in so many activities that the normal hours of work are exceeded, without guaranteeing a sufficient income). The high variability of pluri-activity rates therefore depends on the wording of the related questions in the surveys. Can it be interpreted as if the secondary activity is illegal because the person is hired on a full-time basis by the employer (civil servants or regular paid employees)? Is the information collected as if the secondary activity is performed simultaneously or consecutively, or within a reference period of a week (so that the individual is supposed to be able to split his/her time into various activities) or within a longer reference period (a year, for example, in the case of farmers)? The ‘missing middle’ forms another black hole within the literature on the informal economy. It refers to the firm size distribution. Diversified economies generally benefit from a consequently varied – if not large – number of small and medium-sized enterprises (SMEs) that satisfy the population’s needs as well as providing the large firms with intermediate goods and inputs through sub-contracting arrangements. They significantly contribute to the GDP and the level of employment in these countries. In developing countries, the SMEs are very few and the number of jobs they create is very low: the ‘U’ curve of employment distribution by size of the firm in developing countries highlights the dual

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polarisation of jobs around the microenterprises of the informal sector on the one hand, and the large firms of the formal sector on the other hand; the missing middle in between is striking. The small number of SMEs seems to belie the continuum between informality and formality and to take for granted the absence of potential for growth in the informal sector. Recent research on these topics has focused on finance by assessing that SMEs are not missing because they would not be profitable, but because finance is not reaching them in an effective way: microfinance is not the proper scale, while banks and financial institutions are averse to lending to small-scale firms such that meso-finance has not found its place between micro-loans and larger commercial lending. By focusing on the few small and medium-sized firms that could be identified, research therefore looked at a very specific segment of the formal sector, disregarding the hidden small and medium forms of enterprises in the informal sector that remain invisible. However, the attention on the start-ups or the ‘gazelles’ of the intermediate sector misses the point, given that these firms have in a sense succeeded and are not a good example for identifying the obstacles to enterprise growth. To understand the challenges at stake, it is necessary to go back to the early discussions about dualism, continuum and the informal sector. Among various options offering distinction of several sub-sectors in the informal sector (for instance, Nihan and Jourdain, 1978, who referred to a ‘modern’ informal sector), or invalidating such attempts as arbitrary against the notion of continuity (Breman, 1976), Steel and Takagi (1983) suggested a third, intermediate sector between the modern and the informal sectors in order ‘to analyse the consequences of replacing the dichotomized model by a closer approximation of the continuum […] and (specifically) to analyse the implications of policies to promote Small Scale Enterprises’ (p. 424). Since then the presence of the intermediate sector has given rise to analyses by many authors, such as Page and Steel (1986), and Mead and Liedholm (1998). More recently Grimm et al. (2012) came back to Nihan’s idea for refining the sector by distinguishing, among the informal sector units surveyed in seven capital cities of West Africa, the successful ‘top performers’, and the not yet but potentially successful ‘constrained gazelles’ remaining hidden inside the amorphous group of ‘survival entrepreneurs’ in order to pursue a significant improvement of targeting policies and ensuring the effectiveness of interventions in the informal sector. Whereas the top performers hardly reach 1 per cent of the overall number of informal economic units, the ‘constrained gazelles’ range from 19 per cent in Togo to 34 per cent in Côte d’Ivoire. That said, it is far

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Origins, development, magnitude and trends of the informal economy 41 from certain that the exercise has properly identified all the potentially growth-oriented informal enterprises. However, the invisibility of the intermediate sector comes from the assimilation of informal economic units to autonomous units. The main and unique sources of measurement of the intermediate sector or of the ‘missing middle’ are the establishment censuses that occur through a door-to-door enumeration of all locations where an economic activity is performed. Although a usual question of such censuses comprises identifying the subsidiaries of the surveyed enterprise, either the responses are not reliable, or the question is rarely exploited, so that it is generally impossible to reconstitute the enterprise on the basis of all its subsidiaries. From the 1981 national establishment census of Tunisia, a listing of establishment by names was compiled, which allowed for comparing the questionnaires of all homonyms or quasi-homonyms and reconstituting enterprises with several subsidiaries. As we have shown for Tunisia at the beginning of the 1980s (Charmes, 1985), the ‘missing middle’ – that is, small firms employing 10 to 49 permanent workers and comprising several establishments employing fewer than ten permanent employees – represented an intermediate sector amounting to 21 per cent of the total number of jobs. The 10 workers threshold was a must-not-exceed barrier, in fact a non-written indicator for tax inspectors, for the informal microentrepreneurs. Logically and understandably, for a performing microenterprise, it is easier to grow by increasing the number of establishments rather than closing a small one and opening a larger one, because it is important not to move for the sake of keeping clients and also because it is easier to manage several small units than a larger one where the owner does not have the management skills and capacities; moreover, remaining hidden may be essential due to the inability to deal with administrative authorities. In other words, growth of microenterprises operates gradually by multiplying the number of small establishments, either in the same activity (horizontal growth) in the vicinity of the initial establishment and later on in other areas, or in other activities (diversification or integration of upstream and downstream activities in the value chain): these are all strategies that could be observed in the analysis. Grimm’s constrained gazelles were probably part of this missing middle; maybe they were not so constrained as they appeared, but certainly in need of adapted measures for initiating their transition to the formal sector. To sum up this section, pluri-activity and the ‘missing middle’ or growth strategy of informal microentrepreneurs are two dimensions of the research on informality that constitute not only shortcomings but also

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pitfalls, and are therefore still challenging for researchers in a domain already well ploughed.

2.7 CONCLUSION Although it has been criticised, the fuzziness of the informality concept has been an asset in terms of opening various directions for research, many of which await further exploration. Ongoing confusion with shadow or underground or illegal activity is still widespread, the reason for a continuing extensive use of the concept as a synonym for illegality being the price of its success. A major difference between the concepts, though, is that the informal economy can be measured directly and compared with other macroeconomic magnitudes, whereas the shadow economy results from economic modelling and at some stage needs to lean on more robust estimates of the phenomenon.

NOTES 1.

2.

The ICLS is in charge of discussing and adopting recommendations, resolutions and guidelines concerning the concepts and data collection methods of labour force, employment, underemployment and unemployment to be applied at international level. Founded in 1997, WIEGO (Women in Informal Employment: Globalizing and Organizing) is an international network of membership-based organisations, activists, practitioners from development agencies, researchers and statisticians who focus on securing livelihoods for the working poor, especially women, in the informal economy. It aims at creating change by building capacity among informal worker organisations, expanding the knowledge base, and influencing local, national and international policies (see Chapters 10 to 12 in this Handbook).

REFERENCES Anteby, Michel (2003), ‘La “perruque” en usine: approche d’une pratique marginale, illégale et fuyante’, Sociologie du travail, 45 (4), 453–471. Breman, J. (1976), ‘A dualistic labour system? A critique of the “informal sector” concept: II: A fragmented labour market’, Economic and Political Weekly, 11 (49) (4 December), 1905–1908. Charmes, Jacques (1985), Place et rôle du secteur non structuré dans la planification du développement et les politiques d’emploi en Tunisie, Rapport pour une mission officielle de la Banque Mondiale, in World Bank, Tunisia. Industrial Employment, Report no. 5564, TUN, June, working paper no. 5. Charmes, Jacques (1987), ‘Débat actuel sur le secteur informel’, Revue Tiers Monde, 28 (112), 855–875.

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Origins, development, magnitude and trends of the informal economy 43 Charmes, Jacques (2013), Informal Sector, Informal Employment and National Accounts, African Group on Employment and Informal Sector (AGEIS), Yaoundé, Cameroon, 29 April–3 May. Charmes, Jacques (2016), ‘The informal economy: definitions, size, contribution and main characteristics’, in Erika Kraemer-Mbula and Sacha Wunsch-Vincent (eds), The Informal Economy in Developing Nations: Hidden Engine of Innovation? Cambridge: Cambridge University Press, WIPO, pp. 13–44. Charmes, Jacques (2019), Dimensions of Resilience in Developing Countries: Informality, Solidarities, Unpaid Care Work, Basel, Switzerland: Springer Nature. Eurostat (2012), ‘SNA Eurostat tabular approach types of non-exhaustiveness’, accessed 28 May 2020 via https://ec.europa.eu/eurostat/statistics-explained/index.php?title= File:SNA_Eurostat_tabular_approach_types_of_non-exhaustiveness,_2012.PNG&oldid= 78699 Eurostat (2014), Essential SNA: Building the Basics, Luxembourg: Publications Office of the European Union. Fields, Gary (1990), ‘Labour market modelling and the urban informal sector: theory and evidence’, in David Turnham, Bernard Salomé and Antoine Schwartz (eds), The Informal Sector Revisited, Paris: OECD Development Centre Seminars, pp. 53–79. Grimm, Michael, Knorringa, Peter, and Lay, Jann (2012), Constrained Gazelles: High Potentials in West Africa’s Informal Economy, Washington, DC: World Bank. Hart, Keith (1973), ‘Informal income opportunities and urban employment in Ghana’, Journal of Modern African Studies, 11 (1), 61–89. Hugon, Philippe (1980), ‘Dualisme sectoriel ou soumission des formes de production au capital. Peut-on dépasser le débat?’, Revue Tiers Monde, 21 (82), 235–259. ILO (1972), Employment, Incomes and Equality: A Strategy for Increasing Productive Employment in Kenya, Geneva: ILO. ILO (1993a), Statistics of Employment in the Informal Sector, Report for the 15th International Conference of Labour Statisticians, Geneva, 19–28 January. ILO (1993b), Report of the Conference, Report of the 15th International Conference of Labour Statisticians, Geneva, 19–28 January. ILO (1993c), Resolution concerning Statistics of Employment in the Informal Sector, adopted by the 15th International Conference of Labour Statisticians, January, accessed 9 February 2020 at http://www.ilo.org/wcmsp5/groups/public/—dgreports/—stat/ documents/normativeinstrument/wcms_087484.pdf ILO (2003a), Report 1, General Report, 17th International Conference of Labour Statisticians, Geneva, 24 November – 3 December. ILO (2003b), Guidelines concerning a Statistical Definition of Informal Employment, adopted by the 17th International Conference of Labour Statisticians, Geneva, November, accessed 9 February 2020 at http://www.ilo.org/wcmsp5/groups/public/— dgreports/—stat/documents/normativeinstrument/wcms_087622.pdf ILO (2013), Measuring Informality: A Statistical Manual on the Informal Sector and Informal Employment, Geneva: ILO Department of Statistics. ILO (2015), Recommendation 204 – Recommendation on the Transition from the Informal to the Formal Economy, adopted by the Conference at its 104th session, Geneva, 12 June. ILO (2018), Women and Men in the Informal Economy: A Statistical Picture (3rd edn), Geneva: ILO Employment Sector. Jütting, J.P., and de Laiglesia, J.R. (eds) (2009), Is Informal Normal? Towards More and Better Jobs in Developing Countries, Paris: An OECD Development Centre Perspective. Lewis, W. Arthur (1954), ‘Economic development with unlimited supplies of labour’, Manchester School of Economic and Social Studies, 22 (2), May, 139–191.

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Mead, D.C., and Liedholm, C. (1998), ‘The dynamics of micro and small enterprises in developing countries’, World Development, 26 (1), 61–74. Nihan, G., and Jourdain, R. (1978), ‘The modern informal sector in Nouakchott’, International Labour Review, 117 (6), 709–719. OECD (2002), Measuring the Non-Observed Economy: A Handbook, Paris: OECD, IMF, ILO. Page, John, and Steel, William (1986), Le développement des petites entreprises: questions économiques tirées du contexte africain, Washington, DC: World Bank. Peattie, Lisa (1987), ‘An idea in good currency and how it grew: the informal sector’, World Development, 15 (7), July, 851–860. Perry, G., Maloney, W.F., Arias, O.S., Fajnzylber, P., Mason, A.D., and SaavedraChanduvi, J. (2007), Informality, Exit and Exclusion, Washington, DC: World Bank Latin American and Caribbean Studies. SNA (1993), System of National Accounts, New York: Commission of the European Communities, IMF, OECD, UN, WB. SNA (2008), System of National Accounts, New York: Commission of the European Communities, IMF, OECD, UN, WB. Steel, William F., and Takagi, Yasuoki (1983), ‘Small enterprise development and the employment-output trade-off’, World Bank Reprint Series: Number 305, with permission from Oxford Economic Papers, 35 (3), November 1983, 423–446. Todaro, Michael (1969), ‘A model of labour migration and urban unemployment in less developed countries’, American Economic Review, 59 (1), March, 138–148. Turnham, David, Salomé, Bernard, and Schwartz, Antoine (eds) (1990), The Informal Sector Revisited, Paris: OECD Development Centre Seminars. United Nations (1968), A System of National Accounts, New York: Statistical Office of the United Nations.

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3. The Non-Observed Economy vs. the Shadow Economy in the European Union: concepts, measurements methods and estimates revisited Philippe Adair

3.1 ISSUES Since the first report for the European Commission (Barthélémy et al., 1990), the European Union (hereafter EU) has initiated several studies of undeclared economic activities, which escape social regulations and tax compliance as well as statistical recording. The topic expanded throughout the late 1970s; since then, experts have loosely used various terms as synonyms to capture these activities, e.g. ‘black, concealed, hidden, informal, irregular, non-observed, shadow, subterranean, underground, unofficial, unrecorded’, etc. (Feige, 1989; Thomas, 1992 and 1999; Schneider and Enste, 2000). However, definition and scope differ among scholars, as do the magnitude and trends according to measurement methods. The path towards a tractable taxonomy remains work in progress, although major steps have been achieved in the past decades. The ILO provided guidelines for statistics on the informal sector in 1993 and enlarged the scope towards informal employment in 2002, both concepts becoming part of Measuring Informality: A Statistical Manual (ILO, 2013). Alongside the OECD and the IMF, the ILO co-authored the Handbook for Measurement of the Non-Observed Economy (OECD, 2002), which coined the term Non-Observed Economy (hereafter NOE) from the United Nations System of National Accounts (SNA) perspective. The United Nations Economic Commission for Europe launched two surveys on national practices regarding the NOE in national accounts (UNECE, 2003, 2008). The SNA was revised in 2008; the revision was transposed into the European System of Accounts (ESA) in 2010 and the Eurostat national accounts update includes some components of the NOE in 2014. 45

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Meanwhile, Schneider and Williams (2013), Schneider (2015) and Schneider et al. (2015) provided extensive updates of the Shadow Economy (hereafter SE) estimates based upon a calibrated structural model (DYMIMIC, dynamic multiple indicators–multiple causes), while other scholars used Dynamic General Equilibrium (DGE) models that reached similar magnitude and trends of the SE (Elgin and Schneider, 2016). National accountants (Ven, 2017) and Feige (2016) dismissed such so-called ‘black box modelling’ of the SE as inaccurate and overstated. Indeed, the topic of the Non-Observed Economy vs. the Shadow Economy is controversial. How should it be accounted for? How large or small a share of GDP does it represent in the EU countries? Are the trends declining since the 1990s? Section 3.2 of this chapter is devoted to definition and scope. The NOE is designed as a set of eight types or seven categories of activities liable to taxes that are encapsulated within five categories: illegal economy, underground economy (including two sub-categories) and the informal economy are market activities, whereas production for own final use is non-market output. Section 3.3 examines the spectrum of definitions and estimation methods, both direct and indirect. Seven different methods fall into two broad categories. The section first presents direct measurements provided by tax audits, household informal expenditure surveys and labour market surveys; special attention is paid to the cross-sectional survey issued from a unique questionnaire applied to all European countries in 2007 and repeated in 2013. Section 3.4 deals with indirect macroeconomic measurements that are drawn from discrepancies between income and expenditure on the commodity market, discrepancies on the money market and discrepancies on the labour market, as well as from non-monetary (i.e. qualitative) modelling of latent variables and multiple indicators–multiple causes (MIMIC). Section 3.5 compares the estimates of the NOE from EU national accounts with those of the SE drawn from the DYMIMIC model; it discusses the impact of some major determinants such as tax pressure and the informal workforce. Section 3.6 briefly recapitulates the strengths and weaknesses of both methods and sketches a research agenda.

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The Non-Observed Economy vs. the Shadow Economy in the EU 47

3.2 THE NON-OBSERVED ECONOMY AND THE SHADOW ECONOMY: DEFINITION AND SCOPE 3.2.1 The Components of the NOE NOE, a useful typology albeit not an analytical classification, is the outcome of an ongoing process of extensive coverage of productive activities, in order to design an exhaustive standardised definition for measuring concealed GDP. National accountants have traditionally sought to incorporate undeclared production, incomes and expenditures by reconciling income, expenditure and output estimates of GDP. According to international principles of national accounting, GDP includes all types of value added in the economy as evidenced by voluntary transactions where payments are made, including illegal and barter transactions. GDP also includes some production without transactions, such as imputed rents and household production for own use. The first and most important distinction must be drawn between market traded and non-market traded goods and services, both being included in the GDP. The second distinction concerns the compliance with legal standards: illegal activities are criminal, whereas other unobserved activities are legal. A third distinction relates to the nature of the flow: according to the value added approach of GDP, activities that produce an output are included, whereas income transfers (pilfering, theft extortion or money laundering) are not. According to the current nomenclature from Eurostat’s tabular approach, the NOE comprises five broad categories of activities, namely Underground, Illegal, Own-account, Informal and Statistical deficiencies (see Table 3.1). Underground activities (N1 + N6) are legal but deliberately concealed from public authorities to avoid (i) the payment of income tax, value added taxes, as well as social security contributions; (ii) meeting legal standards (minimum wages, maximum hours, safety or health standards, etc.); (iii) complying with administrative procedures (completing statistical questionnaires or other administrative forms). ‘Underground economy’ should not be mixed with illegal activity, as Lippert and Walker (1997) suggest. Tax evasion (i.e. non-reported income and non-issuance of receipts) is illegal, although it relates to legal activities. It should not be confused with tax avoidance (i.e. fringe benefits, legal tax planning), which is legal. Illegal activities generate goods and services forbidden by law (e.g. fencing, pimping and drug trafficking), including those that are carried out by unauthorised producers (e.g. unlicensed practice of medicine),

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Table 3.1 NOE categories and types

Observed Economy

Current nomenclature

Non-Observed Economy

Former nomenclature (Eurostat tabular approach) N1 (producers deliberately not registering)

T2 (out-of-date registers) T3 (non-deliberate unregistered units)

Underground activities

+ N6 (producers deliberately misreporting)

Registered/reported activities

T1 (non-response to surveys)

Illegal activities

N2 (producers deliberately not registering)

Own-account activities

N3 (producers not required to register)

T4 (misreporting of production) T5 (intentionally not registered) T7 (unregistered units)

N4 (legal persons not surveyed) +

Informal activities

T6 (unregistered smallscale units)

N5 (registered entrepreneurs not surveyed) Statistical deficiencies

Sources:

N7 (other statistical deficiencies)

T8 (other types of undercoverage)

UNECE (2003), Eurostat (2014).

whereas income transfers without voluntary exchange are not included. Customs data are biased and the fact that the total amount of drug trafficking remains stable whereas the phenomenon is assessed to be expanding is rather puzzling (OECD, 2009). Informal activities are conducted by unincorporated enterprises in the household sector generating market production that do not comply with labour market regulations; they are unrecorded and/or their size is below a specified threshold of staff employed (e.g. less than five). This is the very definition of the informal sector according to the ILO’s 1993 guidelines (ILO, 2013). (See Chapter 2 in this Handbook.)

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The Non-Observed Economy vs. the Shadow Economy in the EU 49 Household production for own final use is consumed or capitalised by the households themselves: own-account fixed capital formation including house building and major repairs and services of paid domestic servants. Do It Yourself (DIY) home repairs and improvements range from 1 to 3 per cent of GDP in Denmark, Sweden, Germany and the United Kingdom (OECD, 2004); a part of this is included in the GDP. Barter and in-kind exchanges between households that are unregistered and not liable to tax collection should also be included. 3.2.2 Coverage of the NOE in the EU: The Long Road to Exhaustiveness As Blades and Robert (2002) put it, non-observed does not mean non-accounted activities: national accounts do adjust for various types of NOE, thus the ratio of NOE to GDP is meaningful and should comply with the European statistical framework (Eurostat). A tentative measurement of NOE in OECD countries was set up in the 1980s as regards tax evasion and undeclared work, misappropriated in-kind incomes and production of illegal goods and services: figures amounted from 2 up to 5 per cent of GDP in the 1970s (Blades, 1982). A second survey in 2001/02 (UNECE, 2003) covered 16 European countries: 6 from the EU and 9 candidate countries, plus Croatia. The methods enhancing exhaustiveness in the national accounts capture informal and underground activities, although it may not be possible to identify and classify them separately in most EU countries, Italy being excepted. In 2005/06 a third survey (UNECE, 2008) enlarged the sample to 18 countries (17 EU Member States plus Croatia) and the new nomenclature of NOE activities applied (see Table 3.1). Neither coverage nor dates match due to a different scheduling across countries as well as to the non-binding requirement of such surveys. Countries with the largest coverage display the highest NOE magnitude; conversely, countries with the smallest coverage display the lowest NOE magnitude. A comparison between countries providing NOE estimates for the previous survey shows that trends remain stable in Belgium, whereas in other countries they decline (Bulgaria, Hungary and Latvia) or increase (Czech Republic, Italy, Lithuania and Poland). This could be due to the change in nomenclature but not necessarily to the improvement in coverage as for the complying Eastern European countries. As for Belgium, one may suspect that adjustments use the same parameters; therefore, it is no surprise that the NOE remains stable (see Table 3.2).

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/ % of GDP

4 1998

Ireland

Yes

16 1997 Yes Yes

Not stated

Not stated

Yes Yes Yes

Yes Yes Yes

Yes Yes Yes

Yes Yes Yes Yes Yes Yes

9 1998 Yes Yes Yes Yes

Hungary

Greece

Germany

France

Finland

Estonia

Denmark

Czech Rep.

Cyprus

Yes Yes

11.9

Not stated

Not stated

8.9

9.3

13.9

10.2

8 1999 Yes Yes Yes Yes Yes

Yes

T8

Croatia

T7

3.5

T6

Yes Yes Yes

T5

16 2000 Yes Yes Yes Yes Yes Yes Yes Yes

T4

3–4 1997

T3

Bulgaria

T2

Belgium

T1

7.9

% of Year GDP

Austria

Country

2001–2002 UNECE survey (9 EU and candidate countries) N1

N2

Yes

4.2

0.5

3.9

0.6

0.2

1.3

N4

N5

N6

N7

Yes Yes

Yes

1.3

0.2

1.5

0.0

1.0

0.4

0.9

0.3

1.9

Yes Yes

Yes

3.2

4.4

6.3

2.5 Yes Yes Yes Yes

Yes

Yes Yes Yes Yes Yes

N3

2000 Yes Yes Yes

2002

2000

2002

2001 Yes Yes

2002 Yes

2001 Yes

Year

2005–2006 UNECE survey (18 EU and candidate countries)

10.9 2009

6.7 2008

8.1 2009

4.6 2009

7.5 2008

3.1

3.7

6.3

3.8

2.4

% of Year N1 GDP +N6

0.8

0.4

0.2

N2

3.1

2.9

1.3

1.5

N3 +N4 +N5

2012 OECD survey (12 EU countries)

Table 3.2 Share (%) of NOE in GDP according to national accounts adjustments in early and late 2000s

3.9

0.2

0.2

0.7

3.5

N7

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3.7

6.9

0.4

18.9

12.5

16.7

Sources:

Adair (2012), Gyomai and Ven (2014), UNECE (2003, 2008), Ven (2017).

1.3 Not stated

UK

0.6

Sweden

1.3

17.7

11.2

6

Yes Yes Yes

Spain

Not stated

21.6 1998

Slovak Rep.

Slovenia

Not 1998 stated

Romania

Portugal

1 Yes Yes Yes Yes

1.2

Yes

15.7

1998

1.4 13.6

Yes

Poland

13

Yes Yes

Netherlands

Malta

Luxembourg

17.9 1998 1.2s

Lithuania

Yes

1998 Yes Yes Yes Yes

17

Latvia

1998

15

Italy

2000 Yes

2000 Yes

2002 Yes

2002 3.4

1995

2002 0.45

2000 7.2

2003 7.2

Yes

0.6

0.6

1.5

Yes

Yes

Yes

2.5

Yes Yes

Yes Yes

Yes Yes

7.8 3.9

Yes Yes

Yes Yes Yes

0.0

17.5 0.35

1.2 0.1

Yes Yes Yes Yes

0.8

2009 2.3 2005

3

10.2 2007

1.5

3.9

15.6 2009 12.1

15.4 2009 12.7

2.3 2007

17.5 2008 16.2

0.3

0.5

0.9

0.5

0.5

2.8

2.9

2.8

0.5

0.3

3.1

0.2

0.2

0.5

1.2

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In 2012, the OECD used the same nomenclature to survey 12 countries (Gyomai and Ven, 2014; Ven, 2017), out of which 6 were already included in the 2005/06 survey (UNECE, 2008). Trends decline (Austria, Czech Republic, Hungary and Poland) or increase (Belgium, Italy, Netherlands and Sweden), mostly because coverage improved. Despite the agreement of EU countries as regards compliance with the European System of Accounts (Eurostat, 2013), the adjustment process in order to include the NOE experienced slow completion. In 2014, Eurostat required that N2 be included in the GDP for 2010 and it would slightly increase the share of NOE in the GDP for most countries. However, coverage remains disparate and a few countries prove reluctant to disclosure (see Table 3A.1, in the Appendix).

3.3 MEASUREMENT METHODS AND ESTIMATES: THREE DIRECT APPROACHES Direct investigations are provided by tax audits, household expenditure surveys and labour market surveys. They are used in order to collect raw data or control the various estimates computed through indirect approaches. 3.3.1 Tax Audits Audits investigating tax compliance focus on targeted sub-samples that are not representative of the population. They cannot collect data on illegal activities. They provide point estimates rather than time series data. Indirect detection-controlled estimations are based on characteristics of potential offenders, providing both the estimates of the probability of compliance vs. violation (by means of maximum likelihood) and the proportion of violations remaining undetected (applying Bayes’ law). However, violation and detection do not prove easy to disentangle. Surveys underestimate the size of the SE (Giles, 1999; Schneider and Enste, 2000). The same comments apply to social security contributions. In this connection, administrative data and findings from labour inspectorates may be useful, but international comparisons based primarily on these sources have not taken place yet.

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The Non-Observed Economy vs. the Shadow Economy in the EU 53 3.3.2 Households’ Expenditure and Labour Market: The 2007 and 2013 Eurobarometers Sparse households’ expenditure surveys have been carried out on the relevant assumption that it is easier to collect data from the customers on the demand side than from those who provide their provisioning on the supply side. With respect to labour market surveys, the Labour Force Survey designed by Eurostat unfortunately does not address informal employment.1 However, a few questionnaire surveys were undertaken in the 1980s by statistical offices (Netherlands and Spain) and NGOs (Germany and Norway), displaying a large difference between Northern and Southern European countries (OECD, 2004). Inspired by the Rockwool Foundation methodology (see Box 3.1), the first European survey on a small stratified households sample (500–1500 individuals) in each of the 27 EU countries took place in 2007 and was repeated in 2013 including Croatia (EEC, 2007 and 2013); this sketched a benchmark analysis. Both Eurobarometers start investigating household expenditure on informal goods and services on the demand side, then turn to the participation of respondents in undeclared work (or informal employment, according to the ILO) on the supply side, ending up with opinions or attitude towards fraud; criminal activities and sub-contracting were not addressed (see Table 3.3).

BOX 3.1

THE ROCKWOOL FOUNDATION PILOT SURVEY ON UNDECLARED WORK

At the start of the millennium, comparable questionnaire surveys conducted by the Rockwool Foundation in Northern Europe found that ‘black’ hours worked are just over 1 per cent in Great Britain, 2–3 per cent in Sweden, and about 4 per cent in Denmark and Germany. Estimates seem to have slightly increased in the 1990s since the 1980s as for Denmark and Germany. Percentages of GDP when informal work is valued at the actual prices paid by purchasers are lower than when it is valued at formal prices; the former measurement seems quite realistic. On the one hand, there is a lack in coverage for non-wage payments; on the other hand, wages are valued according to average legal wages whereas a valuation according to average wages paid for informal employees would cut off the magnitude to less than half of the official figures.

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/ 1,003 1,017 1,010 1,017

Ireland

Italy

Latvia

Lithuania 500

24

1,000

510

12

1,000

Greece

Hungary

Luxembourg

17

1,510

Germany

Malta

6

1,039

France

14

17

14

12

8

12

10

11

1,004 1,026

27

15

2

–

14

Estonia

1,007

17 18

Finland

1,024

– 503

Croatia

Cyprus

Czech Rep.

1,000

Bulgaria

Denmark

1,009 1,040

Austria

Sample* Demand (%)

Belgium

2007 country

2 (R=1)

5 (R=1)

7 (R=2)

15 (R=4)

3 (R=6)

4 (R=11)

7 (R=4)

4 (R=1)

3 (R=2)

6 (R=1)

4 (R=2)

11 (R=5)

18 (R=1)

7 (R=3)

1 (R=4)

–

5 (R=6)

6 (R=1)

7 (R=7)

Undeclared work (%)

1 (NR=3)

1 (NR=1)

11 (NR=3)

17 (NR=5)

7 (NR=14)

2 (NR=25)

8 (NR=8)

3 (NR=0)

1 (NR=3)

1 (NR=3)

3 (NR=0

8 (NR=4)

2 (NR=1)

3 (NR=4)

4 (NR=3)

–

14 (NR=13)

6 (NR=0)

4 (NR=5)

Wages paid in cash (%)**

34 (NR=6)

48 (NR=1)

40 (NR=7)

61 (NR=4)

39 (NR=15)

27 (NR=14)

45 (NR=8)

47 (NR = 3)

33 (NR=6)

47 (NR=2)

37 (NR = 2)

38 (NR=6)

65 (NR = 1)

40 (NR=7)

35 (NR=8)

–

39 (NR=20)

56 (NR = 2)

36 (NR=13)

Knows an undeclared worker (%)

Malta

Luxembourg

Lithuania

Latvia

Italy

Ireland

Hungary

Greece

Germany

France

Finland

Estonia

Denmark

Czech Rep.

Cyprus

Croatia

Bulgaria

Belgium

Austria

2013 country

500

510

1,027

1,006

1,016

1,003

1,033

1,000

1,499

1,027

1,003

1,003

1,004

1,000

505

1,000

1,018

1,040

1,022

23

14

14

28

12

10

11

30

7

9

11

12

23

19

16

17

16

15

14

Sample* Demand (%)

1 (NR=3)

5 (NR=1)

8 (NR=3)

11 (NR=4)

2 (NR=5)

2 (NR=4)

4 (NR=2)

3 (NR=4)

2 (NR=4)

5 (NR=6)

3 (NR=3)

11 (NR=4)

9 (NR=0)

4 (NR=3)

2 (NR=1)

7 (NR=4)

5 (NR=2)

4 (NR=1)

5 (NR=5)

Undeclared work (%)

0 (NR=5)

3 (NR=2)

6 (NR=4)

11 (NR=6)

2 (NR=8)

2 (NR=5)

6 (NR=9)

7 (NR=5)

1 (NR=3)

1 (NR=1)

1 (NR=1)

5 (NR=4)

2 (NR=2)

5 (NR=2)

2 (NR=5)

8 (NR=6)

6 (NR=7)

4 (NR=1)

2 (NR=8)

Wages paid in cash (%)**

Table 3.3 Expenditure on non-declared goods and services (demand) and undeclared work (supply) in the EU (2007 and 2013)

20 (NR=9)

35 (NR=1)

35 (NR=6)

46 (NR=4)

37 (NR=10)

25 (NR=6)

29 (NR=9)

54 (NR=4)

27 (NR=6)

38 (NR=2)

30 (NR=2)

33 (NR=3)

59 (NR=1)

33 (NR=5)

39 (NR=3)

41 (NR=5)

33 (NR=9)

40 (NR=1)

31 (NR=10)

Knows an undeclared worker (%)

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Spain

Sweden

UK 11

9

23

6

17

15

5 (R=3)

2 (R=3)

10 (R=1)

3 (R=2)

5 (R=3)

6 (R=2)

4 (R=7)

3 (R=4)

5 (R=4)

13 (R=1)

2 (NR=11)

Sources:

Our compilation (EEC, 2007 and 2013).

3 (NR=6)

1 (NR=2)

3 (NR=0)

5 (NR= 9)

5 (NR=3)

7 (NR=11)

23 (NR=31)

4 (NR=10)

11 (NR=5)

Notes: Figures above or equal to EU 27 average in italics. NR: Non-response (refusal and don’t know). * Population aged 15+. ** Sub-sample of dependent employees = 11,066.

26,659

1,037

Slovenia

EU 27

1,075

Slovakia

11

7

1,002 1,004

Portugal

Romania

8

1,000

27

1,001

Netherlands

Poland

66 (NR=1)

38 (NR=7)

24 (NR=2)

56 (NR=3)

27 (NR=7)

52 (NR=4)

39 (NR=5)

29 (NR=10)

25 (NR=10)

45 (NR=5)

Netherlands

1,019

EU 27

UK 26,563

1,306

1,006

1,003

Spain Sweden

1,017

1,000

1,027

1,015

1,000

Slovenia

Slovakia

Romania

Portugal

Poland

11

8

16

8

22

17

10

10

5

29

4 (NR=3)

3 (NR=0)

7 (NR=0)

5 (NR=2)

7 (NR=3)

5 (NR=3)

3 (NR=9)

2 (NR=3)

3 (NR=3)

11 (NR=1)

3 (NR=1)

3 (NR=4)

2 (NR=2)

1 (NR=0)

5 (NR=4)

4 (NR=5)

7 (NR=5)

7 (NR=20)

3 (NR=4)

5 (NR=5)

55 (NR=2)

32 (NR=5)

15 (NR=1)

39 (NR=1)

33 (NR=4)

48 (NR=5)

36 (NR=6)

20 (NR=13)

28 (NR=7)

28 (NR=5)

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The demand for non-declared goods and above all for services comes from rather young (below 40 years old) and well-educated customers. Supply is provided by local networks (neighbours, family and friends) in two cases out of five and by self-employed and firms in one case out of five. Lower prices as compared to official provisioning is the main drive in two-thirds of cases, but purchase is not related to prices in one case out of four and this should be explained. On the demand side, purchasers of non-declared goods and services are usually in higher numbers than those who perform undeclared work, and there is a weak correlation between these two categories. Undeclared work is paid for in two cases out of three; it is performed by males (twice as many as females), respectively on a regular or periodical basis in half and one-third of cases, at most during five weeks per year on average in households services, construction and manufacturing industries. Cash payments for (‘envelope’) wages are widespread in Eastern Europe, enabling businesses to save on tax and social security contributions; there is a high rate of non-response for most countries, and the sub-sample is not representative. Undeclared work or cash payments are not widespread as compared with the share of interviewees who know an undeclared worker; one may suspect that undeclared work is understated in most countries wherein the rate of non-response tops the EU 27 average. It is rather unfortunate that Kayaoglu and Williams (2017) focus on dependent employees (envelope wages), who account for only a fraction of the informal employment issue they address. Attitude (morale) towards fraud is computed with an unweighted score scaling from 1 (no tolerance) up to 10 (tolerance without restriction), as regards five questions related to fraud on social security (households and firms), non-tax reporting, fraud on social benefits and fraud in public transportation. These polls provide biased estimates in as much as respondents may understate their job status. Also, it is unlikely that such surveys will be frequently implemented and provide time series.

