The informal economy: route into or out of poverty?

A new paper published by the IIED raises questions about the link between the informal economy and sustainable development.

News, 10 August 2011

The primer paper, The Informal Economy, is aimed at development professionals operating in any sector, in developed and developing countries.

It asks whether the informal economy could be the route to deliver the big sustainable development ideals such as the green economy, Millennium Development Goals and poverty reduction strategies, given that its share is rapidly increasing and that the poor mostly operate there.

In some developing countries, the share of the informal economy is greater than that of the formal economy. Government planners, donors and NGOs could use the informal or the formal economy to help lift up the wellbeing of the poor and address global challenges such as climate change, but choosing one over the other could lead to most efforts missing the mark.

Planning food security, agricultural development, climate adaptation, low-carbon development and housing requires a careful consideration of the current and future role of the informal economy.

This raises further questions about whether or not the informal economy is an impediment to development and whether it should be eliminated or promoted. In attempting to answer these, we realise that the informal economy is not fully understood, is not clearly separated from the formal economy, is difficult to measure and does not necessarily imply illegality.