The informal economy

A selection of readings prepared by John Conroy is presented here. Most of these materials have been written with Papua New Guinea in mind, though they have wider relevance, especially in the island Pacific region. In many of the countries with which FDC is concerned the informal economy consists primarily of household enterprises (often called ‘micro’ or ‘survival’ enterprises). These enable the poor to ‘get by’ when the ‘modern’ economy is slow in creating enough ‘formal’ jobs. The informal economy is relevant to FDC’s broader concerns – particularly in relation to financial inclusion – because access to appropriate financial services assists poor households to finance their economic activities and to smooth their consumption spending in the face of variable income streams. Livelihoods from cash-crop farming, trading and other services, and petty manufactures, contribute to supporting the majority of households in low-income developing countries. Such activities are the forgotten grassroots element in the private sectors of those countries, and ‘pro-poor’ development strategies must take them into account.

FDC’s first publication (Banking with the Poor, 1992) argued the case for the importance of the informal economy in poverty alleviation. In it, John Conroy wrote, ‘Where poverty rules, open unemployment is rare, but many people are trapped in low productivity activities, both within and outside agriculture. Observers, noticing relatively low labour intensities associated with many such activities, may describe those so occupied as “underemployed”. But it is more relevant to note the low returns yielded to workers who engage in them, and more helpful to most of these people to conceive of solutions to their poverty as lying in income-generation, rather than in “employment”-creation. Most are self-employed, or members of family working units, and efforts to increase the productivity of their labour are necessary if surpluses generated by growth in agriculture and industry are to “trickle down” to them. The “informal” economy in which they operate may be, at one extreme, a dynamic sector in which innovation, rising incomes and capital accumulation occur, or at the other extreme it may be simply a statistical category, a residual sponge into which growing numbers of landless and other poor are absorbed, with little hope of improvement in the material conditions of their lives. Interventions aimed at increasing the productivity of economic activity among the self-employed in the informal sector may assist in releasing the potential for dynamism that exists there. This is an argument for increasing people’s capacity for self-help; strategies of industrialisation and formal sector employment-creation are largely irrelevant to the condition of the very poor’. Source: Banking with the Poor (FDC, 1992, p.12)