3.4 MEASUREMENT METHODS AND ESTIMATES: INDIRECT APPROACHES Indirect macroeconomic measurements are drawn from discrepancies between income and expenditure on the commodity market, discrepancies on the money market and discrepancies on the labour market, as well

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The Non-Observed Economy vs. the Shadow Economy in the EU 57 as from qualitative non-monetary modelling of latent variables and multiple indicators–multiple causes models using monetary calibration (DYMIMIC). 3.4.1 Discrepancies between Income and Expenditure on the Market for Goods and Services By definition, the income approach of GDP should reach the same outcome as the expenditure approach; hence, any discrepancy, such as expenditure being larger than income, indicates the existence of a ‘hidden’ economy (excluding criminal activities). Several European countries have investigated the income–expenditure gap; among these the UK has documented this gap, due to tax evasion, relying on household living standards surveys. According to restricted or extensive assumptions, the range of estimates varies from less than 3 per cent up to over 10 per cent of GDP. This method covers only the ‘underground economy’ NOE type. Dilnot and Morris (1981) use a disaggregated analysis that examines both the income and expenditure behaviours of a sample of 1000 households drawn from the UK’s Family Expenditure Survey (FES) and then extend the analysis to the whole FES sample of 7200 households in order to track ‘black’ economic activity (including tax evasion and social security fraud). After correcting the data for deficiencies and relying on a sample of households whose expenditure exceeds 1.15 of their reported income, the estimate ranges between 2.3 per cent and 3 per cent of GDP (1977). The main drawback is the assumption that the FES is a reliable source of information, despite the fact that the rate of non-response is 30 per cent; actually, the ‘black economy’ is underrated, because selfemployment is underreported in the FES. Pissarides and Weber (1989) use a food consumption function to estimate the size of the black economy from the FES, assuming that only self-employed underreport their income. The estimates for underreporting amount to 5.5 per cent of GDP (1982). This method has several shortcomings. Some employees may engage in self-employment and conceal their income. The relevant assumption that food expenditure is more accurately recorded than other items of expenditure overlooks the fact that luxury items of expenditures (including food) may be underreported. Savings are not taken into account. Preferences are assumed to be identical, whatever the households’ characteristics may be. Lyssiotou et al. (2004) use a single equation for a complete demand system encompassing six categories of non-durable goods. It is based on cross-sectional individual household data from the FES, and includes

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both wages and self-employment incomes. It avoids the confusion between preference heterogeneity and income effects, and takes into account the household characteristics to calibrate the size of the black economy in the UK amounting to 10.6 per cent of GDP (1989). The model does not reach a complete demand system; pensioners and single parents are excluded from the sample; the preferences of self-employed are rather peculiar. Estimates based on discrepancies between income and expenditure, whatever the methods used, capture only a part of the NOE and face several shortcomings. On the one hand, statistical offices may be prone to political influence; there are incentives for higher estimates when the country is a large tax burden and lower estimates when experiencing financial assistance (Tanzi, 1999). Measurement is inadequate because income and expenditure are not estimated according to independent sources (Barthélémy, 1988; Feige, 1989; Thomas, 1992). On the other hand, missing income and non-reported revenue may not be linked. In addition, tax evaded income may be overestimated due to the fact that the level of earnings of the informal workers could be too low for them to pay taxes (Bhattacharyya, 1999). 3.4.2 Discrepancies regarding Monetary Aggregates on the Money Market Monetary measures can be classified into two categories: the currency ratio/demand method and the transactions method. 3.4.2.1 Currency ratio/demand method The method pioneered by Gutmann (1985) does not use any statistical analysis, but simply disentangles the money supply, M1, into two components, currency and demand deposits, and examines their movement as well as the ratio of currency to deposits over the period 1937–76. He assumes that non-declared transactions are paid in cash, and that the velocity of circulation is the same in both the formal and ‘underground’ economies; he takes into account the variation of the cash/deposits (C/D) ratio according to the basic period (or year) considered as an indicator of the ‘underground’ economy. The currency demand approach pioneered by Cagan (1958) is advocated by Tanzi (1982). Tanzi assumes that economic agents involve themselves in ‘underground’ activities in order to escape taxes; thus, an estimate of the tax elasticity of currency demand can be used to calculate the stock of currency held in the underground economy. Provided that the income velocity of money in the underground economy is the same as

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The Non-Observed Economy vs. the Shadow Economy in the EU 59 that in the legal economy, the size of the former can be approximated by multiplying the income velocity of money in the legal economy by the stock of money in the underground economy. Tanzi (1982) runs a simple econometric equation on US time series data for the period 1929–76. The dependent variable is the ratio of currency to deposits, using M2 as the measure of money supply. Other independent variables are per capita income, the ratio of total wages and salaries in personal income, and the rate of interest on time deposits as a measure of the opportunity cost of holding cash. The currency ratio is negatively related to per capita income, whereas the ratio of total wages and salaries (paid in cash) is positively related to the currency ratio. The connection between changes in the level of income taxes and changes in the C/M2 ratio is imputed to the ‘underground’ economy. The currency demand approach has been criticised on three grounds (Thomas, 1999). A base year or period is needed, but the assumption of a period during which there was no informal activity is absurd. The assumption that the velocity of circulation is the same in both the official and informal economies requires some explanation. The assumption that transactions are carried out in cash only is unrealistic. Hence, Tanzi’s econometric model is mis-specified and proves unstable. 3.4.2.2 Transactions method The monetary transactions method developed by Feige (1989) takes Fisher’s equation of exchange as a starting point and assumes that transactions are paid in cash as well as in cheques; he attributes the underground economy to the discrepancy between independent estimates of MV and PT,2 which includes both formal and informal transactions. Following the Cambridge equation of exchange, total income that corresponds to transactions is computed from recorded and unrecorded income: in order to estimate unrecorded income, Feige assumes that there was a period (i.e. a benchmark year) during which all income was properly recorded. If the assumption that non-declared transactions are not exclusively paid in cash seems realistic, it may also overestimate the extent of these transactions, since cheques are also used to carry out transfers without relationship with non-declared transactions. Feige’s method has been criticised because its estimates are sensitive to the choice of initial period (Tanzi, 1982) and lack empirical validity (Thomas, 1992). All monetary approaches provide, in absolute value, a large spectrum of estimates in terms of GDP: Feige’s ratio is increasingly higher than Gutmann’s ratio, which in turn is higher than Tanzi’s ratio (Barthélémy,

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1988). In terms of logarithms, they seem to show either a growing trend (currency demand) or cycles that converge or diverge according to countries (cash ratio, transactions) (Schneider and Enste, 2000). Despite several restrictions they point out, Schneider and Enste (2000), Schneider (2015), and Hassan and Schneider (2016) use extensively the Cagan–Tanzi currency demand approach to calibrate the DYMIMIC model. The main reason seems to be that, due to the availability of time series data, estimates provide trends and enable cross-section comparisons. However, the model should not apply to short-run data: according to Ahumada et al. (2008), in order to avoid the problem of initial condition (or benchmark), the model should only be designed and computed to account for long-run trends. All monetary models eschew economic theory as regards behaviour on the money market, especially preferences relating to the various ways whereby currency is used and kept (species, current accounts), which can vary according to the institutional framework and periods considered. Savings or currency hoarding are not taken into account (Thomas, 1999), possibly causing an overestimation or, in case of previous hoarding, causing an underestimation of the hidden economy; Bhattacharyya (1999) assumes that these two opposite forces cancel themselves but provides no evidence. According to Giles (1999), monetary approaches overestimate the size of the SE. 3.4.3 Discrepancies on the Labour Market Contini (1981) examines the growth of the ‘irregular labour market’ (i.e. jobs outside the social security system) in Italy during the 1960s and 1970s, which is due to three factors: (i) the labour supply is driven by the preference of workers for flexibility in their allocation of time as well as the avoidance of unemployment; (ii) the labour demand from small-scale enterprises for workers prepared to earn less than on the regular labour market; and (iii) tax evasion by employers in the form of the non-payment of payroll taxes and indirect charges (50–70 per cent to the basic pay) given the existence of strict job protection legislation. Contini’s estimates of the size of the irregular labour force reach 16–18 per cent of the total labour force in the late 1970s. Given the fact that high levels of unemployment seem to be in pace with the underground economy, the deficiency within employment estimates or the so-called ‘implicit labour supply’ fills the gap between official labour force participation and the effective labour force participation measured through various investigations, surveys and computations. The official labour force is thus raised by a coefficient resulting from the conversion

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The Non-Observed Economy vs. the Shadow Economy in the EU 61 of the multiple job holding and non-declared activity into full-time employment. Then, it is multiplied by the value added per unit of employment (VAPUE) in order to compute the missing output (see Charmes, 2019 for a detailed presentation). Italy carried out the calculation of implicit labour supply, which reached 17.7 per cent of GDP in 1987 and was officially included within national accounts. Williams et al. (2017) applied this Labour Input Method (LIM) to 27 EU countries (excluding Malta) based on data of the labour force surveys and business data sets as for the year 2013. Weighted estimates are that 9.3 per cent of total labour input in the private sector is undeclared, and undeclared work constitutes 14.3 per cent of GVA in the private sector (see Table 3.4). Unfortunately, there is no explicit assumption regarding the size of businesses and labour productivity: there are loopholes in the coverage of business data bases. Table 3.4 Share (%) of Undeclared Work and GVA according to the Labour Input Method in the EU (2013) Country

UDW GVA

Country UDW

GVA

Country

Austria

8.7 10

Estonia

21.3

Italy

14.8

UDW

GVA

Country UDW

GVA

12.9

17.2

Romania 18.9

26.2

Belgium

11.9 15.4

Finland

9.3

11.8

Latvia

18.3

22.3

Slovakia

13.4

16.4

Bulgaria

17.8 19.2

France

8.8

11

Lithuania

19.8

25.2

Slovenia

13.2

14.7

Croatia

14.2 17.1

Germany

4.4

7.1

Luxembourg 5.4

9.1

8.8

17.9

Cyprus

13.8 17.9

Greece

12.4

22.5

Netherlands 5.2

11.9

Sweden

7.7

9.7

Czech Rep.

7.7 16.9

Hungary

17.3

23.2

Poland

20.8

27.3

UK

2.7

9.5

Denmark

9.6 14.3

Ireland

13

Portugal

6.6

15.5

EU average

11.6

16.43

Notes: sector. Source:

8.6

Spain

UDW stands for Undeclared Work; GVA stands for Gross Value Added. Figures are those of the private

Williams et al. (2017).

If one approximates labour productivity with the GVA/UDW ratio, it follows that average ratio (roughly 1.4) is surprisingly high: 11 countries stand above average (among these are 2 transition countries) and 16 countries are below average (among these are 9 transition countries) without any clear pattern and correlation with GDP per capita. Such a method faces two major drawbacks. On the one hand, the official definition of the labour force (according to the ILO) does not include either children or retired people in the informal work force,

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which will then be underestimated. On the other hand, the crucial assumption, which overestimates adjusted GDP, is that the VAPUE in the underground economy is the same as in the official economy. This may be plausible for informal workers employed by a formal firm, who are a minor share of overall informality (i.e. informal employment outside the informal sector), whereas the largest share of informality is made up of employees in micro-enterprises and self-employed in the informal sector (see Charmes, 2019), workers who have less human capital and/or equipment, thus yielding lower productivity (Tanzi, 1999). In contrast, Giles (1999) and Schneider and Enste (2000) contend that labour force participation data are biased and underestimate the size of the informal economy. 3.4.4 Estimates from Real and Monetary Modelling Most macroeconomic methods are based on one indicator – currency demand, electricity consumption or unreported labour activity – in order to capture the overall NOE; thus, the estimate takes into account only one among its several components. 3.4.4.1 Electricity consumption methods The rationale for electricity consumption assumes it is a good proxy for both official and unofficial economic activities, and the methods provide time series data that have been used by Eastern European countries before joining the EU. Kaufmann and Kaliberda (1996) derive an estimate of unrecorded GDP from the difference between the growth of official GDP and the growth of the overall use of electricity. Lackó (2000) takes into account the households’ activities, which include DIY and home production, thus allowing a broader scope and providing higher estimates. Unfortunately, the size of the SE is exogenous and remains unexplained. Both methods can be criticised on two points: (i) not all unofficial activities require extra electricity consumption (e.g. street trading); and (ii) variations in the elasticity of electricity/GDP do occur and are due to factors that may not be related to unofficial activities of the households and the firms. Although it displays a flatter trend than monetary methods, electricity consumption method overstates the NOE in comparison with national accounts estimates (UNECE, 2003). However, strangely enough, Medina and Schneider (2017) use light intensity as a calibration method for SE DYMIMIC estimates.

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The Non-Observed Economy vs. the Shadow Economy in the EU 63 3.4.4.2 Dynamic multiple indicators–multiple causes (DYMIMIC) DYMIMIC is a special type of structural equation modelling based on the statistical theory of latent (i.e. unobserved) variables that has several advantages. First, it relies on multiple data sources to capture as many components of informal economic activity. Second, it can determine both the size and development of shadow economic activity over time and enables the ranking of various countries. The model consists of two parts. The measurement model links the latent variable – the size of the SE – to observed indicators, whereas the structural model specifies the causal relationships among the latent variables. The quantitative variables relate to institutional constraints (actual tax burden and share of public employment in total labour force) and real GDP growth, as well as to the labour market (male participation rate, rate of unemployment and hours worked). The perceived tax burden and attitude towards fraud are the qualitative variables (Frey and WeckHannemann, 1984). This method has been applied to a repeated cross-sectional analysis of 17 OECD countries (1960, 1965, 1970, 1975, 1978), in order to compare and to rank European countries according to the magnitude of the SE; relative values used for rankings are converted into absolute values through a calibration procedure. Weekly hours worked appears to be the most important indicator. There is also evidence of some non-reciprocal causality (Granger, 1969) from measured activity to shadow activity. However, the estimators are very unstable according to the periods considered, so that the same explanatory variables can account for upturns as well as slowdowns (Helberger and Knepel, 1988). This approach faces several criticisms. The share of public employment is a very rough proxy of regulation constraints, whereas the number of regulations would be more accurate; building a single index of tax morality from US data is disputable; weekly working hours in the manufacturing industries is not a representative and comparable indicator for the countries’ sample. Schneider (2009b) acknowledges that MIMIC remains an exploratory method and has still to become an explanatory method. Giles (1999) advocates this method in so far as the informal economy follows the peaks and troughs of the business cycle. However, at least as regards the calibration model (i.e. currency demand), criticisms of monetary aggregates apply, as do econometric issues regarding the calibration procedure (Breusch, 2005). In this respect, Dybka et al. (2017) design a hybrid model in order to avoid ad hoc identifying assumptions including external benchmarking.

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3.5 THE EU SHADOW ECONOMY 3.5.1 Comparing EU Countries: A DYMIMIC–Currency Demand Approach Schneider (2009a) designs a dynamic MIMIC (DYMIMIC) model with frequent updates (Schneider et al., 2015; Elgin and Schneider, 2016; Medina and Schneider, 2017). Its purpose is to derive an index from qualitative and quantitative causal variables or factors, which is then combined through a benchmark procedure with a currency demand equation in order to calibrate (i.e. transforming ordinal into cardinal values in terms of per cent of GDP) the size and development of the SE (see Schneider and Williams, 2013). We first present the causal variables; then we discuss the trends concerning European countries. Elgin and Schneider (2016) point out that the estimates obtained using the model over a large sample imply that all the seven causal variables of shadow economies have similar effects in magnitude. Between 1999 and 2010 unemployment and self-employment on average have the largest impacts, followed by tax morale, growth of GDP per capita, business freedom, indirect taxes and personal income tax. Table 3.5 allows us to examine the magnitude of the SE relative to GDP according to country ranking, as well as the trends over a 15-year period (1999–2013). Unemployment sheds little light on the SE, and Enste (2010) provides unconvincing results in this connection. Although poorer countries as regards GDP per capita, in Southern and Eastern Europe, experience inefficient regulations and have the largest share of the SE, it does not explain why some richer countries (Denmark and Belgium) reach a fairly high size in the NOE. The size of the SE grows moving from West to East and also from North to South, although without displaying a clear pattern. Dividing the EU 28 into quartiles, the average size over the period ranges from below 10 per cent (Austria) up to 17 per cent (Ireland) as for the first quartile, beyond 24 per cent (Spain) as for the second quartile, beyond to 27 per cent (Estonia) as for the third quartile and beyond 33 per cent (Bulgaria) as for the last quartile. Ranking remains stable over time.3 With respect to the EU average, the size of the SE fluctuates but declined throughout the 2000s, although experiencing an upturn over 2008–10 (see also Schneider, 2015). Actually, monetary time series may fluctuate much more than non-monetary variables. This declining trend may be explained thanks to improving regulations and enforcement policies, as well as tax cuts (Schneider, 2009b).

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/ 18.4 18.9 22.7 23 23 25.4 30.8 27.4

Slovak Rep.

Belgium

Spain

Portugal

Hungary

Latvia

Malta

16.1

Ireland

Denmark

16.4

Germany

19.3

15.7

France

Czech Rep.

13.3

Netherlands

18.4

12.8

UK

Finland

10

Luxembourg

19.6

10

Austria

Sweden

1999

Year Country

27.16

28.53

23.49

23.26

18.87

20.81

19.24

17.65

18.87

18.08

17.87

14.33

15.74

14.32

12.6

12.33

9.37

9.28

2000

28.48

26.71

24.3

23.99

19.6

22.32

18

17.85

18.02

16.7

17.86

14.18

15.27

14.44

12.9

12.89

10

10.03

2001

31.03

26.11

25.64

25.49

20.59

22.75

26.56

18.07

20.36

17.7

18.13

15.88

16.57

15.09

13.94

12.94

10.91

9.97

2002

30.7

26.2

27.1

26.02

22.54

23.76

21.98

18.37

20.6

18.7

19.45

16.2

17.4

15.63

14.88

13.5

11.33

9.99

2003

31.7

23.95

26.42

25.74

21.47

23.16

21.14

18.7

20.18

18.66

19.33

16.47

16.78

15.41

14.5

13.55

11.23

9.9

2004

30.06

23.59

26.18

26.45

22.17

22.9

19.29

17.88

19.73

18.9

19.25

16.26

16.45

15.77

14.39

13.74

11.56

9.67

2005

32.53

22.64

25.76

25.37

21.57

21.82

19.08

17.82

17.23

17.73

18.43

16.66

14.31

15.17

13.94

13.99

10.2

9.31

2006

32.46

24.35

25.47

24.12

24.99

21.7

22.14

18.47

16.76

17.43

18.26

17.55

13.94

14.79

14.12

14

10.26

9.23

2007

21.83

33.94

26.84

25.29

28.85

23.22

27

19.38

18

18.79

18.54

20.17

14.66

15.1

14.38

15.03

10.38

9.83

2008

22.42

34.75

28.97

26.02

30.4

23.91

26.47

21.39

19.66

20.32

19.9

21.14

16.27

16.37

16.18

15.08

11.16

10.11

2009

21.84

31.07

27.94

26.94

30.86

23.79

24.77

21.51

19.99

20.09

18.84

20.22

15.65

14.86

16.56

15.26

10.85

10.05

2010

21.29

24.29

25.2

27.3

28.59

23.45

23.52

20.05

18.58

19.47

18.53

17.77

15.18

14.43

16.01

14.43

10.63

9.75

2011

Table 3.5 Ranking of EU countries according to the size of the Shadow Economy (% of GDP)

21.5

20.96

24.37

25.97

27.62

24.56

23.71

20.15

18.48

20.44

18.65

16.65

15.91

14.98

16.21

13.84

11.63

10.18

2012

21.62

19.92

23.88

26.42

28.11

25.34

19.85

19.91

18.47

20.68

18.95

15.56

15.96

15.03

16.38

13.78

13.47

10.13

26.8

26.52

25.8

25.43

24.61

23.08

22.11

19.04

18.95

18.81

18.77

17.01

15.77

15.14

14.69

13.26

10.87

9.83

2013 Average 1999– 2013

17.42

17.24

16.77

16.53

16.00

15.00

14.37

12.37

12.32

12.22

12.20

11.05

10.25

9.84

9.55

8.62

7.06

6.39

‘True value’* Average 1999– 2013

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/ 34.3 36 23.307

Romania

Bulgaria

EU average

Source:

23.31

42.52

35.3

28.11

28.64

36.71

35.38

25.55

33.14

26.95

32.78

2000

22.03

37.56

35.01

27.61

27.77

30.34

28.75

26

23.17

25.96

31.2

2001

22.65

31.63

31.56

30.02

29.61

27.09

28.93

26.35

24.7

27.7

28.8

2002

22.94

31.86

37.12

28.8

33.11

23.01

25.07

26.73

24.96

28

29.42

2003

22.5

31.65

32.61

28.17

33.18

25.92

25.49

27.03

25.41

27.03

26.36

2004

22.31

32.49

33.98

29.46

34.26

25.91

24.79

26.75

22.48

26.9

23.37

2005

Our compilation from Hassan and Schneider (2016).

We use a 0.65 coefficient suggested by Hassan and Schneider (2016, 29).

28.5

Greece

*

29.2

Cyprus

Note:

33.8

27.8

Italy

Croatia

33

Estonia 33.8

27.3

Lithuania

27.7

Slovenia

1999

Poland

Year Country

Table 3.5 (continued)

21.6

33.15

30.16

28.47

34.35

24.26

24.87

28.47

19.69

25.86

22

2006

22

33.11

30.8

29.85

36.42

25.48

26.41

27.48

21.08

25.16

21.46

2007

24.02

34.42

33.13

30.65

37.26

26.06

34.52

29.16

35.64

26.28

24.18

2008

25.6

35.97

35.29

35.72

29.34

29.83

39.13

31.58

43.86

28.14

27.49

2009

24.98

37.3

33.5

37.62

29.75

30.34

34.36

30.22

37.82

29.01

28.48

2010

23.51

33.99

31.9

42.34

30.59

31.66

26

31.22

24.96

29.48

27.76

2011

23.3

33.59

32.13

43.67

32.64

32.1

21.85

32.02

21.7

29.97

26.87

2012

23.12

35.55

30.65

39.39

33.79

31.61

21.95

32.01

22.94

29.49

26.62

23.12

34.72

33.16

32.56

31.99

28.94

28.75

28.56

27.64

27.55

26.97

2013 Average 1999– 2013

15.02

22.57

21.55

21.16

20.79

18.81

18.69

18.56

17.97

17.91

17.53

‘True value’* Average 1999– 2013

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The Non-Observed Economy vs. the Shadow Economy in the EU 67 Among non-monetary variables, tax morale is presumably asymmetrical: it may sharply decrease, albeit it will slowly increase. Last but not least, the DYMIMIC/currency demand method provides estimates that seem oversized for two main reasons. First, the scope of the SE is supposedly restricted to underground, informal and household activities, regardless of illegal activities (N2 in Table 3.1, supra), whereas currency demand applies to all NOE categories; therefore, calibration exceeds the scope. Second, so-called official GDP is somehow adjusted as regards a fraction of NOE types, thus fully adjusted GDP (i.e. including all NOE types) should generate a lower NOE/GDP ratio; furthermore, this could explain some inconsistencies in using the percentage of official GDP as the share of SE. Hassan and Schneider (2016) acknowledge that the MIMIC and/or currency demand approach achieves high SE estimates. They claim that DIY activities, help from neighbours and friends (N3), as well as criminal activities (N2) are at least partly included. Once these activities have been deducted, roughly 65 per cent of the SE remains, which should more accurately reflect its ‘true’ size. We calculated the average true size of the SE (see last column in Table 3.4), using the 0.65 coefficient suggested by Hassan and Schneider (2016, 29). It does not affect the country ranking, whereas it shrinks the absolute magnitude of SE estimates, which gets closer to albeit above the NOE estimates, with few exceptions (e.g. Austria). It is worth mentioning that the ranking based on the average true size remains the same as in 1999. However, the magnitude and accuracy of this figure should be discussed. On the one hand, stating that over one-third (0.35) of the SE is made up of the N3 + N2 categories does not fit the data of EU countries for which the share of NOE components is available (see Table 3.2). On the other hand, if those activities are included, and indeed they should be according to the NOE standard definition, why should they be dropped? Using a Dynamic General Equilibrium (DGE) model, Elgin and Oztunali (2012) notice that the 1999–2007 part of their data set is almost perfectly correlated with the SE data reported by Schneider, supporting the hypothesis that the size of the SE is countercyclical. Elgin and Schneider (2016) acknowledge that DGE and DYMIMIC models reach similar conclusions, although the former smooths the fluctuations that are displayed in the latter. 3.5.2 Comparing Estimates from Indirect Methods According to the comparison of indirect methods, there is quite a large gap between estimates from the Labour Input Method (LIM) and from

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DYMIMIC for the Shadow Economy (SE). If we apply the adjustment suggested by Hassan and Schneider (2016, 29), using a 0.65 coefficient to reach a ‘true’ value of SE, the gap shrinks, but the distribution of countries doesn’t match (see Figure 3.1). LIM

30

Adjusted SE 19.92 21.96

25 19.17

20 15 10

12.32 8.96 10.37 7.8 8.76

10.65 12.94 13.44 10.11 9.77

17.17 16.47 12.9 15.03 12

20.81 20.55

25.6 23.11 12.95 14.91

14.27

17.3

15.52

18.27

5 0

.

Sources:

Our compilation from Hassan and Schneider (2016) and Williams et al. (2017).

Figure 3.1 Estimates (% of GVA) from Labour Input Method and DYMIMIC 3.5.3 Tax Burden and the NOE: Some Ambiguous Links The robustness of the explanation that connects tax pressure with the NOE is far from being proven. The average (or marginal) tax rate of taxation may not matter as much as the tax structure with respect to basis and thresholds; unfortunately, the latter varies across countries and among tax payers (e.g. bachelors, families, etc.) according to the average wages (OECD, 2006, 2009; Adair, 2009). As regards levels, the correlation between the NOE (as per cent of GDP) and tax burden (including social security contributions, as per cent of GDP) is poor and improves but a little whenever logarithms are computed. The upper bond of the countries with the highest share in the NOE (above the EU average) does not include those that have the largest percentage of tax burden in terms of GDP. Correlation is poor for the group of so-called Southern countries (Greece, Italy, Spain and Portugal) also including Belgium and Sweden, which obviously are not located in the same area. As the difference between the level of tax collected and the total tax owed, the tax gap can broadly be split into two types of activities: tax

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The Non-Observed Economy vs. the Shadow Economy in the EU 69 evasion and tax avoidance. Raczkowski and Mróz (2016) contend that the level of the tax gap is rather negatively correlated with GDP, i.e. the higher the GDP is, the lower the tax gap as a percentage of GDP. However, Italy is an exception (see Table 3A.2, in the Appendix). The distribution of tax gaps does not match that of the SE (Schneider, 2016), neither does the tax gap distribution of Muller et al. (2013). 3.5.4 Labour Market Segmentation and Informal Workforce According to Doeringer and Piore (1970), the labour market is segmented between formal and informal workforce. The latter consists of informal dependent employment and informal self-employment (ILO, 2013). The authors observe significant differences in the composition and profile of the informal workforce across the EU countries. In Bulgaria, Romania and Slovenia, the informal workforce is roughly evenly split between dependent workers without a legal contract and the nonprofessional self-employed. In contrast, informal self-employment is the dominant form in the Czech Republic, Hungary, Lithuania, Poland and Slovakia. This split also applies to Greece, Italy, Portugal and Spain. According to Packard et al. (2012), undeclared jobs seem to rise during recovery and to contract during recession. Bajada and Schneider (2009) point out that opportunities in the SE are fuelled by the expansion of the official economy, which is pro-cyclical, and short-term fluctuations in unemployment directly contribute to short-term fluctuations in the SE; thus, there is no trade-off between the official and the shadow economies. However, authors do not exclude the possibility that long-term unemployed may also be participating in the SE. Correlation between NOE (as a percentage of GDP) and selfemployment (as a percentage of non-agricultural employment) is poor. The upper bound of the countries that have the highest share in NOE are also those that have the largest percentage of non-agricultural selfemployed population: correlation is high for Southern countries (Greece, Italy, Spain and Portugal). As regards the lower bound of countries with the smallest share in NOE (Ireland, France, Netherlands, the UK and Austria), the percentage of non-agricultural self-employed population is far from being the lowest and no correlation shows up. Although self-employed is the working group that complies the less with tax requirements (underground economy) and represents a significant fraction of unincorporated enterprises (informal economy), it is not a satisfactory proxy for the NOE.

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3.6 DISCUSSION AND CONCLUSION According to Table 3.6, a glimpse at the ranking of NOE macro estimates shows that DYMIMIC displays the highest magnitude (upper bound), whereas the lowest one comes from national accounts (lower bound). It is worth mentioning that transactions method, currency demand, implicit labour supply and the income–expenditure gap provide piecemeal data and stand between the upper and the lower bound. Table 3.7 compares these various macro estimates with respect to the coverage of NOE components. Table 3.6 Macro estimates: approaches and Non-Observed Economy coverage Approaches

NOE categories Underground N1+N6 (producers deliberately not registering + misreporting)

Illegal N2 (producers deliberately not registering)

Own account N3 (producers not required to register)

DYMIMIC

Yes

To some extent

To some extent

Yes

No

Transactions method

To some extent

To some extent

To some extent

To some extent

No

27

Implicit labour supply

To some extent

No

To some extent

To some extent

No

17.7

Italy (1987)

Currency demand

To some extent

To some extent

To some extent

To some extent

No

8.1– 14.6

West Germany (1980)

Income– expenditure

To some extent

To some extent

To some extent

To some extent

5.5– 10.6

UK (1982, 1989)

Yes

Yes

Yes

Yes

8.67*

EU 12 countries (2005–09)

National accounts

Note:

*

Sources:

Columns

Design

Estimates

XML

Informal Statistical N4+N5 deficiencies (legal N7 persons + nonsurveyed registered entrepreneurs)

Yes

% of GDP

Country (Year)

22.49– 14.62*

EU 28 (2005– 2009) West Germany (1980)

Unweighted average. Author from Barthélémy (1988), Gyomai and Ven (2014), Hassan and Schneider (2016).

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The Non-Observed Economy vs. the Shadow Economy in the EU 71 Table 3.7 The Non-Observed Economy vs. the Shadow Economy NOEa (national accounts)

Shadow Economyb (DYMIMIC) ‘True’ value*

Matching

9.83

6.39

Consistent

19.66

12.78

Year

% of GDP

N1+ N6

N2

N3+ N4+N5

N7

% of GDP

Austria

2008

7.5

2.4

0.2

1.5

3.5

Czech Rep.

2009

8.1

6.3

0.4

1.3

0.2

Hungary

2009

10.9

3.1

0.8

3.1

3.9

28.97

18.83

Inconsistent

Netherlands 2007

2.3

0.8

0.5

0.5

0.5

14.12

9.18

Inconsistent

Inconsistent

Poland

2009

15.4

12.7

0.9

2.8

0.2

27.49

17.87

Inconsistent

Slovak Rep.

2009

15.6

12.1

0.5

2.9

0.2

26.47

17.21

Inconsistent

Slovenia

2007

10.2

3.9

0.3

2.8

3.1

25.16

16.35

Inconsistent

Note:

*

Sources:

We use a 0.65 coefficient, as suggested by Hassan and Schneider (2016, 29). a

Gyomai and Ven (2014), Ven (2017); b Hassan and Schneider (2016).

There is a striking gap between the DYMIMIC estimates (22.49 per cent and 14.62 per cent as for the true value) and national accounts average estimates (8.675 per cent), with respect to comparable dates from the mid- to late 2000s. This is a puzzling issue, in as much as the Shadow Economy concept used for DYMIMIC estimates encapsulates a narrower scope than that of national accounts; hence, estimates from the former should stand below those of the latter. Such is not the case, in the light of Table 3.6, which records the percentage in GDP according to national accounts for seven countries with exhaustive coverage of all NOE components and that of the SE according to DYMIMIC estimates as for the same years (see tables 3.2 and 3.4). Austria being excepted, there is an obvious mismatch for six countries wherein the ‘true’ value of SE as a percentage of GDP stands always above that of NOE. The DYMIMIC vs. national accounts controversy looks like another hare–tortoise contest. In contrast with the fable, DYMIMIC runs faster than national accounts, but neither reaches the finishing line. The former provides oversized estimates, whereas the latter lags behind due to the lack of exhaustiveness. So far, the DYMIMIC model has been presented as exploratory and has not required any a priori specified factor. Recently, it has been claimed as explanatory (Elgin and Schneider, 2016), although there is no

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explicit theory behind the model and econometric issues require robustness checks. Macro-econometric models make strong assumptions, use highly aggregated data and have little control over what exactly is being measured; it is unclear whether the NOE includes adjusted GDP or not. They provide times series that prove cheap to compute. Similarly, there is no model in national accounts; it is the framework and procedures that shape the estimates. Including standardised data on the illegal component (N2) of the NOE helps in completing the scope since 2014 (Adair and Nezhyvenko, 2016), although exhaustiveness is far from achievement. NOE estimates may be conservative in as much as adjustments already include some components, although parameters are not disclosed. Data are computed at a highly disaggregated level and double counting is avoided, but timely regular estimates are lacking and should become available. In the absence of consensus on the most reliable method (e.g. time series data vs. cross-sectional surveys), it seems that the search for an optimal indicator is still beyond reach. One may share the claim of Ven (2017), advocating that both the national accounts and macroeconometric models share the best in order to improve the scope and measurement of NOE, starting with the disclosure of their data and procedures in order to open the ‘black box’. Moreover, the unemployment challenge remains and calls upon both standardised data and closer monitoring of undeclared work (EC, 2016),4 provided that the interpretation of data resist political interference (Tanzi, 1999) or misuses (Dixon, 1999).

ACKNOWLEDGEMENTS We are grateful for several comments from Jacques Charmes (IRD), which helped in improving the paper. The usual disclaimer applies.

NOTES 1. 2. 3.

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Poland implemented specific modules since the 1990s and stands among a few exceptions (Adair, 2020). On the left-hand side of the equation of exchange, M stands for the aggregate Money supply and V for Velocity of circulation, whereas the right-hand side includes P the Price index and T the volume of Transactions. Trends from Schneider’s figures are consistent with those of Afonso and Almeida (2017), using the MIMIC method and focusing upon the PIIGS (Portugal, Italy,

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The Non-Observed Economy vs. the Shadow Economy in the EU 73

4.

Ireland, Greece and Spain) over 1980–2013. However, including Ireland proves inconsistent over 1999–2013. The absence of some available NOE estimates for informal labour force provided by national accounts, and the use of undeclared work figures from 2013 Eurobarometer, which do not fit in the Eurostat nomenclature, alongside disparate dates makes EC (2016, table 1, 3) a very misleading paper.

REFERENCES Adair, P. (2009), ‘Economie non observée et emploi informel dans les pays de l’Union européenne: Une comparaison des estimations et des déterminants’, Revue Economique, 60 (5), 1117–1153. Adair, P. (2020), ‘Non-Observed Economy vs. Shadow Economy and informal employment in Poland: A range of mismatching estimates’, in Wladimir Andreff (ed.), European Comparative Economic Studies: A Thirty Year Review – In Honour of Horst Brezinski, London: Palgrave Macmillan, Chapter 12 (forthcoming). Adair, P., Nezhyvenko, O. (2016), ‘Sex work vs. sexual exploitation in the European Union: What are the likely guesstimates for prostitution?’ Proceedings, 6th Economics & Finance Conference, OECD, Paris, 6–9 September, IISES, pp. 27–50. Afonso, O., Almeida, F. (2017), ‘The non-observed economy in the European Union’, Applied Economics Letters, 24 (1), 14–18. Ahumada, H., Alvaredo, F., Canavese, A. (2008), ‘The monetary method to measure the shadow economy: The forgotten problem of the initial conditions’, Economics Letters, 101 (2), 97–99. Bajada, C., Schneider, F. (2009), ‘Unemployment and the Shadow Economy in the OECD’, Revue Economique, 60 (5), 1033–1067. Barthélémy, P. (1988), ‘The macroeconomic estimates of the hidden economy: A critical analysis’, Review of Income and Wealth, 34 (2), 183–208. Barthélémy, P., Miguelez, F., Mingione, E., Pahl, R., Wenig, A. (1990), Underground Economy and Irregular Forms of Employment (travail au noir), Brussels: Commission of the European Communities. Bhattacharyya, D.K. (1999), ‘On the economic rationale of estimating the hidden economy’, The Economic Journal, 109 (456), 348–359. Blades, D. (1982), ‘The hidden economy and national accounts’, The OECD Observer, 114, 15–17. Blades, D. (2011), ‘Estimating value added of illegal production in the Western Balkans’, Review of Income & Wealth, 57 (1), 183–195. Blades, D., Roberts, D. (2002), ‘Measuring the Non-Observed Economy’, Statistics Brief 5, November, Paris: OECD. Breusch, T. (2005), ‘Estimating the underground economy using MIMIC models’, Canberra: The Australian National University. Cagan, P. (1958), ‘The demand for currency relative to the total money supply’, Journal of Political Economy, 66, 303–328. Charmes, J. (2019), Dimensions of Resilience in Developing Countries: Informality, Solidarities and Carework, Basel, Switzerland: Springer Nature. Contini, B. (1989), ‘The irregular economy of Italy: A survey of contributions’, in Edgar L. Feige (ed.), The Underground Economies: Tax Evasion and Information Distortion, Cambridge; New York: Cambridge University Press, pp. 237–250. Dilnot, A., Morris, C.N. (1981), ‘What do we know about the black economy?’, Fiscal Studies 2 (1), 58–73.

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Dixon, H. (1999), ‘Controversy: On the use of the “hidden economy” estimates’, Economic Journal, 109 (456), 335–337. Doeringer, P.B., Piore, M.J. (1970), Internal Labor Markets and Manpower Analysis, Cambridge, MA: Harvard University, MIT. Dybka, P., Kowalczuk, M., Olesinski, B., Rozkrut, M., Torój, A. (2017), ‘Currency demand and MIMIC models: Towards a structured hybrid model-based estimation of the shadow economy size’, Warsaw School of Economics, Working Papers Series No. 2017/030, September. EC (2016), European Semester Thematic Factsheet: Undeclared Work, Brussels: European Commission, November. EEC (2007), Undeclared Work in the European Union, Brussels: European Commission, Directorate General Employment & Social Affairs, Special Euro barometer 284. EEC (2013), Undeclared Work in the European Union, Brussels: European Commission, Directorate General Employment & Social Affairs, Special Euro barometer 402. Elgin, C., Oztunali, O. (2012), ‘Shadow economies around the world: Model-based estimates’, Working Paper 2012/05, Istanbul: Bogˇaziçi University, Department of Economics. Elgin, C., Schneider F. (2016), ‘Shadow economies in OECD countries: DGE vs. MIMIC approaches’, Bogˇaziçi Journal Review of Social, Economic and Administrative Studies, 30 (1), 51–75. Enste, D. (2010), ‘Shadow Economy: The impact of regulation in OECD-countries’, International Economic Journal, 24 (4), 555–571. Eurostat (2013), European System of Accounts: ESA 2010, Luxembourg: Publications Office of the European Union. Eurostat (2014), Essential SNA: Building the Basics, Chapter 6, ‘The informal sector’, pp. 121–134, Methodologies and working papers, Luxembourg: European Union. Feige, E.L. (ed.) (1989), The Underground Economies: Tax Evasion and Information Distortion, Cambridge; New York: Cambridge University Press. Feige, E.L. (2016), ‘Reflections on the meaning and measurement of unobserved economies: What do we really know about the “Shadow Economy”?’, Journal of Tax Administration, 2 (1), 5–41. Frey, B.S., Weck-Hannemann, H. (1984), ‘The hidden economy as an “unobserved variable”’, European Economic Review, 26 (1–2), 33–53. Giles, D.E.A. (1999), ‘Measuring the hidden economy: Implications for econometric modelling’, The Economic Journal, 109 (456), 370–380. Granger, C.W.J. (1969), ‘Investigating causal relations by econometric models and cross-spectral methods’, Econometrica, 37 (3), 424–438. Gutmann, P. (1985), ‘The subterranean economy, redux’, in Wulf Gaertner and Alois Wenig (eds), The Economics of the Shadow Economy, Berlin: Springer Verlag, pp. 2–18. Gyomai, G., Ven, P. van de (2014), ‘The Non-Observed Economy in the System of National Accounts’, OECD Brief, 18, June, 1–12. Hassan, M., Schneider, F. (2016), ‘Size and development of the shadow economies of 157 countries worldwide: Updated and new measures from 1999 to 2013’, IZA DP No. 10281, October. Helberger, C., Knepel, H. (1988), ‘How big is the shadow economy? A re-analysis of the unobserved-variable approach of Frey and Weck-Hannemann’, European Economic Review, 32 (4), 965–976. ILO (2013), Measuring Informality: A Statistical Manual on the Informal Sector and Informal Employment, Geneva: International Labour Office. Kaufmann, D., Kaliberda, A. (1996), ‘Integrating the unofficial into the dynamics of post-socialist economies’, in Bartolomiej Kaminsky (ed.), Economic Transition in the Newly Independent States, New York: M. E. Sharpe, pp. 81–120.

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The Non-Observed Economy vs. the Shadow Economy in the EU 75 Kayaoglu, A., Williams, C.C. (2017), ‘Beyond the declared/undeclared economy dualism: Evaluating individual- and country-level variations in the prevalence of under-declared employment’, International Journal of Economic Perspectives, 11 (4), 36–47. Lackó, M. (2000), ‘Do power consumption data tell the story? Electricity intensity and hidden economy in postsocialist countries’, in Eric Maskin and Andras Simonovits (eds), Planning, Shortage, and Transformation, London; Cambridge, MA: MIT Press, pp. 345–366. Lippert, O., Walker, M. (eds) (1997), The Underground Economy: Global Evidence of Its Size and Impact, Vancouver, BC: Fraser Institute. Lyssiotou, P., Pashardes, P., Stengos, T. (2004), ‘Estimates of the black economy based on consumer demand approaches’, Economic Journal, 114 (497), 622–640. Medina, L., Schneider, F. (2017), ‘Shadow economies around the world: New results for 158 countries over 1991–2015’. CESifo Working Paper series no. 6430 (www. CESifo-group.org/wp). Muller, P., Conlon, G., Lewis, M., Mantovani, I. (2013), ‘From shadow to formal economy: Levelling the playing field in the single market’, Brussels: European Parliament, accessed 10 February 2020 at http://www.europarl.europa.eu/studies OECD (2002), Handbook for Measurement of the Non-Observed Economy, Paris: OECD. OECD (2004), Employment Outlook, Chapter 5, ‘Informal employment and promoting the transition to a salaried economy’, Paris: OECD, pp. 225–289. OECD (2006), Employment Outlook, table 2 ‘Evolution of the tax burden 2000–2005’, Paris: OECD. OECD (2009), Employment Outlook, Paris: OECD. Packard, T., Koettl, J., Montenegro, C.E. (2012), In from the Shadow: Integrating Europe’s Informal Labor, Washington, DC: World Bank. Pissarides, C., Weber, G. (1989), ‘An expenditure-based estimate of Britain’s black economy’, Journal of Public Economics, 39 (1), 17–32. Raczkowski, K., Mróz, B. (2016), ‘Tax gap in the global economy’, Argumenta Oeconomica, working paper, Wroclaw University of Economics. Schneider, F. (2009a), ‘The size of the shadow economy in 21 OECD countries (in % of “official” GDP) using the MIMIC and currency demand approach: From 1989/90 to 2009’, Working Paper, April, University of Linz. Schneider, F. (2009b), ‘Size and development of the shadow economies in Germany, Austria and other OECD Countries’, Revue Economique, 60 (5), 1079–1116. Schneider, F. (2015), ‘Size and development of the shadow economy of 31 European countries and 5 other OECD countries from 2003 to 2015: Different developments’, accessed 31 March 2016 at http://www.econ.jku.at/membrs/Schenider/filers/ publications/2015/ShadEcEurope31.pdf Schneider, F., Enste, D.H. (2000), ‘Shadow economies: Size, causes and consequences’, Journal of Economic Literature, 38 (1), 77–114. Schneider, F., Williams, C.C. (2013), The Shadow Economy, London: The Institute of Economic Affairs (IEA). Schneider, F., Raczkowski, K., Mróz, B. (2015), ‘Shadow economy and tax evasion in the EU’, Journal of Money Laundering Control, 18 (1), 34–51. Tanzi, V. (ed.) (1982), The Underground Economy in the US and Abroad, Lanham, MD: Lexington Books. Tanzi, V. (1999), ‘Uses and abuses of estimates of the underground economy’, Economic Journal, 109 (456), 338–347. Thomas, J.J. (1992), Informal Economic Activity, Brighton: Harvester Wheatsheaf, LSE Handbooks in Economics. Thomas, J.J. (1999), ‘Quantifying the black economy: “Measurement without theory” yet again?’, Economic Journal, 109 (456), 381–389.

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UNECE (2003), Non-Observed Economy in National Accounts: Survey of National Practices, Geneva: United Nations Economic Commission for Europe. UNECE (2008), Non-Observed Economy in National Accounts: Survey of National Practices, Geneva: United Nations Economic Commission for Europe. Ven, P. van de (2017), ‘The Non-Observed Economy in the System of National Accounts’, Illicit Financial Flows and Underground Economy in Developing and Developed Countries: A Mirror Conference, Leuven, 22–23 May. Williams, C.C., Bejakovic, P., Mikulic, D., Franic, J., Kedir, A., Horodnic, I. (2017), ‘An evaluation of the scale of undeclared work in the European Union and its structural determinants: Estimates using the Labour Input Method’, Brussels: European Commission, Directorate-General for Employment, Social Affairs and Inclusion, November.

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/ 2010 2010 2010

Germany

Greece

Hungary

Ireland UNECE (2003); ** Blades (2011); *** Adair and Nezhyvenko (2016).

2010

France

Sources:

2010 2010

Finland

*

2010 2010

0.6

Estonia

2006

Denmark 0.8

2010

1998

2010

2010

Czech Rep.

0.86

Cyprus

2006

2010

0.52

1999

2010

Year***

2003

0.2

% of GDP

Croatia

2008

Year**

Bulgaria

1.3

% of GDP

2010

Year*

Belgium

Austria

Country

Table 3A.1 Illegal production (N2) in the EU countries

APPENDIX

0.73

0.85

0.1

0.1

0.52

0.14

0.53

1.09

0.7

0.21

0.37

0.16

% of GDP

UK

Sweden

Spain

Slovenia

Slovak Rep.

Romania

Portugal

Poland

Netherlands

Malta

Luxembourg

Lithuania

Latvia

Italy

Country

1998

1998

1998

1998

Year*

0.59

0.13

0.5

0.97

% of GDP

2007

2009

2009

2007

2002

2000

Year**

0.3

0.5

0.9

0.5

0.9

1.5

% of GDP

2010

2010

2010

2010

2010

2010

2010

2010

2010

2010

2010

2010

2010

2010

Year***

0.58

0.14

0.87

0.36

0.46

0.35

0.38

0.3

0.23

0.9

1

% of GDP

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2.3 2.3 2.3 2.4

Muller et al. (2013), Raczkowski and Mróz (2016).

Spain

Latvia

EU 27

Finland

Sources:

Italy

Estonia

Slovenia

Hungary

2

Bulgaria

Cyprus

Belgium

Malta

Poland

Romania

Lithuania

Denmark

Sweden

Portugal

France

2 2

Germany

1.6

Greece

Czech Rep.

1.5

Ireland

1.7

1.4

UK

1.7

1.3

Austria

Slovak Rep.

1.2

Luxembourg

Netherlands

2011

Member State

Table 3A.2 Tax gaps in the EU (% of GDP)

3.8

3.5

3.3

3.2

3.2

3.1

3

2.9

2.8

2.7

2.7

2.7

2.6

2.4

2011

7.5 7.5

Slovenia

7.3

6.9

6.5

6

5.8

5.2

5

4.3

3.5

3.2

3.1

2.9

1.7

2015

Portugal

Czech Rep.

Slovak Rep.

Sweden

Germany

Cyprus

Croatia

Finland

Austria

Netherlands

UK

Denmark

Ireland

Luxembourg

Member State

Member State

Italy

Estonia

Romania

Greece

Lithuania

Spain

Hungary

Malta

Belgium

Poland

Bulgaria

Latvia

France

EU 28

Portugal

13.5

12.9

12.1

11.2

11

10.6

10.5

10.1

9.4

9

8.3

8.3

8.2

7.7

7.5

2015

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4. Informality and development in Africa Dorothy McCormick, Erick Manga, Radha Upadhyaya, Paul Kamau, Herbert Wamalwa and Samuel Ngigi

4.1 INTRODUCTION This chapter examines the relationship between informality and national development in Africa in both theory and practice. Both sides of the relationship have varied meanings, as examined in the sections that follow. Informality, which is discussed in much more detail in Chapter 2 of this Handbook, has a plurality of meanings. It was coined by Keith Hart in 1971 in the context of observed economic activities (Hart, 1973), but over time it has been applied to many different phenomena, including illegal and/or unregulated trade, unplanned housing, and a range of political and social organisations (ILO, 1972; Ram et al., 2017). Beginning with the period immediately before Africa’s decolonisation, both scholars and policymakers grappled with the meaning of national development (Sumner, 2006). Development means different things in different contexts. At its broadest conceptualisation, development refers to a set of goals associated with improvements in the material, social, and spiritual welfare of a given group of people (Were, 1979; Sumner, 2006). Thus, one can speak of national, regional, local, and/or community development. Scholars have also tended to draw on a particular disciplinary perspective to emphasise one or other of the aspects of development. For example, many early development studies analysts came from the discipline of economics, and therefore focused on the material aspects of development. The term ‘development’ is also used to indicate the process of change used to achieve the desired improvements. The change process itself can be abrupt or gradual (Seers, 1972; Allen & Thomas, 2000), and its sources internal or external (Cowen & Shenton, 1996). Most efforts at national development planning, for example, envision situations of gradual change using ideas gleaned from both internal and external sources. Nevertheless, in some cases, political change brings with it ideas 79

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for more radical economic or social measures. What is clear is that there are no ‘one size fits all’ solutions, and a particular country’s history is very important to the crafting of appropriate development strategies (Were, 1979). The methodology followed in writing this chapter is comprehensive literature review and policy analysis. The literature review was organised in terms of epochs of development paradigms. We reviewed policy pieces that were related to informality as well as theoretical and empirical literature. The rest of the chapter is organised as follows. Section 4.2 focuses on different development paradigms in post-independence Africa from the 1960s onwards and explores the relationships between different development paradigms and informality in Africa. These are linked to informality in section 4.3. Using the example of Kenya, the fourth section examines the evolution of the policy and regulatory framework governing informal activities. This section also identifies the theoretical underpinnings of the policies and highlights inconsistencies between theory and practice. The final section draws conclusions.

4.2 DEVELOPMENT PARADIGMS IN POST-INDEPENDENCE AFRICA This section traces the evolution of development thinking in the African context from the 1960s to the present, highlighting the main schools of thought (see Table 4.1). We then link these to informality in section 4.3. Table 4.1 Main approaches to development in Africa and other developing regions, 1960s onward Decade

Main development approaches

1960s

+ Modernisation theories: All countries should follow the European model + Dependency theories: Southern countries are poor because of

exploitation by Northern countries + Dependency theories* + Basic Needs Approaches: Focus of government and aid policies should

1970s

be on providing for the basic needs of the world’s poorest people + Women in Development: Recognition of the ways in which development

affects or fails to affect women

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Informality and development in Africa 81 Decade

Main development approaches

1980s

+ Basic Needs + Neo-liberalism: Focus on the market; government should retreat from

direct involvement in economic activities + Gender and Development: Recognition of the differential effects of

development on women and men, boys and girls + Sustainable Development: Need to balance needs of current generation

against environmental and other concerns of future generations 1990s

+ Neo-liberalism + Sustainable Development + Gender and Development + Institutional theories: Emphasise the importance of social, political,

and/or economic institutions in the development process + Human Development: Defined as a process enlarging people’s choices,

achieved by expanding human capabilities and functioning + Sustainable Livelihoods: Recognition that households often have an

array of capabilities, activities, and assets that together provide their means of living 2000s–

+ Neo-liberalism, and globalisation + Institutional theories + Sustainable Development + Human Development + Sustainable Livelihoods + Gender and Development

Note: * Each approach is given a short description the first time it appears in the table, but not in subsequent mentions. Source:

Adapted from Willis (2005), p. 27.

4.2.1 Main Development Approaches The material in Table 4.1 raises three key points. First, the schools of thought did not occur sequentially, but overlapped in time, in space, and as implicit or explicit foundations for policy. Second, the table demonstrates that, far from an agreed consensus, the study and practice of development is at any one time ‘intrinsically a field of multi-level negotiations and struggle among different stakeholders’ (Pieterse, 2010, p. 11). Third, two of the approaches – Women in Development, and Gender and Development – are both what can be termed ‘gender-based approaches’. They are, however, listed separately in order to recognise the evolution of thinking around gender issues. Despite differences in strategies underpinning these theories, which could be as a result of many factors such as historical circumstances and disciplinary biases, they had one thing in common: the need to improve

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the human well-being. We discuss each of them in turn but include the gender-based approaches within institutional theories. 4.2.2 Modernisation Theories Inspired by the success story of post-war reconstruction of Europe, post-colonial African development strategies were mainly informed by modernisation theory, which defined a successful society as one characterised by rapid economic growth driven by the industrial sector. The resulting increase in productivity would absorb the workforce from low-productivity sectors (agriculture) to the industrial sector. This theory further posits that accelerated industrialisation would in turn fuel growth, which in turn would encourage savings and investments in technological innovation. National development in this case is mainly measured in terms of growth in the size of national economies and per capita income (Lewis, 1954; Chenery, 1975; Rostow, 1960). The following are some of the key assumptions underlying these theories: development is linear and necessarily passes through five predictable stages of economic development in a particular society (Rostow, 1960). Modernisation is a homogenising process because it leads to convergence among societies that resemble one another (Levy, 1967; Hermassi, 1978), as exemplified in both Western Europe and the United States of America in terms of their perceived unmatched economic prosperity and democratic stability. Since development is viewed as linear, modernisation is equally considered an irreversible process once it begins (Tipps, 1976). It is also assumed that modernisation is a progressive process that in the long run is not only inevitable but desirable. Finally, modernisation is a lengthy process. It is an evolutionary change, not a revolutionary one. It will take generations or even centuries to complete, and its profound impact will be felt only through time. Most of these assumptions are derived from European and American evolutionary theory (Huntington, 1971). The economic aspect of modernisation theory has been based on Rostow’s (1959) five stages of development model. The five stages comprise traditional society, precondition for take-off, the take-off process, the drive to maturity, and high mass consumption society. According to this exposition, Rostow has found a possible solution for the promotion of Third World modernisation. If the problem facing Third World countries resides in their lack of productive investments, the solution lies in the provision of aid to these countries in the form of capital, technology, and expertise (Rostow, 1960). Some of the economic

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Informality and development in Africa 83 plans that have been influenced by Rostow’s model include The Marshall Plan and the Alliance for Progress in Latin America (McClelland, 1962). Despite its prominence in the public policy arena, especially in developing countries, the theory subsequently faced considerable criticism. Probably the main critique of this theory is that both the history and cultural backgrounds of Europe and Africa were very different, making it difficult to generalise about development using the European and USA experience (Eisenstadt, 1966; Portes, 1976). The basis of this observation is that other societies, like South Korea, have equally registered impressive progress without necessarily following Rostow’s predicted path. Furthermore, since Asian countries had strong authoritarian regimes, development is neither unidirectional nor linear (Killing, 1994). The other observation is that the modernisation perspective shows only one possible model of development, specifically the one experienced by Western Europe and the United States. Lastly, it is argued that, even though modernisation advocated elimination of traditional values, developing countries do not have a homogeneous set of traditional values; they are instead quite heterogeneous. For example, Redfield (1956) distinguishes between the values of the elites and the values of the masses. Another scholar, referring to the variety of indigenous ways of knowing within a given African country, puts it even more strongly: ‘African indigenous ways of knowing are as diverse as approximately the fortytwo ethnic communities in Kenya’ (Owuor, 2007, p. 21). The same may no doubt be said for the heterogeneity of traditional values. 4.2.3 Dependency Theories Dependency theories, which are traceable to the 1950s, gained prominence in the 1960s and 1970s. The theories attempt to explain why poor countries are underdeveloped, rather than how they are expected to develop. The central argument in dependency theories is that developing or Southern countries are poor due to their imbalanced relationship with Northern countries (Prebisch, 1950; Frank, 1967; Dos Santos, 1970; Foster-Carter, 1973; Cardoso & Faletto, 1979). There are two main variants of dependency theory. The first is the one advanced by Prebisch (1950) and contained in the Prebisch–Singer hypothesis. The hypothesis rests on an economic argument about the terms of trade for primary commodities. Specifically, it stated that, over the long term, declining terms of trade would frustrate the development goals of Latin American and other Southern countries. In other words, terms of trade for primary commodities were expected to decline relative

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to those for manufactured goods (Prebisch, 1950; Singer, 1950). Translating this pessimistic scenario into actions for development led to strategies and import substitution policies, exchange rate and capital controls, and promotion of internal industrial development. The second variant of dependency theory consists of the neo-Marxist perspectives that examine the power relations between core and periphery countries using the Marxian lens of imperialism (Frank, 1967; Bodenheimer, 1970; Cardoso & Faletto, 1979). Neo-Marxists saw the subjugation of the periphery as a necessary and intentional part of the development of the core (Frank, 1967). Some saw a particular role for multinational corporations (MNCs) in creating a ‘new type of dependence’ (Dos Santos, 1970). MNCs began to invest in industries geared to the internal market of underdeveloped countries, creating what Dos Santos (1970) termed technological–industrial dependence. This dependence affects not only the relationship between core and periphery nations, but also the internal structure of the Southern economies. Elites, some of which were closely linked to MNCs, were called ‘comprador’ (Frank, 1967). Remedies for dependence, according to neo-Marxists, lay in measures designed to weaken ties between core and periphery as well as those of comprador elites within the country. Ultimately many espoused the need for socialist revolution with peasants in the vanguard (Foster-Carter, 1973). The principal critics of the dependency theory have focused on the fact that this school does not provide exhaustive empirical evidence to support its conclusions. Furthermore, this theoretical position uses highly abstract levels of analysis. Another point of critique is that the dependency movement considers ties with transnational corporations as being only detrimental to countries, when actually these links can be used as a means of transference of technology. 4.2.4 Development as Satisfaction of Basic Needs The emphasis of development as satisfaction of basic needs flows from a realisation of the weaknesses or failures of economic growth and modernisation theory and the need to address or ameliorate them. More fundamentally, the notion of basic needs began with psychological research in the 1940s, notably the work of Albert Maslow (1943). Under this framework, development is first expected to provide opportunities for people to meet needs such as housing, food, shelter, clothing, water, among other basic requirements that enable individuals to live a life of dignity, and which were considered to be necessary prerequisites to productive work (Emmerij, 2010).

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Informality and development in Africa 85 Whereas modernisation theories stressed the importance of employment creation as a means to adequate incomes, the basic needs approach took the position that ‘employment creation was not an end in itself but serves to fulfil the basic needs of individual human beings’ (Emmerij, 2010, p. 1). The ILO report for the 1976 World Employment Conference (Jolly, 1976) defined basic needs in terms of food, clothing, housing, education, and public transportation. The state was placed at the centre as the main custodian and guarantor of these goods. It is thus required to put in place necessary mechanisms, for example legislations, to realise the same. The main critique of the Basic Needs Approach was that it lacked the data necessary for states and international organisations to act on it. Work had just begun in this direction when the economic momentum of the World Bank and the IMF shifted towards neo-liberalism. 4.2.5 Neo-liberalism Theories In this subsection we trace the rise of neo-liberalism in development discourse. ‘Neoliberalism is a theory of political economic practices proposing that human well-being can best be advanced by the maximisation of entrepreneurial freedoms within an institutional framework characterised by private property rights, individual liberty, unencumbered markets, and free trade’ (Harvey, 2007, p. 1 [online]) and ‘the role of the state is to create and preserve an institutional framework appropriate to such practices’ (Harvey, 2007, p. 1 [online]). Markets are the main institutions in the neo-liberal perspective, with the role of the state assigned to supporting these market functions. Theoretically neo-liberalism’s foundations rest on the belief that conservative macroeconomic policy and unregulated markets optimise welfare, with the dictum that the state can do little right if only because it is liable to be captured by special interests. Furthermore, neo-liberal policy prescribes coupling internal liberalisation with external market integration (Rao, 1998). Neo-liberalism was viewed as applicable to all countries including developing countries, as it was considered that ‘liberal policies and openness are predicted to be a guarantee of global economic integration and of convergence in national living standards – the creation of a global economic system’ (Rao, 1998, p. 6). By the late 1980s, the socio-economic situation for many African countries was sombre with sluggish growth and high debt levels (Ezenwe, 1993). Many African countries had borrowed heavily from external sources – including the International Monetary Fund (IMF), the

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World Bank, and foreign banks – to finance development activities, budget deficits, and debt service. The IMF and the World Bank through the structural adjustment programmes (SAPs) espoused the virtues of market-led growth, and the dismantling of the state, inspired by neoliberal thinking (Roy, 1994). As significant lenders, they exerted considerable influence on policy in many African countries and markets for commodities, and currencies were liberalised in some of these countries (Mohan, 2009). Neo-liberal practice, especially the economic reforms associated with SAPs, led to increased inequality and a breakdown of social provision particularly of health and education within Sub-Saharan African countries. By the mid-1990s, with mounting evidence that the structural adjustment programmes had failed to stimulate growth in most African countries, even the World Bank shifted focus to ensuring stabilisation and developing institutional capacity and better governance (World Bank, 1994). Perhaps the most serious critique from a theoretical point of view comes from the institutionalists who argue that neo-liberalism ignored cultural and historical factors and the significant time required to build the institutions that are needed to support market functions (Brohman, 1995). We look more closely at the institutional perspectives on development in the next subsection. 4.2.6 Development and Institutional Theories Some scholars working within the new institutional economics (NIE) paradigm define an institution as a set of rules or societal constraints that shape interactions (Knight, 1992; North, 1990). They are, as North (1990, p. 3) famously said, ‘the rules of the game’. In their most basic form, NIE theories argue that the existence, and more importantly, the quality of institutions, matters for development (Rodrik, 2002; Amenta & Ramsey, 2010). Hall and Jones (1999) show that capital accumulation, productivity, and output per worker are driven by institutions and government policies; what they call ‘social infrastructure’. A variant of institutional theories takes into account not only the economic and political institutions, but also the full array of structural and cognitive institutions, including trust, local norms, values, ethnicity, and gender (McCormick & Kimuyu, 2007, p. 27). Observers of Africa have noted the importance of both African and ‘imported’ institutions. The topics include enforcement of commercial contracts (Fafchamps, 1996), ethnic networks1 (Fafchamps, 2003), family (Kayongo-Male & Onyango, 1984), institutions relevant to commerce

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Informality and development in Africa 87 and industry (Kimuyu, 2000), gender (McCormick, 2001), and trust (Zucker, 1986). The role of institutions in shaping society is widely acknowledged in the existing body of knowledge and is a function of various factors (Acemoglu & Robinson, 2012; Easterly, 2014; & Garrido{Morgado, 2012). Under normal circumstances, formal institutional interventions are intended to create order and reduce transaction costs (North, 1990; Easterly, 2014; Acemoglu & Robinson, 2012). Similarly, literature on social identities and collective action (Booth, 2012; Tsai, 2007) underscores the significance of informal institutions in enhancing service provision even in a context where formal institutions, for example the state, are dysfunctional. Furthermore, institutions foster efficiency (Williamson, 1985), better organisation (Aoki, 2001), education (Bardhan, 2005), social capital (Kornai et al., 2004), trust (Raiser, 1999), and economic growth (Olson et al., 1998). The main critique of NIE theory is that its many variations and approaches, especially its disciplinary variations, make it difficult to relate work done in one field to that done in another. A second critique pertains to data – since institution-driven changes tend to occur over fairly long time periods, collection of data to support its findings is challenging. Finally, NIE has been criticised for its simplistic view on the development of institutions. The key difference is that, while NIE emphasises the importance of institutions for economic growth, it still focuses on the emergence of institutions out of the interaction of individuals, assuming an initial institution-free stage (Hodgson, 1998). On the other hand, ‘old institutional’ economics recognises that, while individuals interact to form institutions, they are also moulded by socio-economic conditions (Hodgson, 1998). ‘Old’ institutionalists emphasise that assuming that ‘direction of causality’ is from individuals to institutions is misplaced, and this criticism is particularly relevant in the African context where institutions develop from collective forms of governance. 4.2.7 Development as Sustainable Livelihoods Like Modernisation, Sustainable Livelihoods is an approach that is income based. Like Basic Needs also, its main concern is with the poor and vulnerable members of society, but instead of expecting government to achieve this goal through national policies, the Sustainable Livelihoods approach directs its efforts towards communities and other local groupings.

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In this framework, a livelihood consists of the capabilities, assets (stores, resources, claims, and access), and activities required for a means of living (Chambers & Conway, 1992, pp. 7–8). The unit of analysis for research purposes is usually the household, although it is possible to conceptualise an individual’s livelihood. A livelihood is sustainable if it can cope with and recover from stress and shocks, maintain or enhance its capabilities and assets, and provide continuing livelihood opportunities for the next generation. A sustainable livelihood is expected to contribute net benefits to other livelihoods at the local and global levels, in both the long and short terms. Sustainable Livelihoods approaches have evolved from changing perspectives on poverty, participation, and sustainable development (Sen, 1981; Swift, 1989; Chambers & Conway, 1992; Brocklesby & Fisher, 2003). The emphasis on sustainable livelihoods was a response to changes in national realities following the advent of neo-liberalism (Arce, 2003). Global support for national neo-liberal structural adjustment programmes reversed the legitimisation of Basic Needs welfare state policies. At the same time, the international institutions were encouraging the withdrawal of the state from community development programmes and favouring the promotion of a neo-liberal development discourse based on individual economic values. Sustainable livelihoods theory and practice tend to focus on changes at local and community levels, that is, community development rather than national or international development (Arce, 2003). Seminal work on sustainable livelihoods was done by Chambers (1987), Scoones (2009), and Ellis (1999), all of whom spent considerable amounts of time in Africa, so their theorising tended to reflect the African realities, especially those in rural areas. As both a conceptual and programming framework, Sustainable Livelihoods is presented as a holistic approach that stands out in three ways in terms of addressing poverty and vulnerability. One, it seeks to understand the fundamental causes and dimensions of poverty without collapsing the focus onto just a few factors (e.g. economic issues, food security, etc.). Two, it also tries to sketch out the relationships between the different aspects (causes, manifestations) of poverty, allowing for more effective prioritisation of action at an operational level. The Sustainable Livelihoods approach (or approaches, given that there is no set way of doing things) aims to help poor people achieve lasting livelihood improvements – sustainable livelihoods – measured using poverty indicators that they, themselves, define (Sustainable Livelihoods Support Office, 1999). Three, the framework goes beyond the traditional approach of identifying causes of poverty and vulnerability (and the

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Informality and development in Africa 89 existing relationship between them) and instead seeks to improve people’s lives by building on what they have – their assets (UNDP, 1999). As a result, the operational framework of the Sustainable Livelihoods approach brings together various actors at different levels, for example of any political settlement, in the decision making, policy formulation, and implementation. This can be achieved using various participatory tools (UNDP, 1999). One of the underlying assumptions is that stakeholders operate in a context of vulnerability, within which they have access to certain assets. Assets gain weight and value through the prevailing social, institutional, and organisational environment (policies, institutions, and processes). This context decisively shapes the livelihood strategies that are open to people in pursuit of their self-defined beneficial livelihood outcomes (Kollmair & Gamper, 2002). In this approach, therefore, livelihood strategies comprise the range and combination of activities and choices that people undertake or make in order to realise their goals, and the strategies may vary depending on a number of factors such as households, geographical location, institutions, processes, asset status, and even time (DFID, 2000). Since the poor also compete in these circumstances, the livelihood strategy of one household might impact the other household either positively or negatively. Nevertheless, the framework envisages an outcome characterised by more income, increased well-being, reduced vulnerability, improved food security, and more sustainable use of the natural resource base (GLOPP, 2008; UNDP, 1999; DFID, 2000; Chambers & Cornwall, 1992). 4.2.8 Development as Human Development Amartya Sen’s capability approach has emerged as a leading theoretical framework in the economics of welfare and development. Sen’s work on development (1980, 1985, 1992, 1999) quality of life, poverty, and inequality offers a coherent critique of utilitarianism and of mainstream welfare economics more generally (Fukuda-Parr, 2011). He argues that human life can be seen as a set of ‘beings and doings’, which he called ‘functionings’. According to Sen (1992), people differ in their ability to convert means into valuable opportunities (capabilities) or outcomes (functionings). Development can expand people’s capabilities and thus enlarge their freedom to lead valuable and flourishing lives (Sen, 1999). The Human Development approach, developed by the economist Mahbub Ul Haq, is anchored in Sen’s work on human capabilities (UNDP, 1990). The approach was given prominence when the United Nations Development Programme (UNDP) introduced its Human Development reports in 1990. The reports gave quantitative and qualitative

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information that enabled readers, many of whom were governments looking to the UN for guidance on development, to compare their own situation with that of others. The concept relies on broad indicators that are central to human well-being, namely literacy, life expectancy, and income (UNDP, 1990). Although it is similar to the Basic Needs approach in its attention to people’s opportunities to meet their basic requirements for living a life of dignity and its rejection of economic growth as the sole indicator of development, the Human Development approach went beyond Basic Needs in its emphasis on measurement and data. In addition to utilising the main Human Development reports, many developing countries, beginning in the early 2000s, received assistance from the UNDP to enable them to prepare annual or bi-annual National Human Development reports, which contained detailed information about human development indicators in the country. Among those were African countries, such as Kenya, Nigeria, Rwanda, and Malawi. These reports highlighted internal differences in capabilities and gave countries useful information for planning and policy purposes. Yet the operationalisation of human development is not without its critics. Gasper (2002), while acknowledging the superiority of the Human Development approach over earlier growth notions of development, raises three main criticisms. First, he notes what he calls an extreme emphasis on choice. Second, he points out that some of the key concepts are not well defined; and third, he notes what he considers to be an over-reliance on the disciplines of economics and philosophy at the expense of sociology, psychology, and anthropology. Nevertheless, he concludes that these are not insurmountable problems, but could be dealt with in further refinements of the approach. 4.2.9 Gender and Development The early inclusion in development thinking of Women in Development, which was later refined into Gender and Development, can be taken as a sign of the importance of gender as an institution. It could, therefore, simply be included in the discussion of institutional theories above. On the other hand, the inclusion of the Gender Development Index (GDI) together with the Gender Empowerment Measure (GEM), which were introduced in 1995 in the Human Development Report (UNDP, 1995), suggests that Gender and Development properly belong to the Human Development approach. Either way, the realisation that the socially constructed relations between women and men, boys and girls, affect development both

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Informality and development in Africa 91 individually and in larger groups is an important issue for development theorists and practitioners. Arising from this realisation, it has been argued that the development process continues to affect women and men in different ways (Momsen, 2009). For example, due to development the modern sector takes over subsistence activities that were formerly undertaken by women. Also because of development, better-paying jobs involving new technology mostly go to men. Women, particularly young women, are left to benefit from new low-paying and low-skilled jobs created in factories producing goods for export (Momsen, 2009). Yet development has been touted as a process that erodes social institutions of exclusion where the shackles of status are replaced by a new conception in which everyone is an equal citizen under the law. Kevane (2004), citing Nussbaum (2001), says development is about expanding freedom and ending discriminatory institutions that restrict the freedom of some to realise their ambitions. These include successful female entrepreneurs who operate in a society where women’s roles remain sharply defined and circumscribed.

4.3 DEVELOPMENT PARADIGMS AND INFORMALITY IN AFRICA 4.3.1 Conceptualisation of Informality In the previous section (4.2), we traced the evolution of development thinking in the African context from the 1970s to the present, highlighting four main schools of thought regarding informality: modernisation, dependency, human development, and institutional theories. It is clear from this analysis that these schools of thought did not form a linear chain, but overlapped in time, in space, and as implicit or explicit foundations for policy. In this section, we attempt to assess how informality manifests itself in each of these development paradigms. Is it an ill to be cured, an opportunity to be seized, or something else? Is it a phenomenon that is likely to diminish with development advances, to persist in its present form, or to be transformed by development in other parts of the economy and society? In Table 4.2, we tease out key messages that emerge from each of the identified school of thoughts. We also demonstrate the overlaps in the theories reviewed in section 4.2 of this chapter.

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Table 4.2 Key messages from different schools of thoughts on informality Key message

Theory

1

Formality is preferable to informality. Informality is a problem that will disappear on its own as a country modernises.

Modernisation theories

2

Formality is preferable to informality. Informality is a problem to be solved. Efforts need to be made to encourage new entrants to register and existing informal enterprises to formalise.

Modernisation theories

3

Formality is preferable to informality. Informality is essentially an employment problem that needs to be addressed. Efforts need to be made to regulate the informal sector, while creating suitable formal sector opportunities for current and potential informal workers.

Modernisation theories

4

Silent regarding preference for formality or informality. Main problem for development is poverty, which demands efforts by government to provide or allow households to provide a minimum set of basic needs.

Basic Needs

5

Formal and informal represent different ‘ways of doing things’. Goal of informal operators is often survival or contribution to basic livelihoods rather than profit maximisation. Authorities need to tolerate informality and make suitable provisions for informal operations.

Dependency, Basic Needs, Sustainable Livelihoods

6

Formality is preferable to informality. Informality is a response to excessive state regulations. Authorities need to remove rules and regulations that stifle private enterprise.

Neo-liberalism

7

Informality and formality can co-exist provided that policymakers and implementers recognise that the institutional environment presents different opportunities and challenges different groups in the society (e.g., to women and men, to citizens and immigrants), even within what appear to be similar socio-economic conditions.

Women in Development, Gender and Development, Institutional theories

Source:

Authors’ conceptualisation.

4.3.2 Informality and Modernisation Theory Proponents of modernisation theory perceive the informal sector as a remnant of traditional, pre-capitalist modes of production and subsistence strategies common to isolated rural peoples. Informality is trapped outside the modern economy because those people in the informal sector lack proper education, skills, and value orientations. The language used to describe the growing informal or excess labour includes ‘marginality’, ‘abnormally swollen’, ‘over distended tertiary sector’, and ‘bazaar types’

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Informality and development in Africa 93 (Moser, 1978; Tokman, 2007). The prescription by modernists connotes the idea that urban surpluses would eventually disappear with the rise of industrialisation (see Table 4.2). For example, capitalists manipulate the reserve army confronting workers in the formal sector with the replacement by cheaper labour in the informal labour market (manipulation). In this case, the informality is seen as a quasi-evolutionary process, where the informal activities will conduct its actors to the formal sector. Ironically, rather than manipulating and absorbing of the reserve army by the formal sector, evidence around the world indicates that the informal economy persists (see Chapter 2 of this Handbook). One of the key weaknesses of the modernisation theories was that the informal sector was not recognised as an area of economic growth or dynamism, nor was it characterised as a reservoir of entrepreneurial training and talent. It was seen as a problem to be solved and not a development strategy to be harnessed and promoted. Challenging this theory were the International Labour Organization’s (1972) studies of informality in Kenya and Hart’s (1973) extensive and comprehensive studies carried out on informal economic activities in Ghana. These two sets of empirical studies rejected the view of the modernists. Subsequently, experiences have demonstrated that informality has continued to exist alongside the formal sector, besides being a productive force to be reckoned with in its own right and a major contributor to the national economy. 4.3.3 Informality in the Context of the Dependency Theory The dependency theory argues that the formal and informal represent different ‘ways of doing things’. The goal of informal operators is often survival or contribution to basic livelihoods rather than profit maximisation. Authorities need to tolerate informality and make suitable provisions for informal operations. Similar views are proposed in the Basic Needs theory as well as the Sustainable Livelihoods approach. Empirical studies by Hart (1973), ILO (1972), Portes and Walton (1981), and Portes and Schauffler (1993) found that informal activities were not a mere extension of traditional subsistence strategies, and participants in these activities were not universally condemned to poverty and marginalisation. Proponents of dependency theory such as Tokman (1978, 1989) and PREALC (1978) describe many common characteristics of enterprises in the informal sector. These included low capital, low technology and production, low profits, utilisation of unpaid family labour, easy entry, low efficiency, and competition. In any case, as mentioned, the dependency theory saw the goal of informal operations as mere survival, not

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profit maximisation. Informal firms were often characterised by taking advantage of their ability to avoid taxes and regulations, and exploiting niche areas overlooked by larger and less flexible firms. According to Tokman (2007), integration of the informal sector in the process of modernisation may be achieved through different but complementary means. Prevailing policies to this effect generally favour a three-pronged approach. The first prong consists of providing support to foster the productive development of microenterprises by facilitating their access to the market and productive resources. The second involves promoting social welfare of informal sector workers. Lastly, a third course of action focuses on the regulatory framework. Informal activities are not caused by regulatory inadequacies, but rather by the failure of the economic system to create enough productive employment. However, we must not neglect the fact that regulatory improvements favour the integration of informal activities in the modernisation process. The dependency theory was criticised because it saw the informal labour arrangement as taking place largely outside the exploitative formal relations of production. Thus, the informal sector was viewed for the most part with suspicion as a mere transposition of the rural subsistence sector into the urban environment. 4.3.4 Informality and Human Development Human development entails the process of enlarging people’s choices, achieved by expanding human capabilities and functionalities (Sen, 1985, 2000; UNDP, 1990). It is strongly linked with institutions, first of all because, in order to expand human capabilities, institutions are needed. Moreover, institutions need to be rightly oriented, providing opportunities to the people and the poor in particular. Values and social norms such as equality, solidarity, and cooperation shape formal institutions and choices. In turn, capabilities are enlarged by institutions (Sen, 1985, 2000; Acemoglu & Robinson, 2012). In fact, institutional policies allow for improvement of basic capabilities for human development, such as leading a long and healthy life, being knowledgeable, and having a decent standard of living. If basic capabilities are not achieved, many choices are simply not available and many opportunities remain inaccessible (Sen, 2000; UNDP, 1999). In addition, sound institutions provide the right tools required to accumulate and to distribute resources generated by economic growth. Institutions are defined as ‘a set of social rules that structure social interactions’ (Knight, 1992, p. 2). If we consider this definition of institutions, the explanation of development should be consistent with that of Kuznets (1965, p. 30): ‘the transformation of an

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Informality and development in Africa 95 underdeveloped into a developed country is not merely the mechanical addition of a stock of physical capital: it is a thoroughgoing revolution in the patterns of life and a cardinal change in the relative powers and position of various groups in the population.’ Most of the available literature underlines the critical role of informal businesses and institutions in expanding choices and capabilities critical for development (North, 1990; Sen, 2000; Acemoglu & Robinson, 2012; Easterly, 2014). Institutional policies and an active state are therefore needed in order to foster cultural change and development. The process of institutional change guarantees two important outcomes. First, it leads to breaking with previous institutions, routines, and norms and overcoming ‘the resistance of a whole complex of established interests and values’ that previously impeded economic growth (Kuznets, 1965, p. 30). Second, it has to guarantee the distribution of growth and of the social benefits of development. It is therefore crucial to know how institutional change enforces a new institutional deal that brings about economic development and as such an improvement in living conditions. According to institutional theory, informality and formality can co-exist provided that policymakers and implementers recognise that the institutional environment presents different opportunities and challenges to different groups in society even within what appear to be similar socio-economic conditions. Women in Development, and Gender and Development theories (Kinyanjui, 2014, 2012; McCormick, 2001) are well-articulated examples of the application of institutional theory. 4.3.5 Informality and Neo-liberalism De Soto (1989), a neo-liberalist, caused a paradigm shift when he published his treatise on Latin America’s informal sector (Henken, 2005). As explained above, neo-liberalism favours economic policies that minimise the role of the state and maximise the role of the private business sector. Neo-liberalism seeks to transfer control of the economy from the public to the private sector under the belief that it would produce a more efficient government and improve the economic health of the nation. De Soto (1989) asserts that the informal sector is a response to excessive state regulations. He subscribes to the notion that the informal sector is made up of ‘plucky’ micro-entrepreneurs who choose to operate informally in order to avoid the costs, time, and effort of formal registration. He noted that micro-entrepreneurs would continue to produce informally so long as government procedures are cumbersome and costly in terms of bureaucratic red-tapism, lack of property rights, and difficult accessibility

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to productive resources like finance and technology. In his view, unreasonable government rules and regulations stifle private enterprises. More recently, De Soto championed property rights as a means of converting the informally held property of informal entrepreneurs into real capital (De Soto, 2000). He, together with other neo-liberalists, argues that the informal sector players are the ‘real revolutionaries’, who heroically stand up to the tyranny of excessive state regulations, and proclaim that these informal workers are the real seeds of the free market (deregulatory) doctrine. ‘In developing countries much of the teeming masses do not consist of oppressed legal proletarians but of oppressed extra-legal small entrepreneurs with a sizeable amount of assets’ (De Soto, 2000, cited in Yusuff, 2011, p. 627). De Soto, a critic of excessive state regulation, further advocates transforming ‘class struggle into a struggle for popular initiative and entrepreneurship’ (De Soto, 2000, cited in Yusuff, 2011, p. 627). Thus, in comparison to other scholars who see the informal sector as exceptional, De Soto contends that the informal sector is filled with revolutionary potential. Moreover, according to neo-liberalism, the informal economy can overcome the problems of a weak government apparatus under market liberalisation (De Olarte, 2001). In the neo-liberalism theory, formality is preferable to informality. Informality is a response to excessive state regulations. Authorities need to remove rules and regulations that stifle private enterprise. However, despite the popularity of neo-liberalism ideology especially among the policymakers, it came under different attacks. Challenging the neo-liberalism theory were different scholars, for instance, in studies carried out by Olmedo and Murray (2002) in Argentina, Henken (2005) in Cuba, and Aladekomo (2004) in Nigeria, whose findings showed that one significant consequence of the new global restructuring outside the core areas of the world economy has been the process of social exclusion. The structural adjustment programmes in Argentina led to the erosion of much of the social contract, collective responsibility, and welfare state ‘safety net’ programmes. Thus, millions of people in the global South who had hitherto depended on state provisions now rely on their own initiative to survive. Furthermore, deregulation of prices of necessities, like housing costs, rent, and utilities, jeopardises the security of tenure of poor and working-class people, subjecting them to the vagaries of market forces and the risk of joblessness and homelessness (Meagher & Yunusa, 1998). Reduction of state spending on social programmes also meant reduced access to decent public education, health care, urban infrastructural development, and state-subsidised housing. In the case of Nigeria, liberalisation resulted in massive layoffs of workers

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Informality and development in Africa 97 without a clear prospect of boosting economic growth and creating alternatives (Meagher & Yunusa, 1998). With the prospects for finding work in the formal labour market declining, retrenched workers turned to all sorts of informal activities and relationships in order to make ends meet. Thus, rather than the informal sector playing its previous supplementary role in the provision of employment and welfare, it is now a primary medium for sustaining the livelihoods of millions who were retrenched from their jobs or whose income is not sufficient to support basic needs. Weiss (1987) argues that the necessary conditions for the development of informality are provided not only by the features of an industry or economic sector, but also by specific socio-economic features of a society. From a neo-liberalist (or Marxist) perspective, it can be argued that informal activity represents a ‘people’s response’ to the over-regulation of the state (De Soto, 1989; MacGaffey, 1987). The informal economy, for example, is seen as a sphere of activity operating, by definition, ‘outside the state’. To this end, it can be further opined that in most cases the informal sector exists as a result of political decisions made either by the state at local level or by international organisations sometimes as a conditionality, going by experiences of the Structural Adjustment Programmes of the 1990s. Whereas in most cases policy decisions are not intended to cause informality as an outcome, there are instances when the state can intentionally make decisions, for example cost-cutting measures, that eventually force the affected citizens to resort to informality as a coping mechanism. 4.3.6 Informality and Institutionalism A lot has also been written on social networks and informality within the broader context of institutions. In informal sector studies, there has been a recent surge of interest in social networks and their role in the operation of the informal economy. Scholars have highlighted the importance of indigenous ethnic or religious networks in providing a context of cohesion, shared norms, and an economic infrastructure capable of coordinating international trading operations outside the formal economic system. There has also been increasing interest in the more localised functions of informal networks in such activities as training, the provision of credit, and various community welfare services. The ILO (1985) has recognised the ambivalent attitude of the state and its ‘failure to promote’ the informal sector as a central impediment to informal sector development. State ambivalence towards the informal sector is rooted in something more complex than ignorance or lack of policy coordination. Ambiguous or inconsistent policy, and policy that is

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difficult to enforce, represents an implicit encouragement of informalisation. It creates a climate suitable for the expansion of exploitative structures of informality, since the state fails to provide active protection and support for the informal actors, and provides gaps in the legal structure permitting stronger economic actors to make use of informal labour (Roberts, 1992). The state’s exclusion of particular socioeconomic groups, such as women, children, and migrants, from certain forms of institutional support or labour legislation creates exploitable reserves of informal labour. Thus, the failure of many African states to provide institutional support for the informal sector is not simply the result of policy mistakes or insufficient information; it is part of the logic of informalisation in the context of crisis. This is a logic based on cheap labour strategies for employers and survival strategies for workers. In the final analysis, there is a fundamental conflict between the pressures to cheapen labour and get the state out of the economy (Portes et al., 1989). In the context of state crisis, there is a growing literature focusing on the potential of social networks to replace the cumbersome and inefficient regulatory framework of the formal economy (Meagher, 2006). Grassroots organisations and communal networks (informal networks) are presented as independent of the state and able to respond more effectively and democratically as state institutions to the economic and social needs of the population (World Bank, 1989). Social networks have become the new consensual analytical tool to explain dynamism in developing economies (Meagher, 2006). The social networks focus on issues of trust, flexibility, and social relationships that provide richer insight into the conditions in which state regulations are not needed to regulate economic behaviour. Commonly, this concept is referred to as social capital. The literature treats social capital as a social asset (stock of social, psychological, and emotional assets) that contributes to a flow of benefit to individuals, or to a community through its social networks (Kinyanjui, 2014; Fukuyama, 2001; Putnam, 2001). The informal activities in developing countries are products of social, cultural, economic, and historical forces comprising what Ellickson (1991) and Sturgess (1997) call ‘order without law’.

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4.4 INFORMALITY AND NATIONAL DEVELOPMENT PLANS: THE CASE OF THE JUA KALI SECTOR IN KENYA The discussion in this section focuses on two issues. The first subsection examines the contribution of the Jua Kali sector to national development in Kenya, while the second analyses policies that the government has put in place that speak to the informality discourse both at general and specific levels. The objective is to identify the theoretical underpinnings of the policies and highlight inconsistencies between theory and practice. The first subsection focuses on analysis of the overall development policy; the second focuses on those documents with substantial impact on informality. 4.4.1 The Jua Kali Sector and Its Contribution to National Development Jua Kali is a Swahili word that translates as ‘hot sun’; it is used to refer to the informal sector in Kenya. The name dates back to early colonial times and was originally used to refer to artisanal fabrication, hawkers, and repair enterprises that operated in open fields with little (semipermanent) or no shelter (Charmes, 2012; Macharia, 2008). However, the name has since evolved over the years to cover a wide range of informal Small and Medium-sized Enterprises (SMEs), including anyone in selfemployment operating in either open space or permanent premises. Indeed, Jua Kali has penetrated almost every sector of the economy, with large footprints in wholesale and retail trade, hotels and restaurants, manufacturing, construction, transport, communication, community, and social and personal services, among others (KNBS, 2018). The sector is characterised by a largely fragmented market structure, individual operations, easy entry and exit, little capital investment, an informal management structure, and employment of rudimentary labour-intensive technologies (Obare, 2015; Ahveninen et al., 2016). The Jua Kali sector’s prominence grew after Kenya’s independence in 1963, as the government introduced capitalist policies that pushed those who did not own land and capital into the informal sectors, moving to urban centres where there were great prospects. The sector burgeoned rapidly in the 1980s and ’90s following the introduction of structural adjustment programmes; these liberalised the market, allowing for the concentration of economic production in a few large corporations (Macharia, 2008). This, coupled with growing population, led to limited

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employment opportunities in the formal sector, forcing most people into labour-intensive sources of income in the Jua Kali sector. Jua Kali has grown into a complex economic sector with significant impact on economic and social growth in Kenya. In response to this development, the government has, over the last three decades, designed and implemented several policies to support and regulate the sector. The main policy documents include: Sessional Paper No. 2 of 1992 on Small Enterprise and Jua Kali Development; Sessional Paper No. 2 of 1996 on Industrial Transformation to the year 2020; Sessional Paper No. 2 of 2005 on the Development of Micro and Small Enterprises; National Trade Policy, 2009; and lastly, the Micro and Small Enterprises Act, 2012 (see Table 4.3). The operationalisation of sessional papers varied. No. 2 of 2005 was significantly implemented alongside the broader policy document, Other Economic Recovery Strategies (ERS), which saw the economy grow by 6.9 per cent in 2007. The same paper culminated in the Micro and Small Enterprise Act of 2012, which established institutional mechanisms to support and regulate the sector (Mang’unyi et al., 2018). From the growth of the sector alongside policy framework, our discussion turns now to a review of the role of the Jua Kali sector in development. Table 4.3 Review of government policies related to the informal sector

Columns

Design

Policy document

Underlying development theories

Objectives and government actions

Sessional Paper No. 2 of 1992 on Small Enterprise and Jua Kali Development in Kenya

– Modernisation theory – Basic Needs – Neo-liberalism – Institutionalism – Gender and Development

This policy document seeks to enhance small enterprise and Jua Kali development in Kenya in order to establish an enabling environment for the development of the informal economy. The paper emphasised the need to create an enabling environment through an appropriate legal and regulatory framework and to put in place support and facilitative measures to promote the growth of the sector. However, these measures have not yielded the expected impact, largely due to their inappropriate design and weak implementation.

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Informality and development in Africa 101 Policy document

Underlying development theories

Objectives and government actions

Sessional Paper No. 2 of 1996 on Industrial Transformation to the year 2020

– Modernisation theory – Basic Needs – Neo-liberalism – Institutionalism – Gender and Development

Aiming to spur industrial transformation by the year 2020, the paper called for review of the Vagrant and Public Nuisance acts to make a conducive environment for Jua Kali enterprises.

Sessional Paper No. 2 of 2005 on Micro and Small Enterprises

– Modernisation theory – Basic Needs – Neo-liberalism – Institutionalism – Gender and Development

The overall goal of this policy framework is to develop a vibrant MSE sector capable of promoting the creation of durable, decent and productive employment opportunities; stimulating economic growth; reducing economic disparities; strengthening linkages between firms; diversifying the domestic production structure and industrial base; and leveling the playing field between MSEs and the larger enterprises; improving MSE.

National Trade Policy 2009

– Institutionalism

This policy was meant to spur industrial transformation by the year 2020. The paper called for review of the Vagrant and Public Nuisance acts to make conducive environment for Jua Kali enterprises.

The Micro and Small Enterprises Act, 2012

– Institutionalism

The Act provides for rules and regulation that guide different aspects of the sector.

Source:

Authors.

4.4.1.1 The Jua Kali sector and employment creation The informal sector is an important contributor to development in contemporary low-income economies. Researchers argue that, to the extent that the sector commands key production and economic growth resources, it plays a vital role in evaluation of the performance of the economy (Obare, 2015; Safavian et al., 2016; Williams & Horodnic, 2015). One of the key areas in which informal sector has contributed to development is in bridging the employment gap (Mang’unyi et al., 2018). The Jua Kali sector includes a wide range of support service businesses, with few or no regulations for entry; thus it is a significant job-creation

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engine (Bull et al., 2016). According to Fox and Sohnesen (2016), the sector is an important source of employment, earnings, and household livelihood in Sub-Saharan Africa. Indeed, the researchers note that over 70 per cent of the employment in the region comes from the informal sector. In Kenya, the Jua Kali sector accounts for 83.4 per cent of total employment, with 787.8 thousand new jobs created in the sector in 2018, which is 21.1 per cent higher than in 2013 (KNBS, 2018). Comparing this with the formal sector, the Kenya National Bureau of Statistics’ Economic Survey Report of 2018 shows that, whereas job creation has been on an upwards trajectory in the informal sector during the last six years, employment in the formal sector has either stagnated or has fallen year to year, with formal employment dropping from 134.2 thousand new jobs in 2013 to 110 thousand new jobs by 2018. In its nature and design, employment in the informal sector is not based on level of education or age. The Micro, Small and Medium Establishment (MSME) Survey Report of 2016 revealed that nearly three-quarters of the people working in the sector had primary school or below level of education and over 60 per cent were people aged younger than 35 years. As observed by Mallubhotla (2013), employment has a negative correlation with crime, thus by absorbing this category of the population (youth and uneducated), the Jua Kali sector not only improves the livelihood of the most disadvantaged but also reduces deviancy and crime in society. However, the dominance of people with low education and the lack of skills training have been cited in literature (Kabecha, 1999; Lauridsen, 1994) as a leading cause of inefficiency and underperformance of enterprises in the sector. 4.4.1.2 The Jua Kali sector and economic growth The importance of the Jua Kali sector goes beyond creating employment to enhancing productivity and commanding a significant share of national output. Beck, Demirguc-Kunt, and Levine (2005) argue that the Jua Kali sector enhances competition, strengthens entrepreneurship, and encourages innovation, which improves aggregate productivity as well as generating external benefits of optimising efficiency across the entire economy. The sector is thus a primary vehicle by which new entrepreneurs provide the economy with a continuous supply of ideas, skills, and innovations. In recent years, the Jua Kali sector has registered higher growth in output than industry and agriculture across the globe (Katua, 2014). In Kenya, Mang’unyi et al. (2018) found that the Jua Kali sector’s contribution to GDP has been rising, from 13 per cent in 1993 to 25 per cent in

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Informality and development in Africa 103 2015. These findings were supported by those of the Kenya Bureau of Statistics in the Micro, Small and Medium Establishment (MSME) Survey Report of 2016; this revealed that the Jua Kali sector contributed 28 per cent of Kenya’s GDP, translating to KSh 3.3 trillion in 2016, which is greater than the contribution of the agricultural sector. 4.4.1.3 Some negative effects of the Jua Kali sector The Jua Kali sector is acknowledged for its provision of goods and services that are affordable, accessible, and available in different quantities, thus enhancing household savings (Muthyoi, 2014). This shows that the sector plays a significant role in economic growth and alleviation of poverty. However, there are concerns regarding the quality of goods and services offered by the sector, as these are not subjected to inspection and regulations, unlike large enterprises (Bowen et al., 2009). The MSME survey report of 2016 established that 82 per cent of businesses in the informal sector are not registered (KNBS, 2016). This, coupled with poor sanitation in marketplaces, poses significant challenges concerning quality, which are often transferred to poor households depending on the sector for products, leading to a myriad of consequences that include health problems. The Jua Kali sector is predominantly characterised by deployment of rudimentary technologies with limited automation, which lowers levels of quality required in industry. Additionally, fragmentation and the weak regulatory framework in the informal sector has created a fertile ground for engagement of illegal activities (Obare, 2015). Sessional Paper No. 9 on National Industrialization Policy Framework, 2012, raises concerns about the proliferation of counterfeits and sub-standard goods, through informal sector importation, in the market; this impacts the economy negatively, especially the local industries. In addition to counterfeits, the Jua Kali sector is linked to illegal importation/smuggling of products into the country and tax evasion, which prompted the government to impose a ban on clearance of cargo at the Internal Container Depot (ICD); this had far-reaching consequences affecting traders and their employees. 4.4.2 Informality in Key National Development Documents from Sessional Paper No. 10 of 1965 to Vision 2030 The discussion that follows is an analysis of the key national development documents published since independence, namely: Sessional Paper No. 10 of 1965 on African Socialism and its application to Planning in Kenya; Sessional Paper No. 1 of 1986 on Economic Management for Renewed Growth; Kenya Poverty Reduction Strategy Papers (KPRSP)

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(launched in 2000); The Economic Recovery Strategy for Wealth and Employment Creation (2003–2007); Kenya Vision 2030 (launched in 2008); and lastly, the 2010 Kenya Constitution, as captured in Table 4.4. Table 4.4 Key national development documents since independence

Columns

Design

Policy document and year

Underlying development theories

Objectives and government actions

Sessional Paper No. 10 of 1965 on African Socialism and Its Application to Planning in Kenya

– Modernisation

The paper mainly centred on trade development and pursued enhanced protection of the domestic market to help develop industries. The policy was a key influence on the development of the trade regime in Kenya over the first decade following independence.

Sessional Paper No. 1 of 1986 on Economic Management for Renewed Growth

– Neo-liberalism

Beginning of neo-liberalism in Kenya, which marked a major break with previous policies. It states the stage for liberalisation of markets in Kenya and implementation included full-scale liberalisation.

Kenya Poverty Reduction Strategy Papers (KPRSP), launched in Nairobi, October 2000

– Neo-liberalism – Citizen participation – Basic Needs

Explains macroeconomic, structural, and social policies in support of growth and poverty reduction, as well as associated external financing needs and major sources of financing. The overall objective of macroeconomic policy is to restore economic growth within a sustainable framework of low inflation and healthy balance of payments.

The Economic Recovery Strategy for Wealth and Employment Creation (2003– 2007)

– Neo-liberalism – Institutionalism – Human Development – Gender and Development

The strategy outlined strategies and plans for decreasing poverty, which aimed at improving access to the benefits of economic growth by the most underprivileged members of the society.

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Informality and development in Africa 105 Policy document and year

Underlying development theories

Objectives and government actions

Kenya Vision 2030 (launched in 2008)

– Neo-liberalism – Institutionalism – Human Development – Gender and Development

The objective is to assist transforming Kenya into a newly industrialising, middle-income country providing a high quality of life to all its citizens by 2030. It is anchored on Economic, Political, and Social pillars. The Economic pillar aims to improve the affluence of all Kenyans through an economic development programme, encompassing all the counties of Kenya.

Kenya Constitution, 2010

– Neo-liberalism – Institutionalism – Human Development – Gender and Development – Participation – Basic Needs

The document restructured the Kenya state with the view of enhancing active citizen involvement in public affairs through devolved system of governance and establishment of independent commissions. The constition also provides for a robust bill of rights.

Source:

Authors.

An assessment of these national development documents shows some interesting shifts in terms of development theories informing national development strategies. The first document (Sessional Paper No. 10, 1965, on African socialism) is mainly informed by the modernisation theory, which underlines achieving national development through rapid economic growth by investing in high-potential areas (agriculture and industrialisation) (Republic of Kenya, 1965). As argued above, in this theory, informality is viewed as an impediment to development that should be addressed through integration into the formal means of economic production. In the sessional paper there was no explicit mention of informal economy or informality, with the implicit assumption that informality would disappear with high growth. The second document, Sessional Paper No. 1 of 1986 on Economic Management for Renewed Growth, leans more towards neo-liberal policies given that it limits the role of the state in development to regulation and instead extols the role of the market. One of the arguments within the development discourse is that emergence of a prominent role of informality in Africa in various aspects of people’s lives as a fallback position was

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more evident under neo-liberal policies mainly due to underdeveloped markets and the low purchasing power among the majority of citizens. The policies that ensued from 1986 are mainly blamed for poor development performance in Kenya (Odhiambo-Mbai, 1999), until 2003, when the newly formed National Rainbow Coalition (NARC) government took over the power from the Kenya African National Union (KANU) government and introduced new policies (Republic of Kenya, 2003). The two documents Economic Recovery Strategy (ERS) and Vision 2030 (Republic of Kenya, 2003, 2008) are complete departures from the previous two documents in terms of theory and practice. Both made major departures from the modernisation and neo-liberal theories. They instead underscore institutional building, gender equity, and economic growth, besides re-introducing some relative role of the state in public service provision. Again, unlike the previous two documents, they underline the significant role of the informal sector in national development. Nevertheless, it is important to note that these documents remain broad statements of intent at the national level. As a result, the extent to which they can realise their intention depends on many factors including the actual operationalisation of these intentions. 4.4.3 Key Policy Documents with Substantial Impact on Informality: From Sessional Paper No. 2 of 1992 to Kenya National Trade Policy of 2009 The significance of the informal economy and its contribution to development in Kenya was for the first time presented in the 1972 ILO Report entitled Employment, Incomes and Equality: A Strategy for Increasing Productive Employment in Kenya. Since then the government has come up with various policy measures with the intention of unlocking the potential of the informal sector in the context of national development. This section explores the following key policy documents: Sessional Paper No. 2 of 1992, sessional papers on industrialisation, Sessional Paper on trade, and National Trade Policy 2009, Sessional Paper No. 2 of 2005 on the Development of Micro and Small Enterprises for Wealth and Employment Creation for Poverty Reduction. A look at the policy documents reveals two things. One, there is an increasing appreciation of the critical role of the informal sector in advancing national development, hence the need to make the sector more productive; this is in contrast to early scholarship, which undermined the role of the informal sector in national development. Two, there is an attempt to include a multifaceted conceptualisation of informality in relation to development.

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Informality and development in Africa 107 Overall, these policies underscore the need for integration of informal MSEs into mainstream economic production, as reflected in the modernisation theory, and the need to improve the overall well-being of informal sector workers, as reflected in the human development theory. To achieve this integration, policy documents stress that the policy framework will encourage all forms of linkages between formal and informal MSEs besides expanding the definition of the MSE sector to include all enterprises, both farm and non-farm, employing fewer than 50 persons. Contrary to past publications, these documents underscore the critical role of the informal sector in creating job opportunities, besides addressing the limitations of formal sectors in advancing human well-being as espoused in the Basic Needs approach (ILO, 1972; Hart, 1973; Sen, 2000). The documents also acknowledge the significance of institutions in creating an enabling environment for MSEs in order for them to streamline their operations as articulated in the institutionalism approach (North, 1990; McCormick & Kimuyu, 2007; Acemoglu & Robinson, 2012). One of the key observations is the need to improve the effectiveness of the existing institutions by strengthening the Department of Micro and Small Enterprise Development (DMSED) and MSE associations, establishing the National Council for Small Enterprises, and legislating a Micro and Small Enterprises Act. The argument is that these institutions and this legal framework will strengthen policy coordination, implementation, and monitoring and evaluation, which have been largely lacking in previous attempts by government to promote the MSE sector. A review of the documents reveals some emphasis on the importance of partnership between key stakeholders, including the citizenry, MSE entrepreneurs, community, private sector, civil society, NGOs, and development partners (through appropriate policy dialogue) to harness synergy for effective resource mobilisation and utilisation, and overall development of the sector. There is also growing recognition of gender equity in the informal sector, in line with the main arguments in gender and development theory. A case in point is the requirement to make credit accessible to women. Lastly, the review of documents and the large body of supporting research shows a gap that has to date received little research attention, namely the negative effects of informality within the sector on the hired workers, who often suffer from low wages and lack of social protection. 4.4.4 Policy Implementation Status: Achievements and Challenges Kenya’s experience is a good example of what has happened across Africa in terms of the debate on informality. Initially there was very little

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recognition of the informal sector in policy documents. More recent policy documents have shown an interest in the informal economy, but attention to implementation remains sketchy. For example, in spite of satisfactory policies, the informal sector workers across Africa continue to be marginalised and lack basic services. Firms in the informal sector face disproportionate barriers to trade compared with those in the formal sector. This is largely due to lack of coherent and implementable policies and legal frameworks at national and county levels. Consequently, the firms face many challenges, including difficulties in international market access, limited credit access, lack of decent work spaces, and harassment by various licensing and regulatory authorities, among others (World Bank, 2016). The government should reduce trade barriers, improve infrastructure and transportation, and enhance access to market information to enable informal sector firms to engage effectively in trade. Regulatory frameworks that prevent firms in the informal sector from participating sustainably in trade should be revised to create a conducive environment in which they can contribute to national development. Government efforts as exhibited through various policies and sessional papers and development plans are yet to bear fruit for the informal sector. Even the creation of a state corporation called Micro & Small Enterprises Authority has not yet delivered the envisaged benefits for the informal sector.

4.5 CONCLUSIONS This chapter sought to examine the role of informality in Africa’s development, with a focus on Kenya, through a review of existing literature from a historical perspective. The chapter identified the following key development theories in post-independence Africa: Modernisation, Dependency, Basic Needs approach, Neo-liberalism, Human Development, Institutionalism, and lastly, Gender and Development. These theories have overlapped in time, in space, and as implicit or explicit foundations for policy. Despite differences in strategies that have underpinned these theories, which could be a result of many factors such as historical circumstances and disciplinary biases, the theories have one thing in common: the need to improve human well-being. Three main conclusions emerge from the analysis. The first is that the multiplicity of understandings of both informality and the aims of national development, have led to complex and often conflicting attitudes, policies, and actions towards the informal economy. The second conclusion is that the result of this multiplicity of policies, regulations,

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Informality and development in Africa 109 and government understandings and actions comes from differing development perspectives, making coherent policy difficult to achieve. Finally, whereas appreciation of the role of informality in the Kenyan economy is increasing, much more research is needed to guide policymakers in crafting appropriate policies. The analysis also gives rise to some practical recommendations that extend beyond the Kenyan case. First, African governments should undertake a careful review of all policies, laws, and frameworks to assess their impact on the well-being of informal sector workers. Second, continued efforts are necessary to ensure that different stakeholders can be involved in policy development. Last, there is a need for well-targeted research to enable policymakers to craft appropriate and coherent policies based on the country’s agreed development goals and its present socioeconomic realities. Such research should include historical, sectorspecific, and policy-driven studies using both quantitative and qualitative methodologies.

NOTE 1.

On ethnic networks and their role in cross-border trade, see Chapter 8 of this Handbook.

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Informality and development in Africa 113 Muthyoi, A. (2014), ‘The relationship between informal sector size and economic growth in Kenya’, unpublished thesis, Kenyatta University repository. North, D. (1990), Institutions, Institutional Change and Economic Performance, Cambridge: Cambridge University Press. Nussbaum, M.C. (2001), Women and Human Development: The Capabilities Approach, Vol. 3, Cambridge: Cambridge University Press. Obare, M.J. (2015), ‘The impact of informal economy on employment creation: the case of kamukunji Jua Kali artisans in Nairobi, Kenya’, International Journal of Economics, Commerce and Management, 3 (6), 853–888. Odhiambo-Mbai C. (1999), ‘The nature of public policy-making in Kenya: 1963–1996’, in N. Ng’ethe & W. Owino (eds), From Sessional Paper No. 10 to Structural Adjustment: Towards Indigenizing the Policy Debate, Nairobi: IPAR, pp. 24–54. Olmedo, C. & Murray, M.J. (2002), ‘The formalization of informal/precarious labour in contemporary Argentina’, International Sociology, 17 (13), 421–443. Olson, M., Sarna, N. & Swamy, A. (1998), ‘Governance and Growth: A Simple Hypothesis explaining Cross-countries Differences in Productivity Growth’, Working Paper No. 218, Center for Institutional Reform and the Informal Sector, University of Maryland at College Park. Owuor, J.A. (2007), ‘Integrating African indigenous knowledge in Kenya’s formal education system: the potential for sustainable development’, Journal of Contemporary Issues in Education, 2 (2), 21–37. Pieterse, J.N. (2010), Development Theory Deconstructions/Reconstructions, second edition, London: Sage. Portes, A. (1976), ‘On the sociology of national development: theories and issues’, American Journal of Sociology, 82 (1), 55–85. Portes, A. & Walton, J. (1981), Labor, Class and the International System, New York: Academic Press. Portes, A. & Schauffler, R. (1993), ‘Competing perspectives on the Latin American informal sector’, Population and Development Review, 19 (1), 33–60. Portes, A., Castells, M. & Benton, L. (1989), The Informal Economy: Studies in Advanced and Less Developed Countries, Baltimore, MD and London: The Johns Hopkins University Press. PREALC (Regional Employment Programme for Latin America and the Caribbean) (1978), El sector informal: Funcionamiento y políticas, Santiago de Chile. Prebisch, R. (1950), The Economic Development of Latin America and Its Principal Problems, New York: United Nations. Putnam, R. (2001), ‘Social capital: measurement and consequences’, Canadian Journal of Policy Research, 2 (1), 41–51. Raiser, M. (1999), ‘Trust in Transition’, EBRD Working Paper, No 39. Ram, M., Edwards, P., Jones, T. & Villares-Varela, M. (2017), ‘From the informal economy to the meaning of informality: developing theory on firms and their workers’, International Journal of Sociology and Social Policy, 37 (7/8), 361–373. Rao, J.M. (1998), ‘Development in a Time of Globalization’, paper prepared for the Workshop on Globalization, Uneven Development and Poverty, UNDP, New York, 24–25 October 1997. Redfield, R. (1956), Peasant Society and Culture: An Anthropological Approach to Civilization, Chicago, IL: University of Chicago Press. Republic of Kenya (1965), Sessional Paper No. 10 of 1965: African Socialism and Its Application to Planning in Kenya, Nairobi: Government Printers. Republic of Kenya (1986), Sessional Paper No. 1 of 1986 on Economic Management for Renewed Growth, Nairobi: Government Printers. Republic of Kenya (1992) Sessional Paper No. 2 of 1992 on Small Enterprise and Jua Kali Development in Kenya. Nairobi: Government Printers.

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5. Facing informal economy practices and institutions: the challenge of formalisation policies in Africa Frédéric Lapeyre

5.1 INTRODUCTION The informal economy is the reality of the world of work for a large majority of people in developing countries, especially in Africa, where informal employment runs close to 86 per cent of total employment compared with an average of 61 per cent at the international level (ILO, 2018). Although modernisation theories in the 1950s and 1960s predicted a universal process of convergence towards formal jobs in a growing modern sector, the informal economy has shown, over the decades, a remarkable resilience and vitality. And in Africa, hundreds of millions of women and men are still to a certain extent securing their livelihoods in the informal economy through great adaptive capacities, entrepreneurship, and innovative practices and institutions (Hillenkamp et al., 2013). While some activities in the informal economy offer reasonable livelihoods and incomes, most workers operating in it are facing a high level of vulnerability to basic risks and a wide range of decent work deficits as they are not covered by legal and regulatory frameworks and are excluded from social protection schemes. From this perspective, the informal economy is a major challenge for the rights of workers and for inclusive development. It also has a negative impact on the development of sustainable enterprises, public revenues and governments’ scope of action, particularly with regard to the level of productivity, access to markets and credit, fair competition, fiscal space and tax fairness (ILO, 2015). To respond to this growing concern, two international instruments were adopted in the mid-2010s. These comprised, firstly, in June 2015, a new international labour standard by the International Labour Organization (ILO), Recommendation no. 204 on the Transition from the Informal to

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The challenge of formalisation policies in Africa 117 the Formal Economy; and subsequently, in September 2015, the Sustainable Development Goals Agenda by the United Nations General Assembly, which included within Goal 8, on promoting “sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all”, (i) a target, 8.3, which aims at promoting formalisation, and (ii) a monitoring indicator, which is the share of informal employment in non-agricultural employment. The report of the ILO’s Global Commission on the Future of Work (2019) echoes this new priority of the development agenda when it calls for including “those who have historically remained excluded from social justice and decent work, notably those working in the informal economy” (p. 14), and for providing opportunities “to create decent work, to facilitate the formalization of those in informal employment and to end working poverty” (p. 24). Finally, the ILO’s Centenary Declaration (2019), adopted at the International Labour Conference, stresses, “It is imperative to act with urgency to seize the opportunities and address the challenges to shape a fair, inclusive and secure future of work with full, productive and freely chosen employment and decent work for all.” From this perspective, it emphasises the importance of “promoting the transition from the informal to the formal economy” ((xiv), Section 2). And it calls “upon all its Members, taking into account national circumstances, to work individually and collectively, on the basis of tripartism and social dialogue, and with the support of the ILO, to further develop its human-centred approach to the future of work” by “[p]romoting sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all through … (iv) policies and incentives that promote the creation and development of sustainable enterprises, innovation, and the transition from the informal to the formal economy” (Section 3.C). This is the context in which public policies have devoted increasing attention to the informal economy in recent years (Islam and Lapeyre, 2020). Although Latin America, and notably Brazil, Argentina and Uruguay have been developing policy frameworks that aim to facilitate the transition of economic units and employment towards the formal economy since the 1990s, the formulation of formalisation strategies in Africa is a new process, which is gathering momentum. The growing recognition of the informal economy as a structural transformation problem related to the pattern of development in low- and middle-income countries is based on multidimensional analyses that show how actors in the informal economy have to cope with very low productivity, lack of access to credit, low level of skills, restrictions on market access, the absence of the rule of law, lack of social protection, poor and even

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dangerous working conditions, and a lack of representation and participation in consultation bodies (ILO, 2014). In recent years, growing research has been carried out into how the informal economy operates; the resulting literature highlights the vast array of practices and institutions aimed at securing people’s livelihoods in developing countries (de Villers et al., 2002; Meagher, 2010; Trefon, 2004). It shows not only the capacity for resilience and innovation of people in light of the risks and crises affecting their living and working environment, but also the people’s will to fight in various ways to maintain or restore their dignity of life. There is a crucial need to develop a new vision of this multitude of initiatives taken at the local level in the informal economy, which is emanating from the grassroots and combining individual and collective approaches with the creation of networks (increasingly articulating the local, national and global dimensions through trade and migration) and associations (Lapeyre and Lemaitre, 2014; Lapeyre and Barussaud, 2019). (See also chapters 8 and 10, 11, 12 in this Handbook.) This proliferation of more or less autonomous practices and institutions involving actors within the informal economy has not really caught the attention of mainstream analytical frameworks and has therefore not been taken into account in formulating public policy for facilitating transition to formality and local development. Actors’ strategies to secure their livelihoods in the informal economy are very difficult to grasp from a methodological point of view, but it is essential to better understand the many transgressive practices within the informal economy; these are the reason for a refractory attitude on the ground, which public policies must face when implementing measures. There are virtually no statistics on the real-life experience of co-production of urban space and the co-existence of competing, if not conflicting, regulations in African cities between formal and informal institutions. In the informal economy there is no observable and comprehensible system of the type that scientists and political decision-makers like so much. Instead, the actual situation is transient, ever changing, disconcerting and ambiguous, and is therefore difficult to measure or calculate accurately; and rigorous reasoning does not come into the equation. Yet these individual and collective responses within the informal economy to factors of stress or new opportunities are crucial to understanding the impact of public policies that will interact with them. This is what George Balandier ([1957], 2007, p. vi) called “the permanent invention of daily life, the material and immaterial creation of what is necessary to maintain it. It is the informal economy and the world it creates …. It is the economy of ordinary people not that of those who are powerful and

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The challenge of formalisation policies in Africa 119 important any more, an economy based on the ‘democracy’ of know-how and fertile ground for inventiveness.” From this perspective, the current chapter proposes to show that public policies intending to facilitate transitions towards the formal economy should be a means to inclusive development and not an end in themselves in terms of aiming at increasing fiscal space or better controlling the informal economy. The chapter targets the adaptive capacities of informal economy actors, describing how informal economy actors systematically reposition themselves vis-à-vis the State, markets, and international and national policies to secure their livelihoods, and how this triggers a need to reformulate questions relating to policy intervention based on a more thorough understanding of the perspective of such informal economy actors (Lapeyre, 2013). The principal objective pursued by most participants in the informal economy is livelihood security, as their work and lives are characterised by ubiquitous vulnerabilities and massive risks. It is understandable that in these circumstances they should pursue multiple strategies centring on enhancing livelihood security and reducing vulnerabilities. They pursue these objectives through strengthening social ties, cementing solidarity, constructing relations of reciprocity, promoting redistribution and encouraging a sharing of resources (Ghai, 2013). The formalisation project should include genuine alternative solutions that can secure livelihoods. The legitimacy of this project hinges on this crucial test. Faced with exclusion, social fragmentation and anomie processes, the State’s responsibility is to make “cohabitation” within the formal economy desirable, feasible and thinkable (Lapeyre, 2019). The results of studies carried out among those in the informal economy reveal that household livelihood security is one of people’s main concerns. In this regard, this should form the central plank of any integrated formalisation strategy and a component of a democratic “new deal” between the people and the State. The “deal” includes consolidating local associative movements and creating an inclusive State that guarantees collective freedoms, social justice and the construction of territories where “sustainable good life” is possible. Such a paradigm shift, however, requires multi-scalar policy frameworks that address the challenges confronting the informal economy by supporting institutions and policies that allow local communities to enhance their capabilities to secure and improve their livelihoods through developing and protecting their economic and social rights (Christopherson et al., 2010).

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5.2 FROM DEVELOPMENT TO MALDEVELOPMENT: HOW THE INFORMAL ECONOMY CHALLENGED MODERNISATION THEORIES In the 1950s, the modernisation paradigm was a large-scale offensive to negate the plurality of people’s “futures” by offering a single linear universal path to development modelled on the experience of developed countries (either capitalist or socialist) (Lewis, 1954; Rostow, 1960; German and al., 2003). This paradigm emphasised the dualistic nature of underdeveloped countries and opposed the modern sector and the traditional sector, founding the obstacles to economic, social and political development in the latter, which was seen as backward, characterised by low productivity, rigid social structures, and inadequate mentality for economic and technological progress. The symbolic violence of the new dominant discourse on development involved setting aside all the cultural richness and diversity of popular socioeconomic practices and institutions in order to produce a vertical ranking based on a single indicator, that of GNP per capita (Sachs, 1992). The “Truman doctrine” as set out in point IV of the US President’s 1949 State of the Union Address, had a deep and lasting effect on the debate about development and forms of intervention in the context of development cooperation (Rosenstein-Rodan, 1957). At the time, in his address, Truman was translating the dominant view of development as a process of modernisation that aimed to help traditional societies transform into modern societies (Hoselitz, 1960; Parsons, 1964; Inkeles, 1969). And an important premise of modernisation theories was that the benefits of economic growth would trickle down to the poor through industrialisation, urbanisation and formalisation (Nurkse, 1953; Scitovsky, 1964). That dichotomous view of “traditional versus modern” was to have highly significant consequences on the vision of the informal economy and the role of grassroots actors in designing development policies. The key actor in development was clearly defined at the time; the State was responsible for launching proactive economic development policies; and there was a very broad consensus on the importance of top-down development planning as a vital tool for structural transformations that aimed to ensure the transition from a rural to an urban society, from agriculture to industry and from the traditional to the modern (United Nations, 1955; Apter, 1965). For a long time, the traditional was perceived as the negative opposite to modernity just as subsequently the informal was defined in terms of

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The challenge of formalisation policies in Africa 121 what it was not in relation to the formal, without any effort being made to understand the rationale and development impact of informal economy actors’ strategies. Modernisation theories simply denounced at length poverty, powerlessness and in particular the harm caused by oblique procedures, convoluted pathways and tricks of approximation seen as the traces of a traditional – and informal – world to be banished to oblivion as quickly as possible (Lerner, 1962; Huntington, 1971). Most of the abundant mainstream literature about the informal economy is based on the implicit assumption that development occurs through the growth of the formal, modern economy. The informal economy was viewed as an employment sector of last resort made up of pre-capitalist, informal production units that would disappear with the development process. Informal economy actors’ practices and institutions were lumped together in a single and decisive condemnation that relegated to the shadows real development processes within what is now known as the informal economy. However, the processes of modernisation appeared, progressively, as “full of holes” and “leaking”, leading to hybrid patterns of development combining a narrow formal sector, a booming urban informal sector and a resilient small farming sector. The early 1970s were marked by a change of perception by a whole category of development specialists, that growth had been uneven and had led to the emergence of modern enclaves delivering a westernised lifestyle and consumption pattern to an elite, with the rest of the population being pushed to the margins of “modernity” (Frank, 1966; Sunkel, 1969). This gradual shift in development thinking took place from an almost exclusive preoccupation with growth rates and industrialisation to concern with the employment problem and worsening income distribution. Development paths in developing countries were marked by a diversity of dynamics of social change, resulting from the confrontation of the practices of popular actors in the informal economy and the modernising offensives of the elites, which were impacting the structures of the everyday lives of the former (Peemans, 2002). Contrary to the myths of convergence or the end of history associated with theories of modernisation, popular practices in the informal economy are the most visible sign of spheres of autonomy, which populations are managing to preserve or recreate for the management of resources, and for the organisation of work, production methods and lifestyles (Lapeyre, 2006; Sanyal, 2007). Taking into account those “forgotten actors” who live within the “folds” of the modernisation

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project, i.e. those who have long been regarded as non-actors in development, necessarily led to a substantially different idea of poverty reduction and the transition to formality.

5.3 TRANSITION TO FORMALITY AND STRUCTURAL TRANSFORMATION: WHAT DO WE KNOW? When the first United Nations development decade drew to a close, there was an emerging convergence of views on the need for development policies to focus more specifically on employment generation and reduction of poverty and inequalities. Thus, the focus of attention shifted towards the working poor and structural obstacles to equity among different socioeconomic groups, between rural and urban areas, between North and South, between men and women, and between those in the formal sector and in the informal sector. As Dudley Seers (1969) put it: The questions to ask about a country’s development are: What has been happening to poverty? What has been happening to inequality? What has been happening to unemployment? If all three of these have become less severe, then beyond doubt this has been a period of development of the country concerned. If one or two of these central problems have been growing worse, especially if all three have, it would be strange to call the result development even if per capita income doubled. (pp. 3–4)

One of the key contributions of the ILO in the 1970s, notably through the World Employment Programme, was the idea of the need of a greater loosening of the ties between the sphere of accumulation and the sphere of development, because growth can be a development mean – depending of the pattern of growth – but can’t be a development end, which is associated with the satisfaction of mankind’s basic needs – whether material or immaterial (Jolly et al., 2004). It was during that period that the ILO contributed to alternative development thinking and practice by supporting and documenting the view that high economic growth may fail to bring about a commensurate rate of poverty reduction if it is not accompanied by a rapid growth of productive and remunerative employment. The ILO emphasised the idea that the most effective way to reduce poverty is to promote full and productive employment. In other words, poverty is most effectively reduced by the greater utilisation of labour, the resource that most poor households have more of than any other resource, in a way that it creates for them entitlement to income and welfare (ILO, 1969).

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The challenge of formalisation policies in Africa 123 New employment-oriented strategies emerged from the ILO’s comprehensive employment missions, composed of academic researchers and officials from the ILO and other UN agencies. Between 1970 and 1976, the ILO organised comprehensive employment missions to Colombia, Sri Lanka, Kenya, Iran, the Philippines, the Dominican Republic, and Sudan. The redistribution with growth approach emerged from the ILO’s employment mission to Kenya, headed by professors Hans Singer and Richard Jolly. Their report proposed a broad strategy of “redistribution with growth”. The general objectives of the proposed strategy were: “(a) continued expansion of the economy, (b) wider sharing of the benefits of expansion, (c) national integration of the economy, and (d) a reduction of extreme imbalances and disparities” (ILO, 1973, p. 5). The cornerstone of the ILO’s basic need strategy was the idea that a greater increase in employment and a more equitable distribution of income should entail a greater increase in the demand for essential consumer goods as compared with non-essential consumer goods and services, while the former was much more labour intensive and so a means to create both employment and income for the poorest. One essential aspect of the ILO’s contribution to the development debate was to re-embed growth in a multidimensional framework in which growth is one component among others such as employment promotion, and inequality and poverty reduction. The challenge was to combine employment policies and economic policies in such a way as to further simultaneously both the employment and growth objectives. The ILO’s approach to the issue of the informal economy and its consequences for the world of work is deeply rooted in that seminal and vast research programme on the importance of patterns of growth rather than growth as such for promoting full and productive employment and improving working and living conditions for all. Indeed, widespread underemployment and informality are structural characteristics of developing countries’ economies and are not a peripheral problem that can be addressed in isolation from mainstream development strategies. Pioneering work on informality in Africa, initiated with the ILO’s multidisciplinary employment mission in Kenya (1972) and Keith Hart’s seminal work in Ghana (1973), have greatly contributed to that shift in perceptions about: (i) the need to re-embed employment – both quantity and quality aspects – as a core element of development strategies; and (ii) the need to tackle the policy challenge of fragmented labour markets associated with the cohabitation of a formal and informal economy. Subsequent research programmes on the informal sector and popular socioeconomic practices went beyond inherently associating them with poverty and the traditional, pre-capitalist sector. Instead, informal

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economy actors came to be recognised for their capacity to combine production activities, the construction of networks of reciprocity and solidarity, and their adaptive capacities to secure their livelihoods despite the multiform vulnerabilities they faced (MacGaffey, 1991; Scott, 1985; Meagher, 2010; Hillenkamp et al., 2003; Lapeyre, 2019). According to development theory and policy, structural transformation is considered as a key element of growth and economic welfare (Rosenstein-Rodan, 1943; Hirschman, 1958; Rodrik, 2008; UNCTAD, 2016). Based on the experimental paths taken by countries that reached the high-income group, it is widely agreed that economic development is the result of a dynamic of change from an economy dominated by low productivity and subsistence agriculture towards a predominantly urban and higher productivity economy marked by the dominant role of industrial and service sectors. Transition to formality is greatly impacted by such structural change, as inclusive structural transformation occurs only when one can observe a shift from low-productivity agriculture to higher-productivity activities. However, in many low-income countries, especially in Africa, analyses of the last decades show that there is a significant shift of the labour force out of low-productivity agriculture yet most of the workers don’t join higher-productivity sectors (in particular industry) but low-productivity service sectors (mainly low wages/income services such as within the small-scale retail sector and other urban informal economy activities characterised by the dominance of low-productivity microenterprises and own-account workers) (de Melo, 2017; Rodrik, 2012). While the East Asian type of structural transformation led by a rapid expansion of the manufacturing wage employment played a crucial role in employment formalisation in many Asian countries, Africa faces a major structural transformation challenge as it is unlikely that it can follow such a path based primarily on manufacturing (Fox et al., 2017). For low- and middle–low-productivity African countries, transition to formality requires some integrated strategies aiming at both: (i) promoting nonfarm employment creation, and in particular wage employment, in higher-productivity industrial and services sectors; and (ii) improving agricultural productivity especially in small-scale subsistence farming. Moreover, an urgent potential exists for inclusive structural transformation through within-sector productivity changes in agriculture and service sectors. Such a process could be speeded up through appropriate incentive frameworks to promote investments in key areas for decent and sustainable work. As highlighted by the ILO’s Global Commission on the Future of Work (2019), such investments should support the development of the rural economy, which accounts for more than two in five of the

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The challenge of formalisation policies in Africa 125 world’s workers and which is marked by poverty, informality and low-productivity small-scale agriculture. Such a supportive policy framework for structural change in employment and economic structures requires: (i) upgrading and modernising small-scale subsistence farming, which would facilitate greatly the transition to formality and decent work; (ii) promoting forward and backward linkages between agriculture, industry and services; and (iii) developing government initiatives and public investment to provide SMEs, especially in rural areas, with access to infrastructure, markets, technologies and credit to exploit value chain opportunities. For the success of such integrated strategies, high-quality physical, digital and social infrastructures, including high-quality public services, will be fundamental prerequisites. And increasing productivity in agriculture and service sectors to support a positive transformation of the structure of employment will necessitate directing more investment towards digital infrastructure to support technological changes in smallscale farming and develop high value-added services (Global Commission on the Future of Work, 2019). Countries must now prioritise long-term, sustainable investments that favour human development and protect the planet. New rules, business incentives and economic policy targets can better direct investments towards areas of the economy that advance decent jobs and formal employment and build the foundation for higher value-added activities, with a strong concentration on gender equality (with a special focus on the care economy) and sustainable development. Sustained job-generating growth is a necessary condition for the process of employment formalisation to take place, but it is the interaction between that process and specific policies that determines policy effectiveness and tangible results in terms of transition to formality. The overall goal is to invest in “decent and sustainable work” as a core element of a transition to formality integrated strategy. This calls for: (a)

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pro-employment macroeconomic policies that support aggregate demand, productive investment and structural transformation, promote sustainable enterprises, support business confidence, and address inequalities; trade, industrial, tax, sectoral and infrastructure policies that promote employment, enhance productivity and facilitate structural transformation processes (including the transition to a carbonneutral set of production systems and the transition to a digitalised world of work); and

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(c)

local economic development and local resources-based policies to strengthen communities’ transformative capacities, especially in rural areas.

What policy makers need are diagnostic tools, evidence-based policy recommendations and knowledge sharing of good practices to be able, through a social dialogue mechanism, to formulate and implement context-specific structural transformation policies aiming at both of the following: 1.

2.

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Developing those productive sectors that offer the promise of major employment and decent work opportunities in the future. This has obvious strategic significance. And while every country will face different circumstances, there are clearly some areas that have transformative significance for the development of formal employment: they are the green economy – the jobs that will come from the transition to an environmentally sustainable future; they are the care economy – so important now that many of our societies are ageing and others require us to focus more on the care of our young people; and they are the rural economy, where it’s too easily forgotten that a very large proportion of the world’s population is employed (i.e. there is a need to pay special attention to the role of the structural transformation of small farming, taking into account the very significant effects of agricultural technology on development and decent work). Generating the appropriate conditions and an enabling environment for a high proportion of in situ formalisation to take place through tackling the structural drivers of informality and obstacles to formalisation, especially for SMEs and self-employed. The experience of Latin America in the 2000s shows that the biggest source of formalisation was that observed in the same job. Approximately 30 per cent of new formal workers in Brazil and Peru, and 40 per cent in Argentina, Ecuador and Paraguay became formal employees in the same job (in situ formalisation). Electrification, rural roads, and other private and public investments in physical and digital infrastructure and appropriate technologies have a significant impact on private productivity, earnings of small-scale producers and the security of livelihoods. Promoting productivity gains, technological change and access to market are especially important because these actions will ultimately determine the opportunity to transit from the informal to the formal economy for most informal economic units and self-employed. Among other important components, one can

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The challenge of formalisation policies in Africa 127 point out making a good use of global supply chains, up-grading value chains, developing backward and forward linkages associated to growth sectors, promoting skills and extending social protection coverage.

5.4 IMPROVING THE WORLD OF WORK IN THE INFORMAL ECONOMY: ILO RECOMMENDATION NO. 204 ON “TRANSITION FROM THE INFORMAL TO THE FORMAL ECONOMY” (2015) Although the ILO became interested in the issue of the informal sector and subsequently the informal economy very early on (back in the early 1970s), it had never proposed, before the adoption of Recommendation No. 204, an international instrument specifically to target it. Convention No. 189 on Domestic Workers, adopted in 2011, highlighted the extent of informal employment in this industry and its implications in terms of decent work deficits. Recommendation No. 202 on Social Protection Floors, adopted in 2012, for its part emphasised the need to extend social security coverage to workers in the informal economy who did not have access to it. In this context, the adoption of Recommendation No. 204 on the transition from the informal to the formal economy was of strategic importance for the world of work. This was the first international standard that addressed the informal economy as a whole, along with its diversity, and which specifically stated that the transition to the formal economy was the necessary route to make decent work a reality for all and to promote inclusive development. The recommendation, a non-binding instrument with a universal scope, took note of the highly diverse nature of informal situations, and in particular considered the specific nature of national contexts and priorities of the various countries with regard to the transition to the formal economy, while at the same time proposing guiding principles and concrete directions in terms of policies to meet these priorities. In keeping with its core mandate based on tripartite mechanisms and social dialogue between governments and workers’ and employers’ organisations, for two years (2014–2015) the ILO became a unique space for the issue of the transition to the formal economy to be discussed and negotiated. Although there were competing and even conflicting views on what form the transition should take and how it should be implemented, there was nonetheless a global agreement on the idea that formalisation was a necessary condition to combat decent work deficits (ILO, 2015).

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The spirit of the Recommendation recognised that formalisation is a means towards sustainable and fair development and not an end in itself, since “decent work deficits – the denial of rights at work, the absence of sufficient opportunities for quality employment, inadequate social protection and the absence of social dialogue are most pronounced in the informal economy” (“Preamble”). This position also acknowledges, “most people enter the informal economy not by choice but as a consequence of a lack of opportunities in the formal economy and in the absence of other means of livelihood” (“Preamble”), and there was also an acknowledgement of existing positive dynamics within the informal economy in terms of the security of living conditions and of work. Thus, there is no question of harassing those who operate in the informal economy and depriving them of their economic and social means of existence, but rather, through comprehensive social dialogue mechanisms, to support these grassroots practices to create security in order to strengthen their contribution to the genuine development of “ordinary” people. This strong vision crops up in various parts of the Recommendation, such as: (i) “Recognizing the need for Members to take urgent and appropriate measures to enable the transition of workers and economic units from the informal to the formal economy, while ensuring the preservation and improvement of existing livelihoods during the transition” (“Preamble”), and also (j) “The preservation and expansion, during the transition to the formal economy, of the entrepreneurial potential, creativity, dynamism, skills and innovative capacities of workers and economic units in the informal economy” (“Guiding Principles”). Recommendation No. 204 is constructed on the belief that only an integrated strategy, which targets not only those working in the informal economy but also the model of growth, can ensure that the fruits of growth are more fairly redistributed through job creation and decent work. As a result, it provides guidance to draw up integrated strategies with a view to achieving a three-fold objective: (a)

(b)

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facilitate the transition of workers and economic units from the informal to the formal economy, while respecting workers’ fundamental rights and ensuring opportunities for income security, livelihoods and entrepreneurship; promote the creation, preservation and sustainability of enterprises and decent jobs in the formal economy, and the coherence of macroeconomic, employment, social protection and other social policies; and prevent the informalisation of formal economy jobs.

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The challenge of formalisation policies in Africa 129 This Recommendation, which was adopted in the same year as the 2030 Agenda for Sustainable Development, is a tool for implementing the agenda and specifically for achieving sustainable development goal 8. In terms of intervention, the specific nature of the recommendation, in addition to the elements set out above, is based firstly on a desire not to delink the formalisation of economic units, the formalisation of employment and the creation of decent employment. The intention is not to set up a two-tier system wherein incentives would be offered to companies to formalise themselves with the administrative and tax authorities without a trade-off in terms of principles and fundamental rights at work and social protection for their workers. The integrated approach proposed combines curative, preventive and punitive actions to ensure that the formalisation project becomes a core driver not only to establish a better economic environment for the development of formal micro- and small enterprises, but also to improve living and working conditions for workers and their families. The emphasis is placed on the fact that the purpose of all the incentives should be to facilitate the effective transition in good time from the informal to the formal economy. The second specific feature involves recognising the importance of giving a voice to workers in the informal economy (see Box 5.1), firstly through representative workers’ and employers’ organisations, which in recent years have made a concerted effort to affiliate and defend the interests of workers and productive units of the informal economy, and, secondly, to provide support to organise and strengthen the capabilities of the multitude of associations and groups of workers and producers in the informal sector (Lapeyre, 2017). BOX 5.1

GIVING A VOICE TO WORKERS IN THE INFORMAL ECONOMY

The last decade was marked by important efforts in Africa to organise workers and economic units to strengthen their bargaining power and include their concerns and priorities in policy-making processes. In Ghana and in Côte d’Ivoire, for example, traditional trade union organisations have supported and affiliated associations of informal economy workers who are now part of social dialogue mechanisms. Meanwhile, one can observe in Africa the multiplication and the capacity building of numerous associations of street vendors, artists, small peasants, domestic workers etc., which play an increasing role in transforming their members from “voiceless” actors to an emerging force contributing to improving the world of work (Singh and Kumar, 2017; Barussaud, 2019). For example, in Senegal, the private security sector, which generates more than 30,000 jobs, faces significant decent work challenges. In the face of that

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situation, marked by the fact that most workers within this sector had precarious jobs, no access to social security and pension schemes, and were de facto not covered by a trade sector collective agreement (most employers not complying with it), the National Confederation of Workers of Senegal (CNTS) initiated action to formalise those workers, including the creation of unions in companies that employ guards. Thus, the National Union of Civil Personnel, Public Security Services, Private and Assimilated was created with 4,260 current members (including 492 women). The CNTS trained delegates in their trade union roles and negotiation skills. As a result, social dialogue is now a reality in these companies, and has resulted in important advances: regularisation of almost 1,500 workers; payment of the transport premium; creation of a medical insurance (MPI); regular payment of contributions to the pension fund (IPRES) and the Social Security Fund (CSS); and implementation of occupational health and safety provisions. A collective agreement adapted to the sector with a new professional classification and salary scale was proposed by the CNTS and negotiated with employers and the Ministry of Labour. And it was signed in January 2019. In Zimbabwe, the Zimbabwe Congress of Trade Unions (ZCTU), seeking to bridge the gap between the trade union movement and informal economy workers, signed in 2003 a Memorandum of Understanding with the Zimbabwe Chamber of Informal Economy Associations (ZCIEA), with the purpose of promoting and protecting the interests of informal economy workers. ZCIEA, which was created in 2001 through an alliance of 22 informal business associations, was initially launched to represent marginalised workers in the informal economy who were lacking rights compared to formal workers. They represent street and market vendors, construction workers, waste pickers and other informal economy workers. This partnership between ZCTU and ZCIEA contributed to empowering marginalised informal economy operators by developing entrepreneurial skills, undertaking research and collecting information on informal economy workers, and supporting members to access social and economic resources in an effort to extend social services coverage and therefore facilitate transition to formality and a more equitable distribution of wealth. Currently the Chamber has over 125 affiliates and some 200,000 individual members, 60 per cent of which are women. Finally, the promotion of the social and solidarity economy (SSE), by providing an enabling environment for productivity growth, organisation and decent work can also provide a very effective formalisation path for own-account workers and micro-businesses in the informal sector; countries such as Tunisia and Morocco have developed in recent years a legal and policy framework to support the development of SSE with a view to facilitating transitions to formality.

5.5 TOWARD A NEW VISION OF ACTORS’ PRACTICES AND INSTITUTIONS IN THE INFORMAL ECONOMY The analysis of popular practices and institutions within the informal economy shows great capacity for resilience and transformation to deal

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The challenge of formalisation policies in Africa 131 with the main factors threatening living and working conditions (Hart et al., 2010; Peemans, 2002; Monnier and Droz, 2004). The many initiatives of those actors (both individual and collective) are driven by the need not only to survive or mitigate the impacts of crises and basic needs deprivation processes, but also to build a better and sustainable future in urban and rural areas that are connected in multiple ways – for better or for worse – to global economic trends (Itzigsohn, 2000; Folke et al., 2002; Tarrius, 2002; Meagher, 2010). It is, indeed, not possible to consign to the past and a static traditional sector the operating models of popular culture and economy. They exist at the heart of the strongholds of the modern economy, but they do not openly manifest themselves for what they are and as such are not in the spotlight. Just like an olive tree, which shows an observer how time has twisted and lacerated it, how water and the wind have forced it over the years to take on this shape that is not down to chance or based on a whim but rather based on necessity, it is vital to analyse those dynamics and how they have changed in the long term because this allows for the development needs of those actors in the informal economy to be understood (Lapeyre, 2013). As they always appear more or less below the surface, they are, for policy makers, as a stranger whose absence usually goes unnoticed. This is mainly because those practices tend to be fleeting, moving, disconcerting and ambiguous realities that do not lend themselves to the sort of accurate measurement, precise calculation or strict logic that appeals to the scientific and policy-making community. Demands for development in the informal economy are apparent more or less by inference. They can be captured only through a better understanding of everyday practices, since actors in the informal economy do not care to explain the nature of their practices or justify them (Detienne and Vernant, 1974). Although day-to-day individual or collective practices that highlight the demand for development by popular actors within the informal economy have no audible discourse or formal channels, they still exist and have meaning in terms of governance and the security of living conditions (in terms of access to basic needs but also of environmental management and preservation of the dignity of life) in a given territory (Berkes et al., 2003; Gunderson and Holling, 2002; Cannon, 2008). The very real existence of these practices does not mean they are capable of reversing job insecurity and marginalisation processes, which continue to challenge those in the informal economy. But the burden of exterior constraints and stress factors does not exhaust their capacity for initiative. Actors in the informal economy are realising their right to

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develop local initiatives, assert their ability to regulate their local ecosystem, express their entrepreneurship spirit and maintain some kind of social control on accumulation. They continuously attempt to exercise a certain degree of autonomy by snatching a little leeway here and there. And dominant actors from the formal economy are confronted by this wayward “elsewhere” and the “fact rage” caused by the persistence and vitality of popular practices in the informal economy (Lapeyre, 2014). In Africa, a traditional redistribution system continues to function, but it has also changed considerably because solidarity associated with the family, lineage or ethnicity is in crisis, due to the crisis of the State and the rise in insecurity and its intensification. A tail-off in vertical redistribution is partly off-set by complex horizontal solidarity arrangements in the context of which the system for money and goods to circulate in the global economy plays a fundamental role through various mechanisms of reciprocity, while migration is also playing an increasingly important part. The series of research papers on the informal economy in SubSaharan Africa launched by the ILO provides some new knowledge about how people struggle to eke out a livelihood and reduce vulnerability (Lapeyre and Lemaitre, 2014; Lapeyre and Barussaud, 2019). Researches are based on original data sets on the functioning of the informal economy, with a spotlight on the perceptions of the people operating in the economy. The main finding of those clinical analyses of grassroots practices in the informal economy – limited to certain business sectors in economically central urban districts in Abidjan, Ouagadougou, Bamako, Cotonou, Kinshasa, Lubumbashi and Antananarivo – is that informal practices and institutions translate to strong demand for decent employment and securing livelihoods. Although growth as such is not a universal demand by populations, in light of the increasing body of research in this area, and to which these studies contribute, the issue of security does appear to be a universal demand. In her investigation into the grand market of Kinshasa in the Democratic Republic of the Congo, Sylvie Ayimpam (2014) examines in depth the informal social protection arrangements implemented at a microsocial level by the market traders to deal with the insecurity inherent in their daily lives. She demonstrates that, in order to protect themselves, as elsewhere in Sub-Saharan Africa, traders use protective risk-pooling schemes based on practices derived from old family-centred societies, based on family and community cooperation. But faced with pressure from events posing a threat to the security of their living conditions and work that are exhausting such traditional schemes, these actors are also developing new security practices, which are evidenced by the strong

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The challenge of formalisation policies in Africa 133 vitality of associative dynamics in Africa, such as the muziki and likelemba tontines in Congo. The “futures” emerging from the multitude of grassroots practices, following the crisis of mainstream development strategies that are unable to keep their promises of improving well-being for all, are not all components of a shared project of sustainable development. They are often simple survival strategies or come under attempts to reinvent an identity that may themselves be a factor of social disintegration and new forms of violence, as in the case with the growth of sectarian communitarianism. Moreover, not all adaptations are sustainable and a “resilient state” is not always a “desirable state” (de Menocal, 2001; Tompkins and Adger, 2003). Indeed, resilience at a given level is not always “positive” when viewed from another level. External drivers, especially in relation to marketing opportunities, may enhance the income-generating ability of some households or communities while rapidly degrading a region’s ecological system or the resilience of other communities or of future generations. This finding must lead us to go beyond an idyllic approach to the practices and institutions of actors of the informal economy to try to understand, firstly, which of these multiple strategies involving resistance, survival, solidarity and securing living conditions practices, can give rise to a “reinvention of being and doing together” and, secondly, how to support them as effectively as possible with public policies. Indeed, the informal economy is also marked by the daily grind of interest, power, exploitation and inequality. Solidarity is neither a matter of good intention nor a matter of feeling good: it is a social construct that brings control, dependency and often social violence. And that which is local is not necessarily beautiful; it is an arena of conflicts among horizontal and vertical actors with very unbalanced bargaining powers.

5.6 RETHINKING PUBLIC POLICIES TOWARDS THE INFORMAL ECONOMY The modest (at this stage) but fundamental (from a dynamic point of view) contribution of recent literature on the functioning of the informal economy in Africa is to enrich, and even provide more up-to-date data to fuel the debate involving political decision-makers on the issue of the transition from the informal to the formal economy and decent employment. They point out the need to move away from the beaten track of normative frameworks, sweeping statements and proposals of the “you just need to” kind along with other such wish lists and, instead, based on

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specific case studies, to think about informal economy’s logic, practices and institutions with a view to transitioning to decent employment. In addition to its specific nature, such knowledge must lead to changes in the formulation of development policies to ensure that such policies are better adapted to the systemic and complex nature of the reality that is to be transformed. This new practical knowledge can be put into practice directly by those concerned and enable an overhaul of the perception and deep understanding of the context for action (Friedberg, 1997). The great diversity of the practices and institutions in the informal economy argues against the possibility of a universal framework for intervention for the transition to the formal economy and sustainable development. On the contrary, it suggests the possibility of a highly diverse and broad range of possible responses currently at work or likely to emerge (Chapple and Lester, 2010). As an amateur mountain-climber and a fan of Erri de Luca’s books, I will develop the concept of “hold” – referring to someone climbing a cliff – to seek to address the issue of the connection between public policies and the informal economy and as a means of discussing the relationship between knowledge and action. The concept of a “hold” covers something often neglected by our scientific approaches. It involves how a reality is actionable by individual or collective actors (Mormont, 2007). A “hold” is part of the reality that enables the action to take place. But the roughness of the cliff face only represents a “hold” because it enables the climber to ascend. It is neither (a property of) the cliff per se, nor (a property of) the climber, but rather what, as part of the cliff, enables the climber to make progress. It is therefore that which binds, albeit momentarily, the cliff and the climber, which makes it an assembly in action, a layout. Does not the art of climbing involve seeing the holds and turning into secure holds what appears to be just a fold in the rock to a novice? There will be as many routes as there are climbers and cliffs depending on the variety of layouts and the multiple holds they offer. From this point of view, it is not so much a question of objectifying or characterising the cliff in a specific way (the incline, height and roughness), but rather of establishing what sort of hold it can offer to such-and-such a climber depending on his or her own ability and the possible layouts (based on the characteristics of the cliff, the skills of the climber, the tools he or she has and the weather conditions). It is vital for public authorities to equip themselves with a capacity to analyse not the cliff (or the chasm) of vulnerabilities that affect people in the informal economy, but to grasp what enables them to gain a foothold and cling on in this context (Amoukou and Wautelet, 2007). Obviously, it is not possible to deny the wisdom of objectifying the processes of

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The challenge of formalisation policies in Africa 135 vulnerability, identifying the groups concerned, and performing all manner of data and valuable analyses to define objectives and policies. But talking about a “hold” implies asking what holds the State can use to ensure actors within the informal economy buy in to the transition project it is suggesting. The problem is that we still do not know very much about the way in which actors in the informal economy experience these situations, the way in which they characterise them and in particular how they act in these contexts, on which points they rely; in other words, which layouts they use to manage to move forward or, in some cases, to survive. And how these practices and tactics co-exist and are linked to the regulations issued – i.e. prescriptive rules – by public authorities. The emergence of a global cooperative game between formal and informal economy actors leading to a common “agreed” regulation is not an easy or automatic result. Devising rules and ensuring they are complied with is only meaningful if somehow the rule is shared. To encourage the emergence of a common regulation means building a common capacity for action on which public policies will be based. Such a process strongly resembles that of an internal combustion engine, as a result of the clash of competing and often conflicting regulations between actors in the formal and informal spheres. This raises the issue of the rules of the game, the nature of a collective regulation between the rules that the public institutions consider to be universal and those each community builds for itself for its own territory. In this context, public policies must be linked with a never-ending process of negotiation and conflict management that allows, firstly, for resisting pressure in order to avoid a breakdown or exit strategies and, secondly, for channelling the energy generated to convert it into a source of positive creation to ensure the promotion of inclusive development. Refusing to enter into dialogue and negotiate with those in the informal economy involves taking the risk of disconnecting public policies from their needs and priorities and, as a result, losing any foothold to effect positive change towards transition to formality. Defining a common regulation is not easy and can only be established after a slow process of negotiation and arbitration. To quote Jean Daniel Reynaud (1997, p. 167): “‘Real’ regulation is (an often) unstable compromise between autonomy and control. But the variety of these compromises is very great, as great as that of the procedures whereby they are achieved.” Both Braudel (1967 and 1985) and de Certeau ([1980], 1990) demonstrated the more or less conflictual co-existence of sources of regulation – control regulation by public authorities and autonomous regulation by actors in the informal economy – that interact on the material living conditions of ordinary people. Thus, trust and a reciprocal

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relationship need to be established, based on give-and-take and amounting to a negotiation between the State and the actors operating in the informal economy. To be sure, such a relationship would be skewed because the State sets the framework. However, in order for the State to exercise its power, the established rules must be legitimate and the people must agree to play the cooperation game. In this relationship between the State and those in the informal economy, coercion and consent occur simultaneously. Rules will be complied with only if they are comprehensible and meaningful for informal economy’s actors. This requires that they accept that there is a space for compliance with rules within the framework of a joint system of regulation, but this will also assume that from the side of public authorities there will be a calling into question of certainties, knowledge and courses of action (Reynaud, 1997). The formulation and implementation of a national formalisation strategy or action plan, when building on inclusive social dialogue mechanisms, creates such a momentum for emerging compromises based on a new social contract regarding transition to formality. From this perspective, formalisation is not about registration or paying tax and social security contributions as such; it is about inclusive sustainable development and a fair distribution of the benefits of economic growth. To achieve this, policy makers have to combine and coordinate different policy packages within an integrated strategy that should aim at facilitating the transition path to the formal economy through: (i) formalisation of economic units (registration and compliance to the legal and regulatory framework); (ii) formalisation of jobs (de jure and de facto coverage of all workers regarding fundamental principles and rights at work, and extension of social security coverage); and (iii) productive job creation in the formal economy (increased formal employment intensity of growth). These policy areas are related, but they are not the same. What is important in an integrated strategy is not delinking the different components of the strategy. Combating the informal economy without providing alternatives in the formal economy for those operating in the informal economy will not be effective. Targeted policies focusing on the informal economy are not enough. Pro-employment macroeconomic policies and an enabling environment for sustainable formal enterprises are crucial for creating job opportunities in the formal economy. The problem of mass informality is rooted in poor governance and in the inability of current growth patterns to create sufficient formal jobs to absorb all those who want to work (either new entrants or those trapped in the informal economy). Meanwhile, formalising economic units through appropriate incentives and legal and regulatory reforms for

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The challenge of formalisation policies in Africa 137 SMEs will not lead automatically to formalisation of jobs if there is no labour productivity growth nor an appropriate compliance mechanism and enforcement system to ensure that formalisation of economic units and formalisation of jobs go hand in hand. In recent years, an increasing number of African countries have developed such integrated strategies. Togo, Côte d’Ivoire, Cape Verde, Ghana, Morocco and South Africa, for example, have launched the formulation of a national strategy for facilitating transition to formality. Taking into account that 88 per cent of informal employment in Africa is related to informal sector enterprises (mainly microenterprises and small family businesses) or own-account workers, those strategies mainly target the structural factors explaining why those workers and economic units are in the informal economy and why they can’t enter a formalisation process. Comparative analysis of success stories and good practices regarding the reduction of informal employment shows that effective packages for transition to formality combine, as was the case in Argentina, Brazil and Uruguay in the 2000s (Maurizio, 2014; Bertranou and Casanova, 2013) due to, on the one side, registration costs reduction, tax incentives (simplified and single tax system), productivity growth of SMEs and access to market (including public market), and, on the other side, the extension of social security coverage (targeting own-account workers, domestic workers, peasants, and those in micro- and small businesses). Many African countries have identified the extension of social protection to uncovered workers as one of their main policy priorities and engines of formalisation (Behrendt and Nguyen, 2018); and some countries have made impressive progress in covering larger groups of workers, such as in Cape Verde, Ghana, Algeria and Morocco (see Box 5.2). Such strategy calls for responses to different policy challenges as: (i) many (but not all) workers in the informal economy do not have sufficient contributory capacity to pay contributions on a regular basis and they may face difficulties in meeting the administrative requirements; (ii) many workers in the informal economy work in sectors of the economy, in occupations or in types of employment that are outside the scope of the existing legal framework – they are simply not regulated (for example, social security legislation may explicitly or implicitly exclude workers in agriculture, domestic workers, self-employed workers, or workers in enterprises with fewer than five workers; and in addition, workers in “new” forms of employment may not be covered, such as workers on digital platforms (Berg et al., 2018)); (iii) legislation may exist, but it may not be implemented at all, or only partially, which in some cases can be explained by a lack of sufficient institutional capacity for its implementation or a problem

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of access to main services; and (iv) legislation may be implemented, but it may not, or only half-heartedly, be enforced because of a lack of enforcement and weak enforcement mechanism.

BOX 5.2

EXPANDING SOCIAL PROTECTION TO INFORMAL WORKERS

In Cape Verde, an important part of the formalisation strategy was to expand social insurance to self-employed workers as laid down in the Operational Plan for Extending Social Security to Self-employed and Domestic Workers. This was associated with communication campaigns that specifically address selfemployed workers and are accompanied by a set of education and awarenessraising activities at local level in urban and rural areas and with the objective to increase knowledge on the topic. In Morocco, the progressive extension of coverage to the self-employed under the auto-entrepreneur scheme was undertaken in close collaboration with professional associations. Algeria’s national social security fund for non-wage earners (Caisse Nationale de Sécurité Sociale des Non-Salariés, CASNOS) was established in 1992 to consolidate and improve social protection for different categories of the self-employed and other non-wage earners, including business owners, artisans, farmers and members of liberal professions. The CASNOS ensures mandatory coverage of all non-wage earners based on the principles of solidarity and the collective sharing of risks. The fund covers health protection (medical care), maternity, disability, survivorship and old age pensions. In 2017, the fund had 1.7 million affiliated members. The CASNOS follows a strategy that combines the simplification of procedures and the facilitation of access, information and awareness raising to ensure the effective extension of coverage and to promote formalisation of employment. Tunisia introduced a new legislation in 1995 that, among others, created one unified social insurance scheme for the self-employed, merging the separate schemes for the self-employed in the non-agricultural and agricultural sector. This unified rules and benefits and increased the number of the insured considerably. Besides, a scheme of free medical assistance was introduced for low-income groups of the population not covered by other social insurance systems. Eligible persons include seasonal agricultural workers under a certain income threshold. Several countries have also developed and implemented labour and social security legislation for domestic workers. South Africa has extended legal coverage of unemployment, maternity and sickness insurance to domestic workers through the Unemployment Insurance Amendment Act adopted in 2003, which has led to a significant improvement in the protection of domestic workers. Finally, workers in the informal economy often face a set of specific difficulties when accessing public health services; these often force them to forego the use of health services or use private facilities instead, with often negative consequences for their health and income security. One specific challenge is the time that is needed to access the health facility and to wait for consultation and treatment, which keeps the worker away from his or her economic activity – time is very literally money. Overcoming such barriers to accessing health services requires a good understanding of the constraints that workers in the informal

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The challenge of formalisation policies in Africa 139 economy face, and an adaptation of the way in which the services are delivered, to make sure that the services actually benefit the people. Policy dialogue platforms may be helpful in identifying the constraints and in finding innovative ways to address these challenges. In addition, mobile services can be used to deliver health prevention messages and inform workers in the informal economy about the availability of health services. In Brazil mobile agencies (agencias móveis) consisting of buses (PREVMóvel) and ships (PREVBarco) are also used to reach potential beneficiaries of the rural pension scheme (Prêvidencia Rural) who live in very remote areas. They are mainly used in the North (Amazonas, Pará, Rondonia) and provide the same services as permanent offices. In South Africa, mobile services of the Integrated Community Registration Outreach Programmes (ICROP) facilitate the registration and payment of social assistance benefits (grants). Mobile services regularly visit remote villages in order to allow rural populations to access benefits and services.

5.7 CONCLUDING REMARKS Facilitating transition to the formal economy involves, for decisionmakers, constantly seeking compromises, accepting and having the actors of the informal economy accept both conflicts and negotiations as an effective way to develop a common project. This is a sine qua non condition for popular players to be “reterritorialised” within the formal economy. The evolution of the fairness model and of trust associated with it has a great impact on exit and voice options by informal economy actors (Hirschman, 1970). Voice always reflects the decision to “stick” with the deteriorating organisation, and this decision is in turn based on: (i) an evaluation of the chance of getting the situation “back on the tracks” through one’s own action and through that of others; and (ii) loyalty. Voice has the function of alerting an organisation to its failing and is at the heart of any cooperative game. What is killing a dynamic of change is less open or latent conflicts – which can be addressed by conflict management mechanisms (based on the sequencing, conflict – bargaining process – compromise) – than the exit option. The presence of loyalty makes exit less likely; in other words, it can neutralise within certain limits the tendency to exit. Loyalty is associated with fairness and the reasoned expectation that improvement can be achieved from within. It reflects the willingness to fight for change from within. Loyalty is deeply related to trust and to the feeling of belonging to a common project. A severe deterioration of trust regarding the benefits of formalisation for those in the informal economy will increase their feeling of “indignation” as regards the functioning of the formal economy. In such a context, providing the minimum effort and not playing the cooperative

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game risk becoming the standard behaviour. Hence the risk for public authorities is no longer the multiplication of open conflict but the “exodus”, in other words a process of withdrawal from the relationship with formal regulatory and legal frameworks, and the fostering of a non-cooperative game within a fragmented society. These exit strategies can also result from formalisation strategies that may be seen as new attempts by dominant actors to push back boundaries and open up new spaces to capitalist accumulation. These strategies targeting the nature of livelihoods and institutions in the informal economy would in effect be the expression of a biopower over those in the informal economy whose economic practices are inextricably embedded in the social sphere.1 Thus, there is indeed a risk that a formalisation biopolicy will emerge to institute biopolitical governance that extends to this elusive “elsewhere” (Foucault, 2004). However, apart from this informal economy “elsewhere”, there are no “vanishing lines” and therefore no “deterritorialisation” that is socially and culturally destructive while excluding the possibility of “reterritorialisation” (Lapeyre, 2018). Such “reterritorialisation” of informal economy actors within the formal economy can only happen through inclusive transformative change. Public policies aimed at facilitating transitions towards the formal economy must include genuine alternative solutions to ensure the “living together” in the formal economy. Cooperation for the success of the formalisation project requires minimal legitimacy and therefore the presence in collective representations of a model of fairness serving as a reference for judging unforeseen contingencies in the course of the implementation of the project. If transition to formality is associated with harassment of those in the informal economy or disruption of the institutions preserving social ties to secure livelihoods, dissatisfaction is likely to take the form of a silent exit from the project. The priority seems to be to consider the types of institutions and mechanisms by which national political decision-makers can encourage “transformational development from the bottom” and encourage synergies, modularity and the connection between the macro-, meso- and micro-levels in order to broaden the options to ensure that people’s means of subsistence are secure rather than constraining them. If these changes are to take place and be protected, the main question is then how to coordinate the strategies vertically and horizontally since they involve a very large number of different agents of change operating at different spatial levels (Hudson, 2010). There will always be multiple tracks within the “response area”, but the political challenge is to develop institutional structures that are in line with the ecological and social

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The challenge of formalisation policies in Africa 141 processes operating at different spatial and temporal scales and to take into account the links between such scales (Folke et al., 2002, p. 21). The State can manage inter-scalar interactions to avoid loss of resilience or to strengthen the adaptive capabilities of households and communities. The local level is vital from the point of view of the policy framework since it is at this level that people are faced with the processes of insecurity and stress factors and where associative initiatives and security dynamics take place. However, development policies must not simply focus on the local level. Adaptation scales are not independent from one another; the capacity of households to cope with vulnerability depends on their community’s adaptive capacity, which itself depends to a large extent on institutional frameworks at a regional and national level and the room for manoeuvre they afford to the local aspect in light of outside forces as a result of globalisation (Smit and Pilifosova, 2003; Yohe et al., 2003). At a local level, adaptive capacity may be influenced by factors such as management capability, access to financial, technological and information resources, infrastructure, the institutional environment in which adaptations occur (in particular the degree of decentralisation), political influence, kinship and skills networks. To conclude, one of the major challenges for the world of work in Africa is the evolution of the informal economy. Either development patterns will continue to generate and maintain fragmented labour markets characterised by mass informal employment at the risk of self-destruction of the conditions of cooperation and sustainable development, or decision-makers will seize the opportunity offered by the new modalities of cooperation to both reconstruct the human foundation of inclusive structural transformation and rebuild the conditions for efficiency and productivity gains from a dynamic perspective. Unleashing the full potential of economic units and workers in the informal economy through transition to formality calls for the construction of alternative development models organised mainly around the “social justice” and “innovation capacities” dimensions to transform technological change, globalisation and economic efficiency gains into jobs and decent work for all. Such a process could precisely bring about a democratisation of policy-making and a new social pact built on a shared project of transition from the informal to the formal economy to open a new era of inclusive and sustainable development.

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NOTE 1.

Biopolitics is a neologism used by Michel Foucault to identify a form of exercise of power that no longer concerns territories but the lives of individuals and populations.

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The challenge of formalisation policies in Africa 143 Folke, C., Elmqvist, T., Carpenter, S. and Gunderson, L.H. (2002), Resilience and sustainable development: building adaptive capacity in a world of transformations, Stockholm: Environmental Advisory Council to the Swedish Government. Foucault, M. (2004), Sécurité, territoire, population: cours au Collège de France, 1977–1978, Paris: Gallimard et Seuil. Fox, L., Thomas, A. and Haines, C. (2017), Structural transformation in employment and productivity: what can Africa hope for? Washington, DC: IMF. Frank, Gunther (1966), “The development of underdevelopment”, Monthly Review, 18(4), 17–31. Friedberg, E. (1997), Le pouvoir et la règle, Paris: Seuil. German, D., Gilman, N., Haefele, M. and Latham, M. (2003), Staging growth, Boston, MA: University of Massachusetts Press. Ghai, Dharam (2013), “Preface”, in I. Hillenkamp, A. Lemaitre and F. Lapeyre (eds), Securing livelihoods: informal economy practices and institutions, Oxford: Oxford University Press, pp.v–vi. Global Commission on the Future of Work (2019), Work for a brighter future, Geneva: ILO. Gunderson, L. and Holling, C.S. (2002), Panarchy, London: Island Press. Hart, K. (1973), “Informal income opportunities and urban employment in Ghana”, Journal of Modern African Studies, 11(1), 61–89. Hart, K., Laville, J.-L. and Cattani, A.D. (eds) (2010), The human economy: a citizen’s guide, Cambridge: Polity Press. Hillenkamp, I., Lapeyre, F. and Lemaitre, A. (eds) (2013), Securing livelihoods: informal economy practices and institutions, Oxford: Oxford University Press. Hirschman, A. (1958), The strategy of economic development, New Haven, CT: Yale University Press. Hirschman, A. (1970), Exit, voice and loyalty: responses to decline in firms, organizations, and states, Harvard, MA: Harvard University Press. Hoselitz, B.F. (ed.) (1960), The sociological aspects of economic growth, Glencoe, IL: Free Press. Hudson, R. (2010), “Resilient regions in an uncertain world: wishful thinking or a practical reality?”, Cambridge Journal of Regions, Economy and Society, 23(3), 11–25. Huntington, S. (1971), “The change to change: modernization, development, and politics”, Comparative Politics, 3(3), 283–322. ILO (1969), The world employment programme: report of the Director-General to the international labour conference, Geneva: ILO. ILO (1972), Employment, incomes and equality: a strategy for increasing productive employment in Kenya, Geneva: ILO. ILO (1973), Activities of the ILO 1972: report of the Director-General (Part 2), Geneva: ILO. ILO (2014), Transition from the informal to the formal economy (White Report), Geneva: ILO. ILO (2015), Text of the recommendation concerning the transition from the informal to the formal economy, Geneva: ILO. ILO (2018), Women and men in the informal economy, Geneva: ILO. ILO (2019), ILO centenary declaration, Geneva: ILO. Inkeles, A. (1969), “Making men modern: on the causes and consequences of individual change in six developing countries”, American Journal of Sociology, 75(2), 208–225. Islam, I. and Lapeyre, F. (eds) (2020), Transition to formality and structural transformation: challenges and policy options, Geneva: ILO; available at: https://www.ilo.org/ wcmsp5/groups/public/—ed_protect/—protrav/—travail/documents/publication/wcms_ 738685.pdf (accessed 29 May 2020).

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Itzigsohn, J. (2000), Developing poverty, University Park, PA: The Pennsylvania State University Press. Jolly, R., Emmerij, L., Ghai, D. and Lapeyre, F. (2004), The contributions of the United Nations to development theory and practices, Bloomington, IN: Indiana University Press. Lapeyre, F. (2006), “Mondialisation, néo-modernisation et ‘devenirs’: un autre regard sur les pratiques populaires”, in G. Froger (ed.), La mondialisation contre le développement durable? Paris: PIE Peter Lang, Collection Ecopolis, pp. 151–162. Lapeyre, F. (2013), “Securing livelihoods in Africa: towards multi-scalar policy frameworks”, European Journal of Development Studies, 25(5), 659–679. Lapeyre, F. (2014), “Les politiques publiques face à l’indocilité du local”, in F. Lapeyre and A. Lemaitre (eds), Politiques publiques et pratiques de l’économie informelle en Afrique Subsaharienne, Louvain-la-Neuve: Academia, pp. 263–285. Lapeyre, F. (2017), “L’organisation internationale du travail face au travail dans l’économie informelle”, Revue de droit comparé du travail et de la sécurité sociale, 3, 18–33. Lapeyre, F. (2018), “La grande colère des faits: quelles perspectives de déterritorialisation– reterritorialisation des acteurs de l’économie informelle”, in I. Yepez, S. Charlier and A. Lemaitre (eds), Le développement revisité, Louvain-la-Neuve: Presse Universitaire de Louvain, pp. 67–84. Lapeyre, F. (2019), “Conditions du ‘voir’ et ‘faire voir’ les acteurs de l’économie informelle”, in F. Lapeyre and S. Barussaud (eds). La formalisation vue d’en bas: enjeux pour la transition vers l’économie formelle, Louvain-la-Neuve: Academia, pp. 17–56. Lapeyre, F. and Lemaitre, A. (eds) (2014), Politiques publiques et pratiques de l’économie informelle en Afrique Subsaharienne, Louvain-la-Neuve: Academia. Lapeyre, F. and Barussaud, S. (eds) (2019), La formalisation vue d’en bas: enjeux pour la transition vers l’économie formelle, Louvain-la-Neuve: Academia. Lerner, D. (1962), The passing of traditional society, Glencoe, IL: Free Press. Lewis, W.A. (1954), “Economic development with unlimited supplies of labour”, Manchester School of Economic and Social Studies, 22(2), 139–191. MacGaffey, J. (1991), The real economy of Zaire, London: James Currey. Maurizio, R. (2014), Labour formalization and declining inequality in Argentina and Brazil in the 2000s, ILO Research Paper no. 9, Geneva: ILO. Meagher, K. (2010), Identity economics: social networks and the informal economy in Nigeria, Woodbridge, VA: James Currey. Monnier, L. and Droz, Y. (eds) (2004), Côté jardin, côté cour: anthropologie de la maison africaine, Nouveaux Cahiers de l’IUED. No. 15. Mormont, M. (2007), “Des savoirs actionables”, in I. Amoukou and J.M. Wautelet (eds), Croisement des savoirs, Louvain-la-Neuve: PUL, pp. 169–186. Nurkse, Ragnar (1953), Problems of capital formation in underdeveloped countries, Oxford: Basil Blackwell. Parsons, T. (1964), “Evolutionary universals in society”, American Sociological Review, 29(3), 339–357. Peemans, J. Ph. (2002), Le développement des peuples face à la modernisation du monde, Paris: L’Harmattan. Reynaud, J.D. (1997), Les règles du jeu, Paris: Armand Colin. Reynaud, J.D. (2003), “Réflexion 1: Régulation de contrôle, régulation autonome, régulation conjointe”, in Gilbert de Terssac (ed.), La théorie de la régulation sociale de Jean-Daniel Reynaud, Paris: La Découverte, pp. 103–113. Rodrik, D. (2008), “Normalizing industrial policy”, Commission on Growth and Development Working Paper, No. 3, Washington, DC: World Bank.

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The challenge of formalisation policies in Africa 145 Rodrik, D. (2012), “Industrial policy and the promotion of structural transformation”, WCAO Thematic Research Note, Special issue on patterns of growth and structural transformation in Africa, No. 02, April. Rosenstein-Rodan, P. (1943), “Problems of industrialisation of Eastern and South-eastern Europe”, Economic Journal, 53, 202–211. Rosenstein-Rodan, P. (1957), The objectives of United States economic assistance programs, Cambridge, MA: MIT Press. Rostow, W.W. (1960), The stages of economic growth, Cambridge and New York: Macmillan. Sachs, W. (1992), The development dictionary: a guide to knowledge as power, London: Zed Books. Sanyal, K. (2007), Rethinking capitalist development: primitive accumulation, governmentality and post-colonial capitalism, New Delhi: Routledge India. Scitovsky, Tibor (1964), Papers on welfare and growth, Stanford, CA: Stanford University Press. Scott, J.C. (1985), Weapons of the weak, New Haven, CT: Yale University Press. Seers, D. (1969), “The meaning of development”, International Development Review, 11(4), 3–4. Singh, A. and Kumar, S. (2017), Trade unions in transformation. Towards a better deal for street vendors in India: the case of Nasvi, Berlin: Friedrich Ebert Stiftung (FES). Smit, B. and Pilifosova, O. (2003), “From adaptation to adaptive capacity and vulnerability reduction”, in J.B. Smith, R.J.T. Klein and S. Huq (eds), Climate change, adaptive capacity and development, London: Imperial College Press, pp. 9–28. Sunkel, O. (1969), “National development policy and external dependence”, Journal of Development Studies, 6(1), 23–48. Tarrius, A. (2002), La mondialisation par le bas, Paris: Balland. Tompkins, E.L. and Adger, W.N. (2003), Building resilience to climate change through adaptive management of natural resources, Working Paper 27, Tyndall Centre for Climate Change Research, University of East Anglia, Norwich. Trefon, T. (ed.) (2004), Ordre et désordre à Kinshasa. Réponses populaires à la faillite de l’État, Paris: L’Harmattan. Truman, H.S. (1949), “Inaugural address”, 20 January, available at: https://www. presidency.ucsb.edu/documents/inaugural-address-4 (accessed 29 May 2020). UNCTAD (2016), Structural transformation and industrial policy, Geneva: UNCTAD. United Nations (1955), Processes and problems of industrialization in underdeveloped Countries, New York: United Nations. Yohe, G., Strzepek, K., Pau, T. and Yohe, C. (2003), “Assessing vulnerability in the context of changing socioeconomic conditions: a study of Egypt”, in J.B. Smith, R.J.T. Klein and S. Huq (eds), Climate change, adaptive capacity and development, London: Imperial College Press, pp. 282–292.

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PART II RECONSIDERING THE MARGINS AND FRONTIERS OF THE INFORMAL ECONOMY

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6. Informal employment and non-market work Nancy Folbre

The informal economy is sandwiched between two other large categories of economic activity. In terms of efforts devoted to measurement, it ranks below activities in more formally organised firms and markets, but above the non-market family care services that women provide. Far more attention has been devoted to its upward than its downward links. Yet there are important similarities in the ways informal market work and non-market family care have been defined by national censuses, labour force surveys, time-use surveys and national income accounts. These similarities dramatise the undervaluation of women’s economic contributions and strengthen the case for re-categorisation of economic activities. Non-market family care services are obviously informal compared to those provided by business enterprises. Indeed, they have been considered too informal to be considered part of informal employment. The current System of National Accounts (SNA) places them outside the ‘production boundary’, and therefore outside ‘the economy’, treating them in much the same way as informal market work was treated in the past. The intellectual history of these categories sets the stage for a critique of the current boundary drawn between them. Both the relative size and the economic dynamics of informal market employment look different when it is reconceptualised as an intermediate category between formal market work and the non-market production of both goods and services.

6.1 NINETEENTH- AND EARLY TWENTIETH-CENTURY ANTECEDENTS The term ‘informal economy’ is of fairly recent provenance, dating back to the mid-1970s (Charmes, 2012; Hart, 1985). Yet the term encompasses forms of family-based production for own consumption that long predated production for exchange, and often resonates with concerns regarding the appropriate definition of productive labour that were deeply embedded in late-eighteenth- and nineteenth-century political economy. 147

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Both Adam Smith and Karl Marx labelled services ‘unproductive’ whether they were unpaid or paid. Yet early national censuses, among the first efforts to formalise economic categories, did not always draw a bright line between goods and services, or between market and non-market work, and the intrinsic difficulties of measurement have always been complicated by the moving target of economic development itself. The evolving process of categorisation has been shaped by diverse ideological pressures, including desires to highlight national achievements, promote capitalist interests and define women’s work as a moral responsibility rather than an economic contribution (Folbre, 2009). Official concepts such as ‘work’, ‘labour force’, ‘employment’ and ‘output’ have long been contested and gradually renegotiated on both the national and international levels (Topalov, 2001; Wobbe and Renard, 2017). This process has often involved distinct transitions in data collection efforts: from ‘should not’ to ‘cannot’ to ‘can be’ measured and from academic journal articles to adoption by national statistical agencies. However, outdated though they may be, inherited assumptions nonetheless retain inertial influence. The well-studied Anglo-American experience reveals important parallels between the treatment of non-market family work and informal market work that had the effect of minimising attention to women’s productive contributions. The first effort to ascertain the occupations of the British people, fielded in the 1801 census, found that few individuals identified with one specific occupation; the subsequent censuses of 1811, 1821 and 1831 asked respondents the occupation of their family as a productive unit and thus implicitly treated the entire population as economically active (Hakim, 1980). In 1831, for the first time, the individual occupations of males aged 20 and older and those of female servants were enumerated; not until 1851 were all women asked their individual occupation. In the latter year many women were enumerated as ‘Wives, Mothers, and Mistresses’ in the so-called Fifth Occupational Class, distinct from a class reserved for ‘dependents’ that included (among others) children, gypsies, and certain ladies and gentlemen of independent means (Davies, 1980). After this date, wives and mothers without paid employment were steadily demoted, classified in 1881 as members of the Unoccupied Class, a class subsequently dropped in the 1891 census, amidst a growing consensus in both Great Britain and Australia that wives and mothers should be described as ‘dependents’ (Folbre, 1991). A similar categorical evolution took place within the state of Massachusetts, which followed British precedents in the implementation of its

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Informal employment and non-market work 149 late-nineteenth-century state censuses. The federal U.S. census, however, never listed wives and mothers without gainful employment among the occupied. Starting in 1860 it inquired after the paid occupations of adult women, but explicitly assumed they were unlikely to be engaged in remunerative employments; their identity as ‘unproductive’ workers typically pre-empted any part-time or part-year participation in market employment. Virtually all men, by contrast, were enumerated with occupations, whether or not they were engaged in full-time market work (Folbre, 1991). The end result was a serious under-enumeration of women who actively participated in the market economy by performing industrial piecework, taking in boarders and lodgers, or helping with family farms or businesses (Folbre and Abel, 1989). Women in rural areas made particularly significant contributions to both marketed and consumed agricultural output, such as milk, butter and garden produce. Women who participated in what we would today term the ‘informal economy’ were clearly undercounted for most of the nineteenth century, with implications for measurements of labour productivity and the level and growth of Gross Domestic Product (Folbre and Wagman, 1993). Census officials, increasingly aware of this problem, attempted to address it in 1910, by giving enumerators explicit instructions to encourage married women to report informal market work (Folbre, 1993). Evidence from the manuscript censuses of Massachusetts suggests that the decline in informal market work that took place between 1880 and 1910 largely countervailed the increase in women’s formal labour force participation during that period—a historical finding relevant to trends in many developing countries today. Similar conceptual boundaries hindered efforts to estimate the monetary value of total production, which gradually developed into national income accounting efforts. One estimate of the value of U.S. output published in 1846 included the value of ‘ordinary domestic labour’, only to exclude it in a second edition published in 1852 (Seaman, 1846 and 1852). In 1878, the Association for the Advancement of Women formally protested U.S. federal census terminology, complaining that housewives were ‘not even incidentally named as in any wise affecting the causes of increase or decrease of population or wealth’ (U.S. Congress, 1878: 305). Two major studies published between 1920 and 1940 in the U.S. offered estimates of the value of housewives’ services (King, 1921; Reid, 1934). The eminent Simon Kuznets noted, in passing, that housewives’ services in the U.S. could be valued at somewhat more than one-quarter of national income in 1929 (Kuznets, 1941, volume 2: 431). Colin Clark, another notable figure in the history of national income accounts,

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estimated their contribution at 27 per cent of the GNP of the United Kingdom in 1956 (Clark, 1958). Norway and Sweden offered official estimates of the value of household production in the late nineteenth and early twentieth century, but, in the 1930s, moved toward conformity with the practices of other statistical offices, which excluded it (Aslaksen and Koren, 2014). In sum, an implicit boundary between family work (goods and services produced for the benefit of family members) and informal market work (activities that took place outside of formal employment but generated a market income) was evident at the inception of national statistical efforts, but this boundary remained fuzzy in part because informal market work was situated within households, and often combined with family work. Although the derogation of these activities did not go uncontested, relatively little effort was made to measure either one; as a result, both were underestimated by conventional survey instruments.

6.2 ACADEMIC AND POLITICAL CHALLENGES In many of the now-affluent industrialised countries, women’s participation in paid employment expanded at a relatively steady pace over much of the twentieth century. Paradoxically, this trend prompted more attention to both unpaid and informal work. It hardly seems coincidental that much of this attention came from women who managed to gain a foothold in political economy. In the U.S., Edith Abbott and Sophonisba Breckinridge at the University of Chicago explicitly challenged the notion that women were economic dependents, laying groundwork for Margaret Reid’s important 1934 book, The Economics of Household Production (Folbre, 2009). In the 1950s, Phyllis Deane at the University of Cambridge in Great Britain, assigned the task of developing national income estimates for several African countries, explicitly challenged the assumption that women’s productive activities should go uncounted (Messac, 2018). In 1970, the Danish economist Ester Boserup published her influential Women’s Role in Economic Development, noting that ‘subsistence activities usually omitted in the statistics of production and income are largely women’s work’ (1970: 163). Both Deane and Boserup focused on developing countries, with particular attention to Africa. Both were particularly interested in subsistence agricultural production—a subset of what is today considered the informal sector—but explicitly mentioned family work as well. The countries of Francophone Africa devoted substantial effort to estimation of the value of subsistence production (Jacques Charmes, personal

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Informal employment and non-market work 151 communication). Many economists in the burgeoning field of development economics took these issues more seriously than those studying more affluent nations, and with good reason: the relatively steady economic growth that took place after the end of World War II, sometimes termed the golden age of capitalism, encouraged confidence that formal wage employment would gradually render other forms of work obsolete. In 1946, for instance, Robert Durand wrote that the end result might ‘eliminate the home as a place of work and housewives as a functional group of the population’ (1946: 222). Sociologist Wilbert Moore described unpaid family workers who contributed directly to market output as anachronistic leftovers of a family-based mode of production (1966: 199). Official U.S. surveys avoided using the term ‘work’ for non-market production. Between 1972 and 1993 the U.S. Current Population Survey, inquiring after the major activities of household members, offered six categories: ‘working’, ‘looking for work’, ‘keeping house’, ‘going to school’, ‘unable to work’ and ‘retired’. Though not treated as such, ‘keeping house’ was, effectively, a full-time occupation for many married women that declined steadily over this period in the U.S. (Cohen, 2004). Yet women, in particular, seldom held only one occupation. ‘Keeping house’ remained a significant responsibility for most employed women in affluent countries, its quantitative dimensions dramatised by early timeuse surveys, such as those conducted by the Multinational Comparative Time Budget Research Project, undertaken under the direction of Alexander Szalai with support from European sponsors, and representing an important example of this approach (Szalai, 1973; Godbey and Robinson, 1997). A burgeoning international feminist movement pointed to women’s obligatory responsibilities in these domains as an important source of gender inequality in earnings. The Canadian case offers a particularly telling example of political pressure meeting official resistance. In 1974, the National Council of Women requested more attention to unpaid work (Hawrylyshyn, 1976: 128). Little happened, however, until 1991, when a Canadian homemaker refused to fill out the official census form because it did not recognise the economic significance of her activities. The subsequent media coverage led the Canadian government to reject the recommendations of its official statistical agency and insist on new efforts to measure non-market work (Luxton and Vosko, 1998). The United Nations World Conference on Women also publicised women’s unpaid family work, first in a Nairobi meeting in 1985 and then, more vehemently, ten years later at its Beijing meeting (Luxton, 1997). In the interim, New Zealand politician and activist Marilyn Waring published an influential book, If Women Counted (1988), that

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emphasised glaring inconsistencies in attention to unpaid family work compared to informal market work (for more discussion of this book’s impact, see Bjornhold and McKay, 2014). Yet the treatment of informal market work was also widely considered inadequate. In April 1997, a group of ten scholars and activists founded a project called Women in Informal Employment: Globalizing and Organizing (WIEGO).1 In particular, the group advocated inclusion of informal wage employment outside informal enterprises, including that based in households. Although they proceeded on somewhat different tracks, both efforts to challenge standard labour force categories included the claim that women’s productive contributions were being obscured in disempowering—as well as inaccurate—ways. Both efforts also helped motivate a gradual, albeit uneven, process of institutional change.

6.3 INNOVATION AND RESISTANCE Changes in the treatment of agricultural production for own consumption, and subsequently, the informal sector, both preceded and foreshadowed changes in the treatment of unpaid family care. The original SNA urged two types of imputation—farm output for own consumption and the rent of owner-occupied houses. In 1968, its recommendations were extended to include the processing of primary products that were considered a ‘major source of sustenance’ (Seers, 1976: 197). In his review of the actual effort that national statistical offices devoted to such estimates, Derek Blades acknowledged, in passing, one study of Nigeria that imputed the value of housewives’ services in cooking and child-bearing (Blades, 1975: 393). He also summarised both philosophical and practical arguments against imputation of the market value of agricultural production for own consumption—arguments that proved unsuccessful in this context, but are still, today, levelled against imputation of the market value of unpaid family work. Blades emphasised the links between relative size of the agricultural sector of developing countries and the relative importance of agricultural production for own use. These links are indeed important, if difficult, to tackle. Agriculture is often considered part of the informal sector when at least part of household production reaches sale in the market, while purely subsistence production is excluded (the proportion of farmers who produce only for their own consumption has long been quite small). In practice, national accounts typically measure agricultural production

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Informal employment and non-market work 153 based on crop areas and yields per acre, not declarations by household units, then estimate its distribution between own consumption and market sales. Blades did not foresee the emergence and growth of relatively informal economic activities in both manufacturing and services. By 1993, however, international statistical agencies felt the need to offer a tentative definition of the informal sector, and the 15th International Conference of Labour Statisticians (ICLS) called for mixed household–establishment surveys that could describe its empirical dimensions (Charmes, 2012). This conference also recommended separation of statistics on agriculture and non-agricultural activities and argued that the definition of informal employment should not include those engaged in the production of goods or services exclusively for own consumption (ICLS, 1993). In 2003, the 17th ICLS adopted additional guidelines, extending attention to a great variety of economic activities taking place outside of households. The employment definition, in particular, included the category of unpaid family workers (whether working in formal or informal enterprises), now termed ‘contributing family workers’, restricted to family workers engaged in the production of goods for own consumption or for sale (Wobbe and Renard, 2017). This could include not merely agricultural output, but also industrial homework and many types of services, including small stores. Little research attention has been devoted to this group, comprised primarily of women and children. Yet in 2018, the International Labour Organization estimated that it represented about 10 per cent of global employment, and more than 30 per cent of employment in low-income countries.2 As the very term ‘family worker’ risks confusion with the unpaid production of goods and provision of family care services, statisticians took pains from the outset to emphasise the exclusion of such services from the SNA. They emphasised again, and again, that care services were ‘non-economic’ in nature (Wobbe and Renard, 2017: 357). Family care services were initially excluded from the rubric of informal employment and/or the informal sector largely on the grounds that they did not constitute ‘production’ or, in more technical terms, were ‘outside the production boundary’, unlike production of goods. Yet sociologists, unlike economists and most statisticians, saw no difficulty in categorising unpaid family care services as work, in terms consistent with those clearly articulated by Margaret Reid in 1934: services that could, in principle, be purchased in the labour market. The aforementioned time-use surveys of the 1970s orchestrated by Alexander Szalai generated widespread interest in the amount of time devoted to non-market work, and in the 1990s many national statistical offices began to field diary-based

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surveys to nationally representative populations. The proliferation of such efforts further publicised the quantitative dimensions of such work. Today, survey data on time use is available for more than seventy countries, increasingly on a regular or semi-regular basis (ILO, 2018a). Not incidentally, these data provide important insights into irregular forms of market employment, as well as unpaid family care services. Studies of Indian time-use data, in particular, reveal how conventional labour force surveys have seriously underestimated both the total labour market participation of Indian women and their total (paid and unpaid) work hours (Hirway, 2017; Ghosh, 2009). The World Bank Living Standards Measurement Survey, first implemented in the 1980s, now features more attention to informal paid and unpaid work. This survey is based on responses to short, stylised lists of activities that do not provide very robust information. Nationally representative time-use surveys conducted by national statistical offices provide a more complete picture, and the sheer volume of international data revealing women’s contributions to family income and living standards has effectively delegitimated previous assumptions of their economic ‘dependence’ on men. The SNA, however, remains resistant to fundamental change. While the 4th revision in 1993 defined a ‘general production boundary’ that would include services for own production by households and recommended the preparation of satellite accounts, the basic SNA production boundary excluding consideration of such services remains in force. Direct and indirect criticisms of this boundary have recently intensified. In 2013, the 19th Conference of Labour Statisticians officially redefined work as ‘any activity performed by persons of any sex and age to produce goods or to provide services for use by others as well as for own use’ (ICLS, 2013). Recognising that this redefinition had implications for the definition of labour force, the conference advocated a new, narrower definition of labour force that excludes all those who primarily produce for own consumption, including subsistence farmers. This aspect of the change has become a source of confusion, because it excludes a substantial portion of the African population previously defined as part of the labour force (Klasen, 2018). Some countries now produce indicators based on the new definitions without helping users understand the resulting discontinuities. Labour force statistics now sometimes distinguish unpaid work, while national accounts do not (Charmes, 2019a and Charmes, 2019b). On the one hand, time-use surveys vindicate the economic importance of women’s non-market care services. On the other hand, application of standard SNA terminology dictates that they are not to be considered ‘productive’.

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Informal employment and non-market work 155 Alternatively, they are sometimes described as ‘productive’, but not ‘economic’, an even more conspicuous contradiction in terms. While the concept of ‘informality’ has clearly expanded over time, its similarities and differences with ‘production of goods and services for own use’ remain significant and suggest the need to redefine boundaries in more consistent terms. When the OECD published a handbook on the ‘non-observed’ economy in 2002, it did not include any significant discussion of unpaid family care services (OECD, 2002). Yet the ‘informal’ market economy is clearly sandwiched in between the formal market economy and the even more informal economy of household production of goods and services for own production, and influenced by both.

6.4 RETHINKING THE BINARIES Current accounting conventions for the informal economy represent the conceptual intersections of several distinct but related binaries: formal/ informal, market/non-market, business enterprise/family, goods/services, economic/non-economic, measurable/non-measurable, money/love and, last but not least, men/women. As currently defined, both the informal sector and informal employment consist of an informal market sector and informal market employment. While informal non-market work in families devoted to the production of goods (currently within the SNA production boundary) was once (unlike services) considered central to informal employment (as for instance, Blades, 1975), that inclusion has been rendered ambiguous by the 19th ICLS recommendations regarding the definition of labour force. Table 6.1 illustrates this ambiguity. More importantly, a distinction between goods and services in nonmarket work (placing one inside and the other outside the production boundary) is inconsistent with the lack of such a distinction in market work: indeed, service work (including personal services) represents a large and growing segment of informal employment. As a result, activities that are essentially identical, such as cooking, cleaning, and taking care of children and the elderly, are included in informal employment (and the informal sector) if they are paid, but not included if they are performed by wives and mothers. The example of domestic servants is particularly salient because, in developing countries, many of them are paid in kind: that is, they live in their employers’ households and their room and board represents an important component of their total compensation (OECD, 2002: 181). In this respect, too, domestic servants resemble wives and mothers, who typically receive indirect compensation from husbands and the fathers of their children.

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Table 6.1 Current System of National Accounts (SNA) and International Conference of Labour Statisticians (ICLS) accounting framework for employment Market work Formal economy

Standard employment in legal business enterprises

Informal economy

Non-standard employment and small enterprises based largely on self-employment/ family labour (sale of both goods and services)

Non-market work

Within the production boundary but outside the informal ‘labour force’ according to the ICLS

Production of goods for own and family consumption

Outside the production boundary

Provision of services for own and family consumption

In practice, the distinction between the production of goods and the provision of services is difficult to establish. For instance, gathering of firewood or other fuels, as well as carrying of water, are currently classified within the production boundary because they are ‘extractive activities’, but they do not literally entail production. Yet preparation of family meals is classified outside the production boundary, even though it transforms raw materials into a distinct product with a clear counterpart in the market. One rationale offered for the SNA distinction points to ‘intent’—the decision whether or not to send home-produced goods to market can be made after the fact, while service provision is often directly intended for the benefit of oneself or family members (see discussion in Charmes, 2019b: 9). But it is not clear why ‘intent’ should determine whether an activity represents production or not, unless one assumes that intrinsic motivation—or normative obligations— automatically disqualify an activity as ‘economic’. If this were the case, any activity from which paid workers derive personal satisfaction or enjoyment should be similarly disqualified. The SNA boundary reflects the implicit assumption that unpaid services are performed for love and might be normatively sullied by assignment of any monetary value. Even the definition of ‘goods for own consumption’ bears a gendered imprint. Under the current boundary, time devoted to the care of dairy cows or goats to produce milk for family consumption qualifies as

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Informal employment and non-market work 157 production. But the breastfeeding of children by human mothers receives no mention, and the economic value of breastmilk is largely ignored despite considerable evidence of its positive health effects. Breastfeeding is physically demanding and time consuming; surveys of the number of nursing mothers can be used to estimate the amount of milk produced, and such milk has a per unit market price based on private and medical purchases—under the existing SNA production boundary, it could and should be counted as part of the GDP (Smith and Ingham, 2005). The term ‘unpaid family worker’ also betrays an obvious inconsistency. In the informal sector literature, it refers to a family member (typically a woman or a minor) who participates in a market-oriented family enterprise without receiving a wage. But unpaid family workers typically receive economic support from family members, in the form of food, housing and clothing; the form of payment they receive is essentially identical to that enjoyed by family members providing domestic and care services to the members of their household who participate in market employment. In recent years, ‘unpaid family worker’ has been largely replaced by the term ‘contributing family worker’, a subtle but important improvement. Yet this term is also—obviously—problematic, because it implies that family members who specialise in domestic services and care provision are not ‘contributing workers’. Formal economic activities are, almost by definition, easier to measure in monetary terms than informal economic activities of any type. Here again, the similarities between informal market and informal non-market work stand out: they are both best measured by relatively new survey instruments such as time-use surveys. It is easier to construct reliable measures of labour productivity when the monetary value of output (as well as labour inputs) can be estimated; the market value of non-market goods and services is probably less standardised. Similar obstacles, however, have never stood in the way of a major imputation long recommended by the SNA—adjustments for the rental value of owneroccupied housing, made in order to ensure that an increase in owneroccupied homes does not reduce measured national income. These imputations are based on highly stylised assumptions and can only be described as rough estimates. Most houses are homes with sentimental value. They are sources of personal utility that are not captured by monetary estimates. Indeed, the same is true of all personal consumption expenditures: they do not measure subjective happiness. Yet many economists and statisticians seem to fear that valuation of the non-market services traditionally provided by female family members will somehow debase their emotional significance. Perhaps the desire to label such activities ‘non-economic’ reflects the notion

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that women’s care for others should be treated the same way as men’s care for themselves—the eating, drinking and sleeping necessary for them to meet their own basic needs and maintain their ability to earn income. The praise of feminine altruism as a precious gift of nature deflects attention from the price that women actually pay for it. Full recognition of the non-market economy would place it on a par with the formal market economy and the informal market economy, rather than placing it ‘outside’ the economy (see Table 6.2). This implies a slight change in definition of what has been termed informal economy employment, moving the production of goods for own and family consumption from under this rubric to combine it with the provision of non-market services in the larger non-market economy. This schema makes it clear that the informal market economy represents an intermediate category between the formal market economy and the nonmarket economy. In practice, the actual boundaries outlined in Table 6.2 may be as fuzzy and difficult to operationalise as those in Table 6.1, but they are conceptually more consistent and more attuned to the diversity and complexity of women’s economic contributions. Table 6.2 A simpler and more consistent accounting framework Market work Formal market economy

Standard employment in legal business enterprises

Informal market economy

Non-standard employment and small enterprises based largely on self-employment/ family labour (sale of both goods and services)

Non-market economy

Non-market work

Production of goods and provision of services for own and family consumption

Table 6.2 focuses only on employment and work in the three domains. A full accounting of the non-market economy requires attention to public goods, positive and negative externalities, natural assets and ecological services. Still, the production of goods and provision of services for own and family consumption represents an important economic domain in its own right. Closer attention to this domain helps put the relative size of the informal market economy in perspective and also raises interesting

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Informal employment and non-market work 159 questions regarding future global trends in gender inequality and economic development.

6.5 THE LINKS BETWEEN INFORMAL MARKET EMPLOYMENT AND NON-MARKET WORK The relatively new trove of international time-use data shows that average time devoted to non-market work is roughly equivalent to that in formal market and informal market employment combined; it also tends to be proportionately lower in low-income countries, partly as a result of the subsistence needs of those living in extreme poverty. Women’s specialisation in non-market work, combined with the normative assumption that they should primarily specialise in family care, helps explain their under-enumeration in paid employment, their relatively large share of informal employment and the gendered disadvantages they face within informal employment, even when self-employed. Both the magnitudes and the cross-sectional differences are worth noting. Table 6.3 presents aggregate averages of daily minutes devoted to unpaid and paid work for 60 countries included in a recent cross-national summary of surveys fielded between the 1990s and the present (ILO, 2018a). These data are not fully harmonised for differences in survey design and wording, and do not control for important economic and demographic differences. Yet they clearly demonstrate the importance of unpaid work: the unweighted average of time devoted to unpaid work (defined in these surveys as non-market work, and not including the activities of ‘contributing family workers’ as described earlier) as a percentage of total work is 48 per cent—65 per cent for women and 29 per cent for men. Unpaid work as a percentage of total work does not appear to decline in the process of economic development; it is positively correlated with GDP per capita in the survey year (R = .34). While the percentage of work time that women devote to unpaid work is not significantly correlated with GDP per capita (R = -.02), men’s percentage share is strongly and positively correlated (R = .58).3 Demographic, as well as economic, factors play a significant role here: in high-income countries, many men live in households without women, and many enjoy years of retirement from paid employment. Women’s work minutes are negatively associated with GDP per capita, possibly as a result of lower fertility rates. The causal relationships, however, are less important here than the larger pattern, which clearly demonstrates the persistent significance of unpaid work for both men and women.

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Table 6.3 Average time devoted to unpaid, paid and total work in surveys conducted between the 1990s and the present (in minutes per day) and GDP per capita (at purchasing power parity)

Columns

Design

Unpaid work as % of total work

Women’s unpaid work as % of their total work

Men’s unpaid work as % of their total work

GDP Women’s per average capita daily in work survey minutes year ($)

Men’s average daily work minutes

Albania 2010–2011

49

73

20

9,383

431

309

Algeria 2012

53

91

18

12,271

342

352

Armenia 2008

49

76

22

7,088

413

354

Australia 2006

56

71

69

37,602

439

422

Austria 2008–2009

49

63

55

41,379

429

410

Belgium 2013

57

68

84

42,258

313

289

Benin 2015

39

56

17

2,127

392

283

Bulgaria 2009–2010

59

69

86

16,695

435

354

Cameroon 2014

37

51

26

3,332

415

358

Canada 2015

50

59

67

46,019

437

425

China 2008

35

47

26

7,586

500

454

Denmark 2001

55

62

88

33,647

390

397

Ecuador 2012

43

65

25

10,452

423

384

El Salvador 2010

33

54

12

6,176

420

389

Estonia 2009–2010

55

62

86

21,746

422

366

Ethiopia 2013

45

60

42

1,492

489

426

Finland 2009

49

57

69

37,349

373

341

France 2010

54

65

74

37,217

360

347

Germany 2001–2002

55

67

74

31,629

403

386

Ghana 2009

36

49

24

2,912

448

356

Greece 2013–2014

63

78

70

25,248

355

259

Hungary 2009–2010

48

61

49

21,587

439

388

India 1998–1999

39

65

9

1,943

457

391

Iran, Islamic Rep. of 2009

54

88

27

16,589

347

360

Iraq 2007

59

92

23

10,778

376

302

Ireland 2005

50

67

46

41,394

428

409

Italy 2008–2009

56

75

48

35,882

408

331

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Informal employment and non-market work 161 Unpaid work as % of total work

Columns

Design

Women’s unpaid work as % of their total work

Men’s unpaid work as % of their total work

GDP Women’s per average capita daily in work survey minutes year ($)

Men’s average daily work minutes

Japan 2016

40

61

23

41,353

419

407

Kazakhstan 2012

51

65

55

22,295

380

314

Korea, Rep. of 2014

37

56

16

35,320

333

285

Kyrgyzstan 2010

47

63

37

2,718

438

367

Latvia 2003

42

54

42

12,083

511

480

Lithuania 2003

47

57

53

13,153

539

479

Madagascar 2001

36

48

21

1,205

462

291

Mali 2008

50

71

13

1,728

339

184

Mauritius 2003

46

70

25

10,400

396

369

Moldova, Rep. of 2011–2012

58

66

92

4,958

498

417

Mongolia 2011

42

55

40

8,802

531

487

Morocco 2011–2012

46

79

13

7,100

381

368

Netherlands 2005–2006

48

64

48

41,777

400

412

New Zealand 2009–2010

49

63

56

31,250

390

395

Norway 2010

49

56

72

61,587

411

430

Oman 2007–2008

61

83

61

42,444

332

302

Pakistan 2007

44

79

9

3,994

365

350

Panama 2011

43

60

36

17,585

502

487

Peru 2010

47

65

38

9,660

522

497

Poland 2003–2004

55

68

67

14,172

431

391

Portugal 1999

44

63

26

17,930

480

375

Romania 2011–2012

60

73

77

17,872

364

288

Serbia 2010-2011

56

70

65

12,628

430

375

South Africa 2010

49

64

46

11,813

358

312

Spain 2009–2010

54

67

61

32,244

391

331

Sweden 2010–2011

49

54

79

43,773

441

439

Taiwan, China 2004

29

43

14

26,714

389

344

Tanzania, United Rep. 2014

36

55

19

2,754

433

405

Thailand 2014–2015

26

43

13

16,246

406

486

Tunisia 2005

48

75

18

7,843

437

353

Turkey 2014–2015

55

81

33

24,307

406

354

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Table 6.3 (continued) Unpaid work as % of total work

Women’s unpaid work as % of their total work

Men’s unpaid work as % of their total work

United Kingdom 2005

49

62

56

33,488

377

364

United States 2016

50

60

67

57,815

439

419

Average (unweighted)

48

65

29

20,847

417

373

0.34

–0.02

0.58

0.09

–0.28

Correlation with GDP per capita

GDP Women’s per average capita daily in work survey minutes year ($)

Men’s average daily work minutes

Source: ILO (2018a), Table A.3.1. Three countries in the source table (Cambodia, Slovenia and Uruguay) were excluded because entries did not include data for paid work. Two countries (Occupied Palestinian Territory and the former Yugoslav Republic of Macedonia) were excluded because GDP per capita figures were not available for them. Argentina was excluded because time-use data is based on Buenos Aires alone. Quatar was excluded because its high income per capita (over $100,000) makes it an extreme outlier. GDP per capita data based on International Monetary Fund at https://knoema.com/pjeqzh/gdp-per-capita-by-countrystatistics-from-imf-1980-2024, accessed 10 February 2020.

In low-income countries, women’s paid work is particularly likely to have an ‘informal’ character: production of goods for own consumption, highly irregular or seasonal agricultural work, contributions to a family enterprise, or self-employment. As a result, it is often combined with unpaid family work in ways that render it invisible almost by association. As with the historical example of the U.S. census, alluded to earlier, standard labour force surveys in developing countries often assume that women’s ‘primary’ occupation is family care, and therefore exclude them from paid employment. A comprehensive review of recent research on Latin American countries finds that standard estimates of trends in rural women’s participation in market work have been biased upward by failure to consider the increased ‘visibility’ of wage employment, yet continue to underestimate actual levels (Deere, 2005: 52). Several studies document the misrepresentation of trends in Indian women’s market labour force participation (Ghosh, 2009; Hirway, 2017). A more pointed example is provided by the Pakistani Labour Force Survey of 2014–15, which reported both a ‘standard’ labour force participation rate and an ‘augmented’ rate based on probing respondents who described their occupation as housewife or

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Informal employment and non-market work 163 homemaker and asking them about informal market-related work activities. The augmented rate for rural Pakistan was estimated at 44 per cent, compared to the standard measure of 29 per cent (Gazdar, 2018: 16–17). Some of the time-use surveys included in the ILO report include questions pertaining to participation in informal market work, but these vary considerably across countries (the International Classification of Activities for Time Use Statistics, which distinguishes between work for household versus corporate enterprises, is not always strictly applied). If these surveys could be standardised to provide comparable measures, they could provide important insights into the number of hours devoted to different activities, including agricultural production for own consumption, industrial homework, self-employment, and temporary or contingent employment (Hirway, 2017). This would also make it possible to explore the links between the share of informal market work and the share of non-market work. These links are particularly important for women, who are overrepresented in informal employment relative to men in Sub-Saharan Africa, Southern Asia and Latin America. The constraints imposed by unpaid family care work go a long way toward explaining this gender difference (Vanek et al., 2014; Chant and Pedwell, 2008). Notably, recent ILO analysis shows that women in informal employment are more than three times more likely than men to be ‘contributing family workers’. In low and lower-middle income countries, more than 30 per cent of women in informal employment fall into this category (ILO, 2018b: 21). These women are contributing to family living standards in more ways than earning income. The unpaid care services they provide make it possible for their families to spend less on purchased services, including child care, elder care, health care and meal preparation. The complementarities between informal market work and non-market work suggest a circular, reciprocal causality that may help explain the stubborn persistence of informal employment: when physical and social infrastructure that could reduce the temporal demands of family care are missing, women find it particularly difficult to engage in formal employment (Folbre, 2018). Likewise, their restriction to informal market work reinforces their specialisation in unpaid family care, possibly encouraging higher fertility. Women’s employment in informal market work is often a desperate response to economic stress rather than a source of individual empowerment. Insufficient market demand helps explain their constricted opportunities, but supply-side care constraints may also limit women’s access to more remunerative jobs. Greater attention to the determinants of

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women’s non-market work and complex interactions between economic and demographic dynamics could facilitate efforts to increase women’s representation in formal market work.

6.6 ACCOUNTING FOR CARE Debates over the statistical categorisation of different types of work may seem tediously abstract. Yet they have significant implications both for understanding the process of economic development and for policies that might nudge it in more successful directions. The non-market work of family care contributes significantly, albeit indirectly, to household living standards. More explicit recognition of its contributions is particularly relevant to the analysis of informal market work—and vice versa. The alternative conceptualisation of ‘the economy’ outlined here situates informal market work in between formal market work and non-market work, emphasising mutual influences among these layers within a larger, more complex system. Much of the quantitative evidence presented above draws from two recent ILO publications, one focusing on the care economy, the other on the informal economy (ILO, 2018a and ILO, 2018b). These publications complement each other in ways that challenge the current division of labour in research on economic development. Those who specialise in analysis of unpaid care should pay more attention to informal market work, and vice versa. While many methodological problems remain, much could be gained from a joint effort to improve the design of labour force, household and time-use surveys, and to coordinate them more effectively.

NOTES 1. 2. 3.

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For more details about the founding of WIEGO, see https://www.wiego.org/wiegoborn-bellagio-1997, accessed 10 February 2020. ILO, Status in Employment Tables, May 2018; see https://ilostat.ilo.org/data/# summarytables, accessed 13 November 2018. GDP per capita (PPP adjusted) is in current rather than constant dollars, but results were quite similar for GDP per capita in all countries in 2008.

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REFERENCES Aslaksen, Iulie and Charlotte Koren (2014), ‘Reflections on unpaid household work, economic growth, and consumption possibilities’, in Margunn Bjornhold and Ailsa McKay (eds), Counting on Marilyn Waring, Bradford, Ontario: Demeter Press, pp. 55–87. Bjornhold, Margunn and Ailsa McKay (eds) (2014), Counting on Marilyn Waring, Bradford, Ontario: Demeter Press. Blades, Derek W. (1975), ‘Subsistence activities in the national accounts of developing countries with special reference to Latin America’, Review of Income and Wealth, 21 (4), 391–410. Boserup, Ester (1970), Woman’s Role in Economic Development, London: George Allen & Unwin. Chant, Sylvia and Carolyn Pedwell (2008), ‘Women, gender and the informal economy: an assessment of ILO research and suggested ways forward’, Working Paper, Geneva: International Labour Office, accessed 15 October 2018 at https://digitalcommons. ilr.cornell.edu/cgi/viewcontent.cgi?referer=https://scholar.google.com/&httpsredir=1& article=1689&context=globaldocs Charmes, Jacques (2012), ‘The informal economy worldwide: trends and characteristics’, Margin: Journal of Applied Economic Research, 6 (2), 103–132. Charmes, Jacques (2019a), Informality, Solidarities, and Unpaid Carework. Dimensions of Resilience in Developing Countries, Basel, Switzerland: Springer Nature. Charmes, Jacques (2019b), The Unpaid Care Work and the Labour Market: An Analysis of Time Use Data Based on the Latest World Compilation of Time-use Surveys, ILO Gender, Equality and Diversity Branch, Geneva: International Labour Office. Clark, Colin (1958), ‘The economics of housework’, Bulletin of the Oxford University Institute of Statistics, 20 (1), 205–211. Cohen, Philip N. (2004), ‘The gender division of labor: “keeping house” and occupational segregation in the United States’, Gender & Society, 18 (2), 239–252. Davies, Celia (1980), ‘Making sense of the Census in Britain and the U.S.A.: the changing occupational classification and the position of nurses’, Sociological Review, 28 (3), 581–609. Deere, Carmen Diana (2005), ‘The feminization of agriculture? Economic restructuring in rural Latin America’, UNRISD Occasional Paper, Geneva: United Nations Research Institute for Social Development (UNRISD). Durand, John D. (1946), ‘Married women in the labor force’, American Journal of Sociology, 52 (3), 217–223. Folbre, Nancy (1991), ‘The unproductive housewife: her evolution in nineteenth century economic thought’, Signs: Journal of Women in Culture and Society, 16 (30), 463–484. Folbre, Nancy (1993), ‘Informal market work in Massachusetts, 1875–1920’, Social Science History, 17 (1), 135–160. Folbre, Nancy (2009), Greed, Lust, and Gender: A History of Economic Ideas, New York: Oxford University Press. Folbre, Nancy (2018), ‘Developing care: recent research on the care economy and economic development’, Ottawa, Canada: International Development Research Centre, accessed 10 February 2020 at https://idl-bnc-idrc.dspacedirect.org/bitstream/handle/ 10625/57142/IDL-57142.pdf?sequence=2 Folbre, Nancy and Marjorie Abel (1989), ‘Women’s work and women’s households: gender bias in the US census’, Social Research, 56 (3), 545–570. Folbre, Nancy and Barnet Wagman (1993), ‘Counting housework: new estimates of real product in the U.S., 1800–1860’, The Journal of Economic History, 53 (2), 275–288.

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Gazdar, Haris (2018), ‘The hidden economic backbone: women in agriculture’, paper presented at the meetings of the International Association for Feminist Economics, June, New York: New Paltz. Ghosh, Jayati (2009), Never Done and Poorly Paid: Women’s Work in Globalizing India, New Delhi: Women Unlimited. Godbey, G. and J.P. Robinson (1997), Time for Life, University Park, PA: Pennsylvania State University Press. Hakim, Catherine (1980), ‘Census reports as documentary evidence: the Census commentaries, 1801–1951’, Sociological Review, 28 (3), 551–580. Hart, Keith (1985), ‘The informal economy’, Cambridge Anthropology, 10 (2), 54–58. Hawrylyshyn, Oli (1976), ‘The value of household services: a survey of empirical estimates’, Review of Income and Wealth, 22 (2), 101–131. Hirway, Indira (2017), ‘Challenges to measuring workforce/labour force in global South’, in Indira Hirway (ed.), Mainstreaming Unpaid Work, New York: Oxford University Press, pp. 199–230. ICLS (International Conference of Labour Statisticians) (1993), ‘Resolution concerning statistics of employment in the informal sector, adopted by the Fifteenth International Conference of Labour Statisticians’, accessed 24 November 2018 at https://www.ilo.org/ wcmsp5/groups/public/—dgreports/—stat/documents/normativeinstrument/wcms_0874 84.pdf ICLS (International Conference of Labour Statisticians) (2013), ‘Resolution concerning statistics of work, employment and labour underutilization’, accessed 15 November 2018 at https://www.ilo.org/wcmsp5/groups/public/—dgreports/—stat/documents/ normativeinstrument/wcms_230304.pdf ILO (International Labour Organization) (2018a), Care Work and Care Jobs for the Future of Work, Geneva: International Labour Office, accessed 10 November 2018 at https:// www.ilo.org/global/topics/care-economy/care-for-fow/lang–en/index.htm ILO (International Labour Organization) (2018b), Women and Men in the Informal Economy, Geneva: International Labour Office, accessed 28 November 2018 at https:// www.ilo.org/global/publications/books/WCMS_626831/lang–en/index.htm King, Willford I. (1921), Income in the United States, Its Amount and Distribution, New York: Macmillan. Klasen, Stephan (2018), ‘What explains uneven female labor force participation levels and trends in developing countries?’, Discussion Paper 246, Göttingen: Courant Research Center–Poverty, Equity and Growth (CRC–PEG), accessed 15 November 2018 at https://www.econstor.eu/bitstream/10419/175179/1/1014708427.pdf Kuznets, Simon (1941), National Income and Its Composition, New York: National Bureau of Economic Research. Luxton, Meg (1997), ‘The UN, women, and household labor’, Women’s Studies International Forum, 20 (3), 431–439. Luxton, Meg and Leah F. Vosko (1998), ‘Where women’s efforts count: the 1996 Census campaign and “family politics” in Canada’, Studies in Political Economy, 56 (1), 49–81. Messac, Luke (2018), ‘Outside the economy: women’s work and feminist economics in the construction and critique of national income accounting’, The Journal of Imperial and Commonwealth History, 46 (3), 552–578. Moore, Wilbert (1966), ‘Changes in occupational structure’, in Neil J. Smelser and Seymour Martin Lipset (eds), Social Structure and Mobility in Economic Development, London: Routledge & Kegan Paul, pp. 194–212. OECD (Organisation for Economic Co-operation and Development) (2002), Measuring the Non-Observed Economy: A Handbook, Paris: OECD, IMF, ILO. Reid, Margaret (1934), The Economics of Household Production, New York: John Wiley & Sons.

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Informal employment and non-market work 167 Seaman, Ezra (1846), Essays on the Progress of Nations, Detroit, Michigan, and New York: Baker & Scribner. Seaman, Ezra (1852), Essays on the Progress of Nations, 2nd edition, New York: Scribner. Seers, Dudley (1976), ‘The political economy of national accounting’, in Alec Cairncross and Mohinder Puri (eds), Employment, Income Distribution and Development Strategy: Problems of the Developing Countries, New York: Holmes and Meier, pp. 193–209. Smith, Julie P. and Lindy H. Ingham (2005), ‘Mothers’ milk and measures of economic output’, Feminist Economics, 11 (1), 41–62. Szalai, Alexander (1973), The Use of Time: Daily Activities of Urban and Suburban Populations in Twelve Countries, Berlin: Walter de Gruyter. Topalov, Christian (2001), ‘A revolution in representations of work: the emergence over the 19th Century of the statistical category “Occupied Population” in France, Great Britain, and the United States’, Revue Française de Sociologie, 42 (1), 79–106. U.S. Congress (1878), Senate, memorial of Mary F. Eastman, Henrietta L. T. Woolcott, and others, officers of the Association for the Advancement of Women, praying that the tenth census may contain a just enumeration of women as laborers and producers, 45th Cong., 2d sess., 1878. S. Doc. 84, Vol. 2, Serial 1786. Vanek, Joanne, Martha Alter Chen, Françoise Carré, James Heintz and Ralf Hussmanns (2014), ‘Statistics on the informal economy: definitions, regional estimates and challenges’, Women in Informal Employment: Globalizing and Organizing (WIEGO) Working Paper (Statistics) 2, accessed 10 February 2020 at https://www.wiego.org/ wiego-working-papers Waring, Marilyn (1988), If Women Counted: A New Feminist Economics, New York: Harper & Row. Wobbe, Theresa and Léa Renard (2017), ‘The category of “family workers” in International Labour Organization statistics (1930s–1980s): a contribution to the study of globalized gendered boundaries between household and market’, Journal of Global History, 12 (3), 340–360.

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7. Assessing the figures of sex work throughout non-transition and transition European countries: magnitude, premium on earnings and informal employment Philippe Adair and Oksana Nezhyvenko

7.1 INTRODUCTION Prostitution, the controversial so-called ‘oldest profession’, raises moral and economic issues such as social stigma, health risks and tax evasion, echoing the economists (Mandeville, 1724; Malthus, 1798; Stuart Mill, 1870) whose doctrines inspired current legislation regarding prostitution in the European Union (EU-28). Advocacy for laissez-faire (Hakim, 2015) confronts the virtuous stance on abolition (Charpenel, 2013). Today, prostitution is back again on the agenda: the EU political arena (Mendez Bota, 2014; Schulze, 2014) has discussed the issue, which also deserves special attention from Eurostat in as much as illegal production and namely prostitution has been included into the national accounts since 2010. Three distinct policy regimes rule prostitution: prohibition, regulation and abolition, which all ban human trafficking for sexual exploitation. Prohibition makes prostitution illegal as well as the prostitute liable to penalties in four Member States (Croatia, Lithuania, Malta and Romania until decriminalisation in 2013), which account for 1.63 percent of EU GDP and 5.5 percent of the total EU population in 2010. It also applies to nine non-EU transition countries (Albania, Armenia, Azerbaijan, Belarus, Georgia, Russia, Serbia and Montenegro, and Ukraine). This regime rules one-third of 39 European countries. Regulation, in line with Mandeville (1724), makes prostitution a legal trade in brothels, including tax collection and labour contracts for sex workers, in four Member States that adopted this regime in the late 1990s and early 2000s: Austria, Germany (2002), Greece (1999) and the Netherlands (2000). They altogether contribute 29.2 percent EU GDP and almost one-quarter (23.26 percent) of the total EU population in 2010. 168

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Assessing the figures of sex work throughout European countries 169 Abolition, in line with Stuart Mill (1870) and the Universal Declaration of Human Rights (UN, 1948), advocates that sexual exploitation should be extinct, as should the non-coercive sex trade. Pimps and brothels managers should be prosecuted, but not the prostitutes themselves. This policy regime applies to 20 Member States1 that account for 69.1 percent EU GDP and 71.2 percent of the total population in 2010. The abolition regime also prevails in Norway and in two non-EU transition countries (Bosnia and Herzegovina, and FYR of Macedonia), ruling almost threefifths of 39 European countries. From an analytical point of view, there are two distinct but related approaches. One addresses the issue of prostitution as legal sex work, a market economic activity that deserves thorough analysis in terms of supply and demand. The other addresses the issue of coercive prostitution in terms of victims of sexual exploitation or forced labour; the emphasis is upon illegal trafficking within a given country as well as cross-border migration, which is used as an approximation in order to estimate overall prostitution including both coercive and non-coercive sex work that actually blurs such distinction. It is common knowledge that data on prostitution are scant and scattered throughout a few papers; hence, expert’s calculations are considered as ‘guesstimates’. To the best of our knowledge, there is no benchmark analysis assessing the magnitude for non-coerced and coerced prostitution in 39 European countries and especially the EU-28.2 Strangely enough, to date no assessment has been applied to expert calculations. It is our purpose to fill the gap and provide a tentative benchmark. Prostitution encapsulates three broad distinct segments: the upper tier (escorts and call girls), the intermediate category (brothels, bars, clubs, massage parlours and other indoor prostitution) and the lower tier (outdoor or street prostitution). Furthermore, some students and housewives participate on a part-time basis in addition to working as full-time professionals. Hereafter, we assume that prostitution is an equivalent full-time activity, the magnitude of which we measure, compiling surveys issued from primary as well as secondary sources, in order to design Estimates. We use a sample of 39 European countries,3 among which are 28 EU Members States. Admittedly, the sample is small, but it is consistent, because EU membership is binding with respect to budget issues and the requested harmonisation of national accounts. Moreover, the EU is an open area for both labour and capital mobility. We disentangle the sample into two subsets, 18 Western countries (17 EU Member States plus Norway) and 21 transition countries (11 EU Member States plus 10

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non-EU countries), in order to focus upon varied prostitution regimes and to take into account the earnings gap. In transition countries, average GDP per capita according to purchasing power parity was roughly one-half of the level of average for EU non-transition countries as of 2010 (Eurostat, nama_10_gdp). The gap is wider for non-EU transition countries. Such a gap is an incentive for cross-border mobility, which is a major pattern of prostitution. The chapter is structured as follows. Section 2 is devoted to a literature review regarding both non-coerced and coerced prostitution. Next, section 3 addresses the demand side, using scant data from representative household surveys on male sexual behaviour. Section 4 collects the data sources on the supply side and designs three series of Estimates using the following measurements: two from HIV prevalence among female sex workers; two from data collected by international NGOs; and two, actually only one is disaggregated, from victims of sexual exploitation trafficking according to the ILO, Eurostat and the United Nations Office on Drugs and Crime (UNODC) in 2010. Section 5 designs an OLS model, an ordered probit, marginal effects and country ranking to test the five Estimates for prostitution according to GDP per capita, legislation, and supply-side and demand-side variables. The penultimate section, 6, checks Estimates of prostitution as regards national accounts adjustment for illegal production as well as for consumption expenditure, using average price for sexual services and related earnings. It points out the puzzling issue of prostitution – it is a legal economic activity according to both the regulation and abolition regimes that rule two-thirds of European countries, but it is illegal in one-third of the countries ruled by the prohibition regime; moreover, it is not classified as an occupation, although it may be included in a special category. The conclusion outlines our main findings as regards the assessment for most likely Estimates, the asymmetry of prostitution regimes regarding the magnitude of sex work, the premium in earnings from prostitution and the inclusion of the ‘oldest profession’ into informal employment.

7.2 LITERATURE REVIEW ON PROSTITUTION Two strands in the recent economics literature address prostitution. One explores various theoretical models based upon and extending the general assumption of rational choice behaviour from sex workers towards the social welfare issue, the last model being the only one that takes into

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Assessing the figures of sex work throughout European countries 171 account coerced sex work. The other strand focuses on victims of sexual exploitation, addressing coerced prostitution and tackling the empirical issue. 7.2.1 Non-coerced Sex Work and Prostitution Regimes Edlund and Korn (2002) design the first formal model of occupational choice involving voluntary prostitution according to rational choice. They state the prostitution puzzle as ‘low-skilled, labor intensive, female, and well paid’ (p. 181) and explain that sex workers draw a compensating differential due to the foregone opportunity to ‘sell’ their fertility in the marriage market. Della Giusta et al. (2009) extend the standard model of rational action, including social interactions and social sanctions. They focus upon stigma as a loss of reputation, which affects social standing for both clients and sex workers. Attitudes towards the exchange of paid sex shape the dynamics of demand and supply and the resulting markets. Farmer and Horowitz (2013) include intermediaries into a theoretical analysis of market structure with heterogeneous buyers and sellers as well as information asymmetry. The market is segmented into separating equilibria and intermediaries affect the distribution of surplus. If brothels are authorised, they are likely to reduce information asymmetry and costs as well as promoting economies of scale and quality. Immordino and Russo (2015) set up an equilibrium model of prostitution wherein potential clients and sex workers simultaneously interact under three different legal regimes and the harm associated with each. An application to Italy documents a tradeoff between equilibrium and social optimum. Prohibition is more effective at decreasing the total quantity of prostitution services than regulation and laissez-faire regimes. Regulation is more effective than prohibition in alleviating the harm associated with prostitution. Lee and Persson (2015) model a semi-coerced market with voluntary prostitutes and trafficking, investigating whether prostitution laws can reach the socially optimal outcome that would arise in a decriminalised market free from trafficking. No regulatory regime currently used achieves this goal, but a combination of the ‘Dutch’ regulatory and the ‘Swedish’ neo-abolitionist regimes would. 7.2.2 Coerced Sex Work Trafficking and Prostitution Regimes Four papers address the issue of sexual exploitation trafficking with respect to policy regimes.

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Akee et al. (2011) use a game-theoretic model to explore the human trafficking market and estimate a gravity model of trafficking upon a sample of 190 countries. They find that domestic and foreign enforcement do mutually reinforce one another, due to mobility, as there is partial bargaining power of traffickers and buyers, and as demand is inelastic. Legal prostitution exerts no effect on trafficking in a twocountry pair cross-sectional sample (country source to host country), whereas there is a negative effect when using instrumental variables. Cho et al. (2013) address the effect of legalising prostitution upon a dataset of 150 countries. It will increase demand as well as instances of some potential sex workers (or their pimps) entering the market. Supply might decline due to tax collection. However, prostitutes unwilling to comply with tax payment can operate illegally. The legalisation of prostitution has two opposite effects on the incidence of trafficking: a substitution effect away from trafficking and a scale effect increasing trafficking. Hence, the overall effect is theoretically indeterminate and becomes an empirical issue. In addition, Cho (2016) points out that the liberal prostitution regime proposes to fight human trafficking by implementing anti-trafficking measures, whilst allowing prostitution. Using a sample of data from 149 countries over 2001–2011, such a regime proves at best irrelevant to victim protection, if not negative. Jakobsson and Kotsadam (2013), using a cross-sectional dataset of 31 European countries from the ILO and UNODC, find a positive effect of legal prostitution on trafficking. Sexual exploitation trafficking of women is least prevalent in countries where prostitution is illegal, most prevalent in countries where prostitution is legal, and in between in those countries where prostitution is legal but procuring illegal. Case studies of Norway and Sweden, which prosecute buying sex, support the possibility of a causal link from harsher prostitution laws to reduced trafficking.

7.3 FIGURES OF PROSTITUTION IN THE EU FROM THE DEMAND SIDE All studies agree that demand for prostitution comes from men. Male behaviour remains a controversial issue. In line with Stuart Mill (1870) and the Swedish neo-abolitionist regime, some scholars contend that demand should, and actually can, be curbed (see Jakobsson and Kotsadam, 2013), whereas others (Cho et al., 2013) assume that demand is inelastic.

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Assessing the figures of sex work throughout European countries 173 Admittedly, sexual patterns and demand for prostitution differ according to European countries (Leridon et al., 1998). Table 7.1 reports significant figures upon demand addressing female sex workers (henceforth FSW). Table 7.1 Share of men from the European countries reporting having paid for commercial sex in the past 12 months Country

Year

Clients of FSW: adult male population (%)

Source

France

1992

1.1

Natsala

France

1998

0.7

NEMb

Germany (West)

1990

4.8

Natsal

Germany

1998

0.0

NEM

Greece

1998

5.3

NEM

Italy

1992

2.0

Natsal

Italy

1998

1.7

NEM

Netherlands

1989

2.8

Natsal

Portugal

1991

5.4

Natsal

Portugal

1999

2.4

NEM

Spain

1990

11.0

Natsal

UK

1990

2.0

Natsal-1

UK

1998

1.0

NEM

UK

2010–12

1.1

Natsal-3

Norway

1992

1.8

Natsal

Norway

1997

1.7

NEM

Notes: a National Surveys of Sexual Attitudes and Lifestyles; until 2010, samples include only sexually active and 18–49 age group. b New Encounter Module; samples include an 18–74 age group. Sources:

Carael et al. (2006), Jones et al. (2015).

In the early 1990s, national household surveys on sexual behaviour were conducted in seven Member States with a sample including only the 18–49 years age group. There are large discrepancies in reported contact with a sex worker: 1.1 per cent in France and 11.0 per cent in Spain. The median value is 4.95 per cent, with a mean of 4.1 per cent, and this proves slightly lower if Norway is included.

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In the late 1990s, surveys based upon the EU New Encounter Module (NEM) with a sample of all adult age groups cover only five Member States and provide much smaller figures: the median value is 2.22 per cent, with a mean of 2.65 per cent. Once again, figures are slightly lower if Norway is included and the figure for Germany is obviously understated. It is noteworthy that none of these countries had started to regulate brothels at the time of the surveys, regulation occurring later on: 1999 (Greece), 2000 (the Netherlands) and 2002 (Germany). Two caveats apply. First, it should be kept in mind that men may be underreporting their number of paid sex partners, as for all figures from national representative surveys. Underreporting may not be an issue as for figures from behavioural surveillance surveys and small-scale studies conducted among population groups with high-risk behaviours, but these samples are not representative for the entire population (Carael et al., 2006). Second, there is a bias in the early 1990s surveys due to age concentration and small sample size for some countries; hence, one cannot conclude that demand is declining over the ’90s. We acknowledge the absence of a robust variable that would gauge demand for paid sex over time, which is little documented. However, demand for paid sex seems to remain stable over time. For instance, the prevalence of paying for sex over the past year among men resident in the UK did not change from the late 1990s to the early 2010s (Jones et al., 2015). Although the case for the UK should not be extrapolated to the overall EU-28, there are several other hints that support the assumption of stable demand. First, a loose proxy for sexual behaviour might be the answer to the question, ‘Have you ever paid for sex?’ (i.e., once in your life). Among 22 000 Danish men aged 18–45 years who were interviewed in 2006, Buttmann et al. (2011) find that sexual intercourse with a commercial sex worker was reported by 11.3 per cent of the men; results are similar to an earlier Danish study from 1989 of 1466 men aged 18–59 years. Among a small sample of Swedish and Danish men, Jæger et al. (2000) find that 16 per cent had visited a female prostitute at least once, well in accordance with estimates provided by three previous sexual behaviour surveys in Denmark and Sweden since the 1980s. Second, the question, ‘Have you paid for sex in the last five years?’ narrows the time span and improves the proxy for sexual behaviour. In this respect, a 2006 survey on a representative sample of 5540 French men (Bajos et al., 2007) finds that 3.1 per cent reported having been clients of prostitutes in the last five years, a stable proportion as compared to 3.3 percent in 1992 (Spira et al., 1992).

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Assessing the figures of sex work throughout European countries 175 Hence, our assumption is in line with Malthus (1798): demand proves rather inelastic throughout the 1990s and the 2000s.

7.4 FIGURES OF PROSTITUTION FROM THE SUPPLY SIDE Hereafter, we address the following question: what is the magnitude of sex workers throughout European countries (including EU-28) in 2010? In this respect, we collect the relevant data from secondary sources and design three series of Estimates using the following measurements: two from HIV prevalence among female sex workers; two from miscellaneous sources collected by international NGOs; and two from victims of sexual exploitation trafficking according to the ILO, as well as Eurostat and UNODC. 7.4.1 Estimates of Female Sex Workers from HIV Prevalence As regards 2008, women constituted 87 per cent of the sex worker population in Europe, men accounting for a conservative 7 per cent and transgender people for 6 per cent (TAMPEP, 2010). In as much as country-level data are lacking for the two latter categories (Beyrer et al., 2015), we focus upon female sex workers (FSW). Table 7.2 records the number of FSW from data on HIV prevalence provided by the World Health Organization, UNAIDS and Eurosurveillance as well as field investigations. Platt et al. (2013) emphasise the paucity of data on HIV prevalence that include 14–20 EU countries (9646–14 548 FSW) spanning from 2001 up to 2011. Country samples sometimes prove too small (below 100 individuals) and biased with respect to specific categories (street prostitution) or location (capital city), which may result in overestimation of HIV among sex workers; conversely, stigma and restrictive health policies towards migrants may drive underestimation. Be that as it may, HIV data are much better documented than other sexually transmitted infections, of which only eight EU countries provide coverage, and syphilis is strongly biased with male overrepresentation (ECDC, 2014).

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XML Females aged 15–64 (2010) 988 172 1 066 915 2 834 771 3 283 115 3 483 521 3 569 607 1 305 930 2 526 777 1 472 363 391 080 3 645 871 1 772 423 474 084 1 757 791 700 395 19 826 818 1 488 122 26 940 240 3 755 038 3 549 879 1 572 928 19 513 215 801 369 1 100 411 171 121 141 841

Country

Albania Armenia Austria Azerbaijan Belarus Belgium Bosnia & Herzego. Bulgaria Croatia Cyprus Czech Rep. Denmark Estonia Finland FYR of Macedonia France Georgia Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta

Ltd

/ 807 199 863 907 1 997 366 2 537 738 2 590 681 2 457 970 972 515 1 938 308 1 085 384 266 650 2 534 082 1 254 051 338 431 1 220 163 531 233 14 442 373 1 200 850 19 535 771 2 796 227 2 452 329 1 115 378 13 916 327 576 022 883 897 109 003 97 104

Females aged 15–49 (2000 or 2004) 0.5(2010) 0.6(2005) 0.5(2009) 1.1(2008) 0.3(2009) 0.2(2008) N/A (0.3)* 0.3(2008) 0.2(2006) N/A (0.3)* 0.2(2005) 0.2(2006) 0.5(2006) 0.1(2009) 0.4(2006) 0.1(2006) 0.4(2009) 0.7(2007) 0.2(2006) 0.3(2000) N/A (0.3)* 0.2(2006) 0.7(2007) 0.4(2008) 0.2(2008) N/A (0.3)*

FSW as a % of females aged 15–64 (year)a 5 744 7 621 14 159 39 542 13 159 7 200 4 830 7 500 2 877 913 7 244 3 603 2 279 1 753 3 422 20 609 7 444 186 667 7 352 10 418 4 619 39 136 5 074 4 253 345 424

Estimate 1A Number of FSW (2011)

Table 7.2 Estimates of female sex workers from HIV prevalence (2010 and early 2000s)

0.7 (2004) 1.0 (2004) 1.03 (2000) 1.5 (2004) 0.6 (2004) 0.47 (2000) 0.5 (2004) 0.52 (2004) 0.52 (2004) N/A (0.43)* 0.38 (2004) 0.35 (2000) 0.72 (2004) 0.32 (2000) 0.6 (2004) 0.17 (2000) 0.7 (2004) 1.45 (2000) 0.34 (2000) 0.52 (2004) N/A (0.43)* 0.33 (2000) 1.04 (2004) 0.47(2004)) 1.64 (2000) N/A (0.43)*

FSW as a % of females aged 15–49 (year)

5 650 8 639 20 573 38 066 15 544 11 552 4 863 10 079 5 644 1 147 9 630 4 389 2 437 3 905 3 187 24 552 8 406 283 269 9 507 12 752 4 796 45 924 5 991 4 154 1 788 418

Estimate 1B Number of FSW (year)b

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a

5 326 650 1 495 486 13 556 499 3 617 774 7 387 376 53 582 246 3 298 817 1 943 623 693 598 15 706 866 2 903 516 19 962 675 16 735 795 254 344 718 166 916 204

3 954 726 1 067 868 9 945 657 2 622 604 5 411 431 39 641 854 2 351 578 1 441 761 503 285 11 291 339 1 983 359 14 148 579 12 213 475 185 098 475 120 319 577 0.3*

0.3 (2002) 0.2 (2005) 0.3 (2006) N/A (0.3)* 0.3 (2006) 0.3 (2009) 0.3 (2008) 0.2 (2006) 0.7 (2004) 0.3 (2008) 0.1 (2007) 0.3 (2003) 0.2 (2009)

16 614 2 991 40 741 10 746 20 599 199 108 12 340 3 877 4 828 46 914 1 503 62 648 33 492 813 621 535 936

Platt et al. (2013); Vandepitte et al. (2006); b Prüss-Ustün et al. (2013) and authors’ calculations.

Notes: N/A: Not available. * EU median.

Netherlands Norway Poland Portugal Romania Russian Federation Serbia + Monteneg. Slovakia Slovenia Spain Sweden UK Ukraine Total EU-28 0.43*

0.43 (2000) 0.3 (2000) 0.34 (2004) 0.27 (2007) 0.47 (2004) 0.5 (2004) 0.6 (2004) 0.39 (2004) 0.92 (2004) N/A (0.43)* 0.1 (2000) 0.4 (2000) 0.4 (2004)

17 005 3 204 33 815 7 081 25 434 198 209 14 109 5 623 4 630 48 553 1 983 56 594 48 854 1 011 956 663 224

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Estimate 1A (813 621 female sex workers throughout 39 European countries and 535 936 in EU-28) is based on multilevel modelling and multivariate linear regression (Prüss-Ustün et al., 2013) upon data collected in the mid- and late 2000s. Coverage for FSW was adjusted for injection drug use, which makes it a conservative estimate; we completed missing data with the median value of HIV prevalence in EU-28 (0.3 per cent). Estimate 1B (1 011 956 female sex workers throughout 39 European countries and 663 224 in EU-28) is based on data collection related either to 2000 or to 2004 (Vandepitte et al., 2006; Platt et al., 2013); by the same token, we completed missing data with the median value of HIV prevalence in the EU (0.43 per cent). Authors (Vandepitte et al., 2006) acknowledge these are ‘only very rough estimates’ and do not explain the estimation methods beyond the use of a multiplier, namely the ratio of adjusted HIV-prevalent FSW upon HIV-prevalent females times female population aged 15–49 for a given year. In as much as sources and methods differ, we have no strong clue to decide whether Estimate 1A understates versus Estimate 1B overstates the magnitude of FSW. Prostitution patterns did change throughout the decade, although change may not be captured by HIV prevalence in the EU that remains roughly stable from the early 2000s (Likatavicius and van de Laar, 2011), whereas data collection and HIV reporting improved over time (ECDC, 2014). The decline in numbers from the early 2000s up to 2011 could be driven by a shift in risk behaviour towards safer sex practices by prostitutes (UNAIDS, 2012) alongside the extension of indoor prostitution. In contrast, the non-use of condoms may be due to the increasing share of migrants among (street) prostitutes. Last, legislation concerning prostitution may influence the supply side. In this respect, the ban on buying sex in Sweden (1999) harmed the supply side; conversely, the regulatory prostitution regime enacted in the Netherlands (2000) and Germany (2002) has promoted sex work, thereupon raising the number of prostitutes throughout the EU over the 2000s. As for non-EU transition countries, data are too scant to assume what might be the ongoing trend, albeit HIV has been spreading throughout Ukraine and Russia irrespective of the prostitution policy regime. 7.4.2 Estimates from NGOs and Miscellaneous Sources An international NGO, the European Network for the Promotion of Rights and Health among Migrant Sex Workers (TAMPEP, 2010), collected 380 responses to a standardised questionnaire issued to NGOs and health services in direct contact with sex workers that helped

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Assessing the figures of sex work throughout European countries 179 building up reports for 23 EU countries; Croatia, Cyprus, Ireland, Malta and Sweden are missing (see Table 7.3). Some answers regarding earnings suggest that the questions were misunderstood and figures were not checked. Almost two-thirds of sex workers in Europe work indoors. Twelve EU countries wherein the share of migrants among sex workers is above 50 per cent are net importers. Conversely, ten EU countries wherein the share of nationals among sex workers is above 50 per cent are most likely to be exporters. One-third of migrants came from EU countries; Romania and Bulgaria were the most-mentioned countries of origin. The distribution of sex workers is respectively 30 per cent and almost 70 per cent for nationals and migrants. Migrants are highly mobile and more vulnerable as regards working conditions and risks (including HIV as well as deportation); two-thirds are prone to be exploited by a third party (pimps and brothel managers), whereas the share is one-third as for nationals. According to TAMPEP (2010), most sex workers in the EU-28, possibly as many as approximately three out of five (55 per cent), would be trapped into coerced sex labour, whereas about two out of five sex workers (45 per cent) would not face coercion. Figures from TAMPEP (2010) are recorded in Table 7.3. In order to fill the vacuum for the missing countries from TAMPEP and include figures for non-EU transition countries, we collected data from UNAIDS (2014) and the abolitionist Scelles Foundation (Charpenel, 2013). The figures recorded in Table 7.3 come from miscellaneous sources (NGOs, the police, etc.) and no information is available as regards coverage and time period for data collection. We completed the missing data for Cyprus and Malta with the median value of 26 EU countries. Last, we designed Estimate 2A as the highest of the lowest (maximin) and Estimate 2B as the lowest of the highest (minimax) that are recorded in Table 7.3. 7.4.3 Forced Labour, Sexual Exploitation Trafficking and Prostitution The ILO (2012a), alongside Eurostat (2013b) and UNODC (2014), provides fragmented information on the patterns of prostitution and its magnitude throughout Europe for the year 2010. Data available across countries cover some demographic characteristics of victims of sexual exploitation (age and gender). Neither the UNODC nor Eurostat databases collect consistent information from the same secondary sources, whereas the ILO seldom uses primary sources. Their main limitation is that victims recording depends on judicial and police effectiveness.

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Albania Armenia Austria Azerbaijan Belarus Belgium Bosnia & Herzegovina Bulgaria Croatia Cyprus Czech Rep. Denmark Estonia Finland FYR of Macedonia France Georgia Germany Greece Hungary Ireland Italy Latvia Lithuania

Country

/ 1 306 2 527 1 453 391 3 662 1 799 458 1 758 721 20 343 1 488 26 368 3 802 3 483 1 573 19 608 742 1 100

Number of adult females (thousand) 988 1 082 2 835 3 283 2 835 3 570

400 10 10–15 N/A 50 2–3 1.25–1.55

18–30

6–10 N/A N/A 10–13 5.56 1–1.2 5–6

15–20

27–30

TAMPEPa

6.525

3.588

1

13

150–400 1.2–20 8–10 1 50–100 15–20 N/A

18–20

8–10 6.7 N/A 5–25 5.5 1 12–15

10 6.7 0.915* 13 5.5 1 6 3.588 20 6.525 150 10 10 1 50 3 1.55

Number of prostitutes (thousand) UNAIDSb, Charpenelc Estimate 2A or other Maximin source 5–30 5 5.6 5.6 5–15 5.5–10 10 25 25 1.93–22 1.93 10–15 15 2.127–4 2.127 10 6.7 1.446* 25 5.5 1.2 12 3.588 30 6.525 400 20 15 1 100 20 1.55

30 5,6 27 25 22 15 4

Estimate 2B Minimax

Table 7.3 Sex workers circa 2010: Estimates 2A and 2B from NGOs and miscellaneous sources

0.40 0.46 0.23 0.35 0.31 0.22 0.34 0.50 0.10 0.44 0.57 0.26 0.29 0.06 0.25 0.40 0.14

Estimate 2A 0.51 0.52 0.35 0.76 0.06 0.42 0.16

0.40 0.46 0.37 0.68 0.31 0.26 0.68 0.50 0.15 0.44 1.52 0.53 0.43 0.06 0.51 2.69 0.14

Estimate 2B 3.04 0.52 0.95 0.76 0.63 0.42 0.31

Prostitutes as a % of adult females

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a

171 142 5 535 1 586 13 732 3 618 7 021 53 582 3299 1 957 688 15 707 3 015 20 945 16736 234 874 169 659 693–730

58–80 50–83

7.5 1.5–3 6

5 N/A 10–15 3.3 10 9.7 2.5–3.8 1–3 3.9

80

12 28 23–47 3 10–40

25

740.4–1,253.7

N/A N/A 300–400 1.5 80–100 65–93

N/A N/A 20–30

7.5 1.5 300 1.5 80 65 1,870,102 748,132

5 0.467* 15 3.3 10 9.7 3.8 1 3.9

TAMPEP (2010); b UNAIDS (2014); c Charpenel (2013). Authors’ calculations.

Notes: * EU-28 median. ** Average.

Luxembourg Malta Netherlands Norway Poland Portugal Romania Russian Federation Serbia + Montenegro Slovakia Slovenia Spain Sweden UK Ukraine Total EU-28 7.5 3 300 1.5 80 83 4,374,876 1,181,863

5 0.467* 30 3.3 12 28 23 3 10 0.38 0.38 1.91 0.05 0.38 0.39 0.796** 0.441**

2.92 0.33 0.27 0.21 0.07 0.27 0.05 1.87 0.12

0.38 0.38 1.91 0.05 0.38 0.50 1.86** 0.697**

2.92 0.33 0.54 0.21 0.09 0.77 0.33 5.60 0.30

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7.4.3.1 Estimate of forced sexual labour trafficking from the ILO The ILO (2009) designed from expert sources a list of 67 indicators related to trafficking with respect to recruitment, working conditions and coercion. The subset of indicators for sexual exploitation encapsulates very bad working conditions (including excessive working time and hazardous work), low or no salary (including wage manipulation) and no compliance with labour regulations (including the absence of contract and social protection). In this respect, forced labour for commercial sex includes women and men who have involuntarily entered a form of commercial sexual exploitation, or who have entered the sex industry voluntarily but cannot leave it (ILO, 2018). Lin (2007) pinpoints that trafficking should not be conflated with prostitution. She argues that there is no consensus upon the abolitionist view embedded in the Palermo Protocol (see Box 7.1), according to which all prostitution involves trafficking and rejecting, without evidence, the other view that prostitution can and does exist without trafficking. BOX 7.1

THE PALERMO PROTOCOL

The United Nations Protocol to Prevent, Suppress and Punish Trafficking in Persons, Especially Women and Children, coined as the Palermo Protocol (2000), entered into force in 2003, setting the minimum standards for the elimination of trafficking of human beings in terms of prosecuting traffickers and supporting victims. The United Nations Office on Drugs and Crime (UNODC) is in charge of its implementation and records the victims (UNODC, 2014). The Palermo Protocol states that exploitation of prostitution and trafficking cannot be separated, albeit it does not apply to non-coerced prostitution. Tier 1 gathers the 17 EU Member States and Norway that fully comply with the minimum standards. The remaining 11 EU Member States that do not fully comply belong to Tier 2, alongside almost all non-EU transition countries.

The ILO (2012a) computed a global estimate of forced labour for the 2002–11 reference period from a capture–recapture investigation (see Box 7.2) based on reported cases from different sources (research institutes, NGOs and the media).

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Assessing the figures of sex work throughout European countries 183 BOX 7.2

THE CAPTURE–RECAPTURE ESTIMATE FROM THE ILO

The estimated number of persons who experienced forced labour (Ti) in country i is based on a national survey with reference period ti. The estimate for country i is adjusted over the reference period ti with the average duration (in months) of forced labour μi, such that (ti/μi) Ti. The comparison of this adjusted estimate with the capture–recapture estimate for country i provides an estimate of the share of reported number of victims in total forced labour, according to the following formula: A × B/C. The first capture is sample A, the recapture is sample B, and the overlap is C, gathering recaptured individuals in sample B already captured in sample A.

As for the EU-28 only, forced sexual exploitation would amount to 270 000 female victims (98 per cent) and the average duration for sexual exploitation turnover is below 18 months. This figure does not gauge the magnitude of overall prostitution, although it might be a starting point for compiling Estimate 3A, provided that country distribution proved available, which is unfortunately missing. We also need to impute a multiplier taking care of coerced versus non-coerced prostitution, such as 1/1–α, wherein 1–α is the coerced share and α is the non-coerced share. If we use the parameters 1–α = 0.55 and α = 0.45 from TAMPEP (2010), though a small sample, we come up with 490 909 sex workers as for Estimate 3A. Although this Estimate can be used for overall benchmark analysis, it cannot be tested because country distribution is missing. 7.4.3.2 Estimate of sexual exploitation trafficking in Europe: Eurostat and UNODC It is acknowledged that the EU currently lacks reliable and comparable statistical information on trafficking in human beings. This is mainly due to the differences between the Member States in the criminal codes, in the reporting and monitoring systems, as well as for the rates of reporting cases to the police, NGOs and other entities. Eurostat (2013b) collected data on human beings trafficking over the period 2008–10. In the year 2010, 20 EU Member States reported data on identified and presumed victims of trafficking for sexual exploitation; these are predominantly female (96 per cent). Sexual exploitation includes all forms of forced prostitution, whether indoors or outdoors. Most victims detected in EU Member States are citizens from Romania and Bulgaria. UNODC (2014), in charge of the Palermo Protocol (see Box 7.1), provided some similar patterns for the period 2010–12. Among the

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detected victims trafficked to EU countries, sexual exploitation is prevalent (66.25 per cent). According to the gap with the country of origin, the richer the destination country, the higher the profits sexual exploitation can generate. The price of women depends on the expected profit and the perceived risk associated with carrying out the crime, as well as the demand for sex services in the destination country. In Central Europe and the Balkans, domestic trafficking accounts for about 80 per cent of the detected victims in accordance with previous findings (TAMPEP, 2010). We compiled the data on victims of sexual exploitation in 2010 from Eurostat (2013b) and UNODC (2014), as for the EU-28 and the full sample of 39 European countries. With respect to consistency, we first checked both series of data for the same 18 EU countries; the data do not match for Spain. At last, we completed the series for EU-28 countries and the 39 European countries, using Eurostat series when available and UNODC otherwise. Table 7.4 reports the average number of victims of sexual exploitation, which is slightly over 1 per 100 000 inhabitants in the year 2010 as for both the EU-28 and the 39 European countries. No clear pattern emerges from the figures of victims for the various countries, according to both their number per 100 000 inhabitants and compliance with the Palermo Protocol (see Box 7.1). Among the category of 19 non-compliant countries (Tier 2), gathering 15 EU and non-EU transition countries, most stand below the average number of victims and only four (Albania, Bulgaria, Estonia and Romania) as well as Cyprus stand above average. Among the category of 20 compliant countries (Tier 1), we find most EU non-transition countries (13 plus Norway), whereof six stand above average (France, Ireland, Luxembourg, Netherlands, Spain and Sweden), whereas Slovenia is the only one out of six EU and non-EU transition countries that stands above average. According to UNODC (2010) the detection ratio is 1 in 20 victims of sexual exploitation trafficking,4 hence the multiplier is λ = 20; furthermore, 1 in 7 sex workers would be a victim of trafficking (µ = 7), although this share remains undocumented. Thus, we calculate the number of victims of sexual exploitation in each country and extrapolate the magnitude of prostitution (see last column in Table 7.4) with the following formula: ∑victims (λμ). We come up with our Estimate 3B, respectively 740 460 for EU-28 and 865 480 sex workers for 39 European countries. It is worth mentioning that UNODC calculates a stock from a flow, ignoring how large is the flow that leaves the market (replacement) or just moves across countries. If net inflow increases, the stock of sex workers may be rising over time and this should lower prices, unless

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Albania Armenia Austria Azerbaijan Belarus Belgium Bosnia & Herzegovina Bulgaria Croatia Cyprus Czech Rep. Denmark Estonia Finland FYR of Macedonia France Georgia Germany Greece Hungary Ireland Italy Latvia Lithuania

Country

29 405 28 773 84 099 90 325 94 731 109 387 37 221 74 046 43 282 11 126 105 363 55 548 13 321 53 658 20 707 630 267 42 317 808 948 114 460 99 278 46 269 597 298 21 188 31 238

Number of inhabitants (100 000) Tier 2 Tier 2 Tier 1 Tier 2WL Tier 2 Tier 1 Tier 1 Tier 2 Tier 2 Tier 2 Tier 1 Tier 1 Tier 2 Tier 1 Tier 2 Tier 1 Tier 1 Tier 1 Tier 2 Tier 2 Tier 1 Tier 1 Tier 2 Tier 2

Compliance with Palermo Protocol

/ 610 N/A 5 56 N/A 3 N/A

726

366 2 24 3 50 N/A 26

43

N/A

Number of victims (Eurostat)

19 419 69 52 52 61 4 15

70 20 20 12

45 14 49 34 324 N/A 15 339 4 24

Number of victims (UNODC) 45 14 49 34 324 43 15 366 2 24 3 50 20 26 12 726 19 610 69 5 56 61 3 15

Number of victims (Eurostat or UNODC) 1.53 0.487 0.585 0.376 3.42 0.382 0.403 4.966 0.047 2.858 0.029 0.899 1.504 0.484 0.58 1.117 0.449 0.719 0.620 0.050 1.116 0.103 0.145 0.491

Number of victims /100 000 inhabitants

Table 7.4 Victims of sexual exploitation (both males and females) and prevalence in Europe as for year 2010

6 300 1 960 6 860 4 760 45 360 5 880 2 100 51 240 280 3 360 2 100 6 580 2 800 3 640 1 680 98 420 2 660 82 320 9 660 700 7 140 8 540 420 2 100

Estimate 3B Number of victims ×20×7

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Tier 1 Tier 2 Tier 1 Tier 1 Tier 1 Tier 2 Tier 2 Tier 2 WL Tier 2 Tier 1 Tier 1 Tier 1 Tier 1 Tier 1 Tier 2 WL

Compliance with Palermo Protocol

4 949 4 889

34 9 6 1 605 19 95

6 4 749 26 N/A N/A 482

Number of victims (Eurostat)

169 17 520 103 90 13 22 207 34 173 267 4 176 2 823

N/A N/A 900

Number of victims (UNODC)

Eurostat (2013b) and UNODC (2014); authors’ compilation and calculations.

Unweighted average.

5 079 4 161 166 829 48 859 383 234 106 523 204 404 1 431 539 96 540 54 043 20 452 467 886 93 902 633 068 457 925 7 416 700 5 038 359

Luxembourg Malta Netherlands Norway Poland Portugal Romania Russian Federation Serbia + Montenegro Slovakia Slovenia Spain Sweden UK Ukraine Total EU-28

Note:

Number of inhabitants (100 000)

Country

Table 7.4 (continued)

6 4 749 26 169 17 482 103 34 9 6 1 605 19 95 267 6 182 5 289

Number of victims (Eurostat or UNODC) 1.172 0.964 4.497 0.532 0.444 0.161 2.386 0.072 0.352 0.167 0.293 3.439 2.018 0.151 0.586 1.041* 1.136*

Number of victims /100 000 inhabitants

840 560 104 860 3 640 23 660 1 400 67 480 14 420 4 760 1 260 840 224 700 2 660 13 300 37 380 858 620 733 600

Estimate 3B Number of victims ×20×7

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Assessing the figures of sex work throughout European countries 187 there is an increase in demand. One may be very sceptical as to the accuracy of such a proxy to gauge prostitution at country level (Savona and Stefanizzi, 2007). Some results are obviously inconsistent as regards country distribution: for instance, Germany counts fewer sex workers than the Netherlands albeit it has five times larger a population, and the same prostitution regime (legal brothels) applies in both countries. Hence, using a uniform multiplier such as λ = 20 is strongly disputable. In this respect, Van Dijk and van der Heijden (2016) advocate the use of Multiple Systems Estimation (MSE), such as the ILO capture– recapture methodology (see Box 7.2), pointing out that the ratio of undetected to detected victims (i.e., the λ multiplier) may widely differ according to countries: for instance, λ = 10 in the Netherlands and λ = 4 in the UK. Using the Dutch multiplier (λ = 10) would cut to one-half Estimate 3B (429 310 victims, among whom 366 800 for EU-28), whereas the British multiplier would shrink Estimate 3B to one-fifth (173 096, victims, among whom 146 720 for EU-28). Compared with the ILO Estimate 3A (270 000 victims for EU-28), the Dutch and the British multipliers stand respectively above and below the (implicit) ILO multiplier that would be 7.5. However, we have no better motive to apply either of those multipliers to the country distribution for EU-28 or the overall sample of 39 European countries. Be that as it may, Estimate 3B is tested alongside other Estimates in Section 7.5.

7.5 TESTING THE ESTIMATES: ORDINARY LEAST SQUARES (OLS), ORDERED PROBIT, MARGINAL EFFECTS AND COUNTRY RANKING We test our five Estimates in order to capture what are the most likely and consistent estimates based on cross-sectional data for 39 European countries, as of the year 2010. We first use an OLS regression, then we use an ordered probit, marginal effects and country ranking. 7.5.1 An OLS Model We design the following OLS model:5 Yi = α + β1Prostitutioni + β2Xi + εi

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Yi represents the five estimates for sex work in country i. Prostitutioni is our dummy variable indicating whether prostitution is legal or not. X is the vector of explanatory variables and εi is the error term. As regards the variable Prostitutioni, we test both legal status for prostitution and for brothels in country i, by testing two dummy variables. These are, first, whether prostitution is legal or not, being 1 in this case and 0 otherwise; and second, whether or not third-party involvement (such as brothel manager or pimp) is legal, being 1 whenever brothels are legal and 0 otherwise. In both cases, the sign is expected to be positive. Brothels being illegal in all Eastern countries, this variable (= 0) will be omitted. We impute a number of explanatory country variables Xi. GDP per capita takes into account the level of economic development that should influence the presence of a high number of sex workers. We include Total adult population to take into account the scale effect and we disentangle Adult female population on the supply side from Adult male population on the demand side. Focusing on the supply side, Female migrant stock per 100 thousand of population takes into account the importance of female migration in Western and Southern European countries; sign is expected to be positive. Unemployment rate of young females (below 25) tackles the assumption that the higher is unemployment, the more women may become sex workers; sign is expected to be negative. Rate of female part-time workers tackles the assumption that prostitution may be a part-time job; sign is expected to be negative. Legal prostitution and Legal brothels are not correlated and thus tested together, whereas Adult male population and Total adult population are tested separately to avoid multicollinearity. All continuous variables are taken in logarithms. We eventually dropped Adult female population, as this proved redundant. It is worth mentioning that we cannot control for unobserved country heterogeneity by including country fixed effects, as we use a crosssectional dataset. Admittedly, our sample and subsample are small; be that as it may, a test6 proves we can safely run the regressions. Table 7.5a reports the results for the whole sample. GDP per capita is significant (p