Informal work, an alternative to the crisis?

By ETCO
16/03/2009

Source: Valor Econômico, 16/03/2009

Economists have always thought that the informal economy – the vast, unregulated market that ranges from street vendors to unlicensed taxi drivers – was a bad omen for the world economy. Now, informality has gained a new role as a last resort amid an ever-worsening economy, forcing analysts to rethink that point of view.

At the Manek Chowk fair, in the crowded center of this Indian city, street vendors housed in a row of rotten counters offer beans and copper pots while monkeys make a racket above. A man sharpens nails with a sharpener connected to a bicycle wheel.


The average income in Manek Chowk is meager compared to the standards of the rich world. But there are no layoffs at the fair. The people who work here just need to be present and offer their products - something that more and more people have been doing today.


Without that work, "we would have nothing," says Surajben Babubhai Patni, a 58-year-old marketer who sells tomatoes, corn and nuts under an improvised canvas stall. She earns 250 rupees a day, or $ 5, but it is enough to feed her nine family members, including her son, who recently lost his job as a diamond polisher.


Patni and millions of others like her are part of the informal economy, a gigantic, vital and poorly understood segment of world trade. And that sector is gaining in importance now that the global financial meltdown is eliminating the breadwinners of millions of people with stable jobs. Especially in developing countries, many of these people are falling into the informal sector, which has become a crucial safety net in the face of the crisis.

Economists have emphasized the negative aspects of the informal market for decades. No taxes are paid and capital and knowledge are lacking to obtain the same productivity as large companies, which generates less innovation and a worse standard of living. Since informal workers do not have health insurance and other social protections, they are forced to save more for emergencies, which results in less casual consumption, reducing the impact of economic activity. Having a significant informal sector "is not something to celebrate," says Nancy Birdsall, an economist at the Center for Global Development, a study center in Washington. "When everyone sells apples to each other, new wealth is not created - it is an indication that things are not going well."


The growing severity of the current recession is forcing some analysts to reconsider this view. Up to 52 million people can lose their jobs in the world because of the crisis, calculates the International Labor Organization, a UN agency. Without the informal sector, many people will have nowhere to go.


Informal jobs "will absorb a lot of people, offering them a source of income" next year, says WF Maloney, an economist at the World Bank in Washington. These occupations even “are one of the reasons why the situation in the most miserable countries is not as bad as you might think,” says Simon Johnson, a former chief economist at the International Monetary Fund.

Until the end of December, Pilaporn Jaksurat, 33, worked full time operating a loom in a textile industry in Bangkok. She earned about $ 7 a day, and among her benefits was a $ 30 attendance bonus and $ 800 severance pay if she loses her job.


But then she was fired from the factory, which sells fabrics to clothing manufacturers in Europe, so she had to cut costs in the hope of surviving the global economic crisis. Finding a similar job was not a viable option, as the other local factories were also laying off due to the total decline in orders in Europe and North America. She decided to start her own business, selling doses of medicinal wine to truckers and motorcyclists on the road near her home. With the help of his friends, he built a makeshift tent with bamboo on an unoccupied lawn beside the road. The initial cost was $ 275, she says, paid for with money from the termination package.

A few weeks later, screaming to make himself heard by the roar of the trucks in transit, Pilaporn said he made about $ 10 a day after subtracting expenses on ingredients like wine and herbs. It is better than the $ 7 I earned a day at the fabric factory. She prefers to be her own boss, she says, and the new income still allows her to continue sending money to her parents and a two-year-old son who live in rural northern Thailand.


There are also some informal workers in rich countries, such as unpaid maids, gardeners and taxi drivers who do not pay taxes, although the phenomenon is not as widespread as in the developing world. Analysts say that informality can account for up to 10% of the American economy, and that percentage is probably increasing now that companies are cutting jobs, which forces people to try their luck with micro-businesses or part-time jobs.


In the developing world, half or more of non-rural workers are in the informal sector, according to the ILO. In India, 83% of workers are informal, while in Sub-Saharan Africa they are 72%.

The percentage of informal workers, at certain times in recent decades, has even increased in some developing countries. According to the ILO, the informal sector accounted for some 90% of new jobs created in Africa during the 90s. In Mexico, the share of informal employment increased in 1997 to 54% of all jobs, compared to 50% in 1990. Venezuela and Brazil showed similar growth.

Some researchers are beginning to argue that the informal economy is becoming permanent in poorer countries, as population growth outpaces job creation. The current recession, which has been pressing companies to cut employee costs, may intensify this process of leading companies to lay off expensive formal workers and replace them with part-time, unprofitable people. Many laid-offs may never again get a job in the formal economy, while companies get used to the flexibility of temporary workers. (Wilawan Watcharasakwet and Vibhuti Agarwal collaborated)