S.V. Sethuraman
Development Policies Department
International Labour Office
Geneva
United Nations Development Programme
New York
August 1997
With increasing urbanization the developing world is faced with a new challenge: how to arrest the decline in urban environment and living conditions? The situation is likely to get worse because of population growth and migration. The urban population in these countries is expected to reach about two billions by the year 2000, or three times the figure in 1970. Much effort has gone into building capacity within governments to cope with the problem.
It has however become increasingly clear that unless the level of urban poverty is significantly reduced there is little chance of reversing the current trends. Substantial urban poverty not only limits the scope for mobilizing the revenue of urban authorities; more importantly it limits the effective demand for housing and other basic urban services due to low incomes. Employment being the most effective instrument to reduce poverty on a sustainable basis it is imperative that the development policies in these countries place emphasis on higher productivity and incomes of workers.
Since the informal sector, consisting of very small scale economic activities, accounts for a substantial, and increasing, share of urban employment in most developing countries, and since a large majority of the urban poor depend on such activities for their livelihood, any credible strategy to reduce urban poverty in these countries must pay due attention to this sector. This policy paper addresses the issue of raising incomes of workers in the informal sector. It summarizes the lessons learnt from research and operational activities in the developing world during the last twenty five years and presents a critical appraisal of the on-going efforts. Though the past and current efforts worldwide have deepened our understanding of the problem as well as the solutions, they also at the same time point to many shortcomings in the strategies that are being pursued. The paper identifies a number of areas where both policies and action programmes can be improved. More importantly it emphasizes the need to consider certain reforms and the creation of an enabling environment for the poor to help themselves.
I. Introduction
The developing world is currently faced with a serious development challenge resulting from rapid urbanization. The pace of urbanization in certain countries has accelerated. The consequences of urbanization in terms of environmental degradation and deteriorating living standards are in fact already visible. In most cities of the developing world investment in infrastructure including housing has failed to keep pace with the growth in population, which has a direct negative consequence on the living conditions as well as productivity of labour and other resources. There is an increasing concern in the international development community that this process of urbanization has not received the attention it deserves from policy makers and development practitioners alike. This is reflected in the recent publications of the United Nations Development Programme, the World Bank and several bi-lateral donor agencies.(1) The need to improve the coping strategies and make the urbanization process more efficient and equitable through urgent action can not be overemphasized.
Efforts are being made to understand and assess the extent of damage caused to the urban environment as a result of urbanization.(2) Among the various factors that influence the urban environment in developing countries are included: localized air pollution resulting from energy combustion in transport, industry and households in densely inhabited areas; toxic and non-toxic wastes (from industrial and other sources) that degrade land and water resources; poor and insufficient waste disposal systems which inflict serious health risks and increase the threat of epidemics; heavy reliance on biomass materials as the main energy source for domestic needs, especially by the poor, which is held responsible for a variety of health problems particularly among women; increasing share of urban population living in marginal and environmentally vulnerable locations largely due to scarcity of land and inappropriate human settlement policies; inadequate water supplies of acceptable quality pushing households to draw water from sources that are increasingly polluted; and poor city maintenance causing a variety of atmospheric pollution and traffic congestion. Improving the urban environment in developing countries thus clearly involves major challenges on several fronts: resources, management, institutional and technological capacity of the urban authorities. It also raises questions about the capacity to maintain the systems on a continuing basis once they are established viz., sustainability.
Diminishing access to housing and other basic services: Proximate causes
Evidence in support of worsening urban living conditions in the wake of urbanization in developing countries is striking. Already in the 1970s over half the cities in the developing world were estimated to have more than 40 per cent of their population in slums and squatter settlements.(3) The situation seems to have shown little improvement if any during the 1980s as the figures from Asia would seem to suggest: Dhaka(1986), 47 per cent; Jakarta (1987), 54 per cent; Manila (1985), 28 per cent; and Bangkok (1987), 16 per cent.(4) Data from other sources for 1980 indicate that this proportion was even higher in certain cities: Addis Ababa, 85 per cent; Luanda, 70 per cent; Dar es Salaam, 60 per cent; Bogota, 59 per cent; Ankara, 51 per cent; Lusaka, 50 per cent; Tunis, 45 per cent; Karachi, 37 per cent.(5) With regard to sanitation it is estimated that in 1987 less than 60 per cent of urban population had access to adequate sanitation; and only one-third was connected to sewer systems.(6) The proportion of urban population having access to sanitation varied considerably between countries. In Asia, for example, it varied: from 34 per cent in Nepal to 99 per cent in the Republic of Korea during 1988-90 which represented a significant improvement over the early 1980s for many of them.(7) Urban population without adequate sanitation in 1990 was estimated to be 747 million of which Asia and the Pacific alone accounted for almost half.(8) Access to safe water in the Latin American and Caribbean region seems to have improved with urban water supply service increasing from 78 per cent of urