What does it mean to 'formalise' the informal sector? Discussions at an informality event with our partners revealed some of the barriers to successful formalisation and examples of what works.
From food sellers in Lima to waste pickers in Mumbai, and from artisanal miners in Ghana to furniture makers in Indonesia, hundreds of millions of poor people trade, produce, live and work in the informal economy, beyond the reach of government regulation, taxation or protection.
But do these workers need to be 'formalised'? This was one of the questions discussed at a recent event organised by IIED and partners, And if the answer was yes, what, we wanted to know, does formalisation mean?
In many countries, this informal private sector is already far bigger than its formal counterpart. And, according to the International Labour Organization (ILO) (PDF), it is unlikely to shrink any time soon, particularly in the global South.
Any realistic plans to 'green' economies and achieve the kind of inclusive growth that can simultaneously reduce poverty and protect the environment must work with, and for, the informal workforce.
Most policymakers and business analysts argue that the only solution is to 'formalise' the informal. Indeed, the Sustainable Development Goals even include a target to promote formalisation (SDG 8.3) as a proxy for decent work.
Green jobs expert Peter Poshen from the ILO said that he would strongly defend formalisation as being what was needed. But he added a note of caution, saying that unless formalisation is appropriate, it could do more harm than good.
What is formalisation?
What makes for 'appropriate' formalisation is the nub of the problem. There are many opinions on how to make the informal formal but, as delegates at the London meeting made clear, none are without problems.
For example, the idea that 'formalisation equals jobs' – that nations can shift informal workers by creating more formal employment – is just a pipe-dream. According to Poshen, there is no conceivable pattern of growth that can create the number of jobs required to achieve this.
Economist Louise Fox from the University of California, Berkeley, agreed: "Transformation to a waged economy is simply not going to happen in this generation or the next."
Perhaps formalisation is about ensuring tax registration? Not according to international coordinator of WEIGO, Martha Chen. She told the London meeting that many informal workers pay some form of tax. But the real problem, she added, is that in a sector where earnings are low and costs are high, most people simply don't make enough money to meet even the most basic of tax thresholds.
If it's not about collecting tax, perhaps formalisation is about creating rules – regulating activity through licensing or certification?
Wrong again. The chair of Women in Mining Ghana, Georgette Barnes Sakyi-Addo, described how the licensing process for informal miners in her country was both bureaucratically cumbersome and costly. She said getting a licence "should take three months – but some people have waited three years".
And there's often little or no incentive to go through the process. Furniture maker Mohammad Amin Sulthon told us how 8,000 small-scale furniture makers in Jepara, Indonesia went through the certification process only to find that having a permit simply wasn't profitable. So when the permits expired, many didn't bother to renew them.
"If legality is just an added cost, it will never solve the problem of the informal furniture maker," he said.
Despite the too frequent stories of failure, there are also stories of success where formalisation is happening at scale:
- Micro-businesses in Brazil: in the past five years, around 5.5 million micro-businesses have been formalised by volunteering for a package of incentives that includes simplified tax assessments and access to social protection, business development services and public markets
- Waste pickers in Colombia: in 2013, following a 20-year legal and advocacy campaign, Bogota's waste pickers, or 'recicladores' were formally recognised as public service providers and paid at fixed rates, under formal contracts, for their work. The Bogota model is now being replicated across Colombia, and
- Artisanal miners in Ethiopia: a series of legislative and administrative changes combined with extension services and financial support have made it possible for more than 100,000 artisanal and small-scale miners across Ethiopia to become licensed.
Regulation and support
The successes shared at the London meeting are all different. But they all acknowledge that formalisation is more than a piece of paper – it is a package of regulations, incentives and support that enable informal workers to benefit from the process.
The process of making the informal formal needs to add value if it is to work. That added value can take many forms – from training to networking to social protection to micro-finance. But it needs to include a combination of mechanisms that complement each other. And it needs to be context-specific.
The world of informality is so diverse that there can be no single recipe for success. Rather, interventions will need to be tailored to meet the local circumstances of waste pickers, smallholders, construction workers, street vendors, market traders, homeworkers, artisanal miners, small-scale loggers, charcoal producers, fisherfolk and the myriad other informal workers that provide the broad base of so many economies.