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DO CONTEMPORARY APPROACHES TO THE INFORMAL ECONOMY FOSTER GREATER SOCIAL INCLUSION, OR DO THEY REPRESENT NEW

MECHANISMS OF ADVERSE INCORPORATION? DISCUSS WITH REGARD TO EMPLOYMENT GENERATION

The informal economy (IE) has been growing considerably in developing world as

well as the affluent OECD economies over the last few decades, despite the

implementation of policies designed to dissipate it. This economy is growing in

importance especially in the developing world in employment generation with about

60% of workers deriving a livelihood directly from this economy (ILO & WTO,

2009). Traditionally, the existence of the IE has been considered a drag on

development due to its inability to generate government revenues, failure to provide

social protection and low wages (Jutting & Laiglesia, 2009) to name a few.

Nonetheless, the persistence of the IE and improvement data has resulted in a gradual

shift in paradigm towards the inclusion of informal workers and their niche into the

wider economy to enhance its contributions to development. Although the new

approaches are capable of providing employment, some consider them as new

mechanisms of adverse incorporation rather than social inclusion. This writing

critiques this debate with particular emphasis on informal employment, following an

elaboration of concept of IE and the contemporary approaches brought to light.

(Jutting & Laiglesia, 2009).

The informal economy is characterized by the presence of informal employment both

inside and outside of the formal sector (ILO, 2002). Informal employment refers to

activities or jobs in the production and distribution of legal goods and services that are

not regulated or protected by the state (Jutting & Laiglesia, 2009). In the new

approach, the presence of opportunities for different stakeholders including the

governments and formal sector enterprises are emphasized. Policy in certain countries

now directed toward supporting growth in the informal employment and expansion of

linkages with the formal economy and the global supply chains (GVCs)1. This shift in

recognition of the organized activities of the IE as a useful resource within the GVCs

1 The full range of activities that go into the production and distribution of a product.

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involves the concept of hybrid governance, which engages both the informal and

formal economies to achieve objectives, especially with poverty alleviation and

employment.

Academics, as well as policy makers, have advocated informal employment as a way

forward to absorb unemployed workers since the 1990s (Cooke, 2008). The most

populous countries in the world, China and India are successfully incorporating the IE

in their GVCs to provide employment and lift millions out of poverty. The Chinese

government in particular has adopted development of informal employment as on the

main mechanisms in its employment strategy (Zhu, 2001 in Cooke, 2008). In African

countries, attitudes towards informal economies in academic as well as policy circles

have shifted markedly in the past decade (Meagher & Lindell, 2013). The transition is

much slower in this case, but hybridization promises increase in dominance into the

future. New movements from organizations such as the Trades Union Congress of

Ghana (TUC) are calling for recognition of informal workers in the policy circle.

The employment generation effect of hybridized societies is evident in sectors of the

informal economy around the world. A good example is the “hawala” informal money

transfer networks where funds are mostly transferred from developed western

countries to developing countries in the south informally. The formal sector financial

institutions aid this network by facilitating bulk transfer of funds. Such a system

creates thousands of remittance companies that informally provide employment and

also keeps vast number of people out of poverty in countries such as Somalia. The

global garments, textiles and horticulture sectors involve labour intensive patterns of

production and presence of informal enterprises and lower tier informal workers

(Nadvi, 2004). The increase in inclusion of such informal sector activities in the

GVCs of these industries is generating poverty-reducing employment for the

vulnerable in those societies. The growth of the informal economy provides a wage

income to millions of people who are likely to be worse off and become an economic

and social burden to the state (Cooke, 2008).

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However, to understand the real impact of the new paradigm, it is important to

understand the reasoning behind this approach and what is distinctive about the

informal economy. From the definition of informal employment, it is easy to see that

it creates room for adverse incorporation, where informal workers are included but on

worse terms. Given that informal employment is not protected by legal framework of

governments, firms can source labour that is cheaper and more flexible. No minimum

wage scheme exists in the informal economy and regulation does not limit working

hours. Many of the workers are vulnerable actors such as migrants who have no

livelihood alternatives and are, therefore, flexible with employment terms. Such

characteristics of the IE provide avenue for lower production costs in the GVCs.

The competitive logic of the GVCs dictates that corporate practices are shaped by the

tension between codes and standards and the competitive pressure on profit making

enterprises. As a result, their employment practices are skewed towards adverse

incorporation of workers by providing low wages, longer working hours, adverse

working conditions and other product of cost minimization motive of firms. Such

practices help lead multinational firms to capture a higher share of final value along

the GVCs (Kaplinsky, 2006 in Barrientos & Kritzinger, 2004). These contradictory

commercial pressures help to explain the employment strategies of suppliers in global

production networks (Barrientos, 2008). In addition, informal employment generation

is skewed towards sectors that are of value to the formal economy. As Yusuff (2011)

puts it “hybrid governance in countries focus on the productive units of the society…

where structural support is provided” which means, inclusion is highly selective.

Such are reasons why adverse incorporation exists where employment is generated

through the informal economy. Such a narrative applies to East Asian Economies

where, inclusion with adversity manifests itself through direct incorporation into the

GVCs, outsourcing of production and subcontracting of labour.

In certain countries in Africa, inclusion of the IE into the GVCs manifests itself at the

end of the chain through waste recycling. This is especially prominent in countries

such as Ghana (e.g. Amoyaw-Osei et al., 2011) where electronic waste such as

obsolete and defected electronic appliances are “dumped” for the informal economies

to assimilate. Although they provide employment for workers at the lower tier of the

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IE, negative consequences are immense. Recycling of metals from the appliances

often involve open-air combustion, which has serious negative health implication for

the workers as well as environmental impacts. Such avenues of inclusion show clear

indication of incorporation of IE with adversity by corporate actors in order to take

advantage of the cost minimization opportunity available.

It is often cited that code of labour practices implemented by corporations in their

GVCs as part of corporate social responsibility (CSR), alleviates the presence of

adverse incorporation, but evidence indicates that such codes are not abided by.

According to Barrientos (2008), research indicates that the benefits of codes for

workers are limited and fail to reach the most vulnerable, particularly those employed

by labour contractors who face the worst employment conditions. Research also

shows that children are recruited through informal networks of labour subcontractors

or subcontracting arrangements without knowledge of the buyers (Barrientos, 2008).

The reasons for such outcomes can be, as a result of difficulty in monitoring activities

as in the case of labour subcontracting as well as prioritization of low production costs

over ethics by the corporations.

The gender distribution of the effect of the new approach to informality is also of

interesting insight especially in assessing the impact of this new approach. In most

developing countries, women have a higher representation in the informal economy

and they are often the ‘weakest links’ in the GVCs (Chant & Pedwell, 2008). In the

new highly active Africa-China trading network, women are largely disadvantaged

(Meagher & Lindell, 2013), showing that they are the stakeholders that experience

adverse incorporation the most. It is not very surprising, given that of the approximate

1.3bn people living in poverty, 70% are women (Clancy & Skutch, 2002), but also

shows that social inclusion can greatly reduce female poverty.

This writing acknowledges the undeniable inconsistencies in the informal economy

and its potential as a drag on growth, but focuses on the opportunities it creates when

included, especially in providing employment that the governments and their formal

economy fails to do. Nonetheless, quality of the employment generated has shown to

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be questionable with adverse incorporation persisting in the informal environment.

The flaws in the informal economy system show that only the sectors of benefit to the

GVCs will be promoted and others most likely neglected or even repressed. Biggest

challenge for social inclusion without adverse incorporation is the need for striking an

ideal policy balance that would protect workers and also preserve the competitive

edge the IE has which is essential for employment generation, but this in reality seems

far-fetched. The new paradigm has shown the capability of social inclusion in

employment but given the actors the IE is serving (business enterprises), adverse

incorporation is a result that is here to stay. Thus, an economy with socially included

IE, generating the much-needed employment, with a tolerable adversity in conditions

is the only feasible ‘win-win’ outcome in the horizon.

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References CitedAmoyaw-Osei, Y. et al., 2011. Ghana e-Waste Country Assessment. Assessment. Accra: SBC e-Waste Africa Project.

Barrientos, S., 2008. Contract Labour: The 'Achilles Heel' of Corporate Codes in Commercial Value Chains. Development and Change, 39(6), pp.977-90.

Barrientos, S. & Kritzinger, A., 2004. Squaring the circle: global production and the informalisation of work in South African Fruit exports. Journal of International Development, 16(1), pp.81-92.

Chant, S. & Pedwell, C., 2008. Women, Gender and the informal economy: An assessment of ILO research and suggested ways forward. Assessment report. London: London School of Economics and Political Science London school of Economics and Political Science.

Clancy, J.S. & Skutch, M., 2002. The Gender-Energy-Poverty Nexus: finding the energy to address gender concerns in development. Project report. London: DFID UK Department for International Development (DFID).

Cooke, F.L., 2008. Labour market regulations and informal employment in China: To what extent are workers protected? Manchester: University of Manchester.

ILO & WTO, 2009. Globalisation and informal jobs in developing countries. Study. Geneva: WTO Secretariat Internation Labour Organisation (ILO) and World Trade Organisation (WTO).

ILO, 2002. Women And Men In The Informal Economy: A Statistical Picture. Geneva: International Labour Organisation (ILO).

Jutting, J.P. & Laiglesia, J.d.R., 2009. Is Informal Normal? Towards More and Better Jobs In Developing Countries. Paris: Organisation for Economic Co-orporation and Development (OECD).

Meagher, K. & Lindell, I., 2013. ASR Forum: Engaging With african Informal Economies: Social Inclusion or Adverse Incorporation. African Studies Review, 56(3), pp.57-76.

Nadvi, K., 2004. Globalisation and Poverty: How can Global Value Chain Research Inform the Policy Debate? IDS Bulletin, 36(1), pp.20-30.

Yusuff, O.S., 2011. A Theoretical Analysis of the Concept of Informal Economy and Informality in Developing Countries. European Journal of Social Sciences, 20(4), pp.624-36.

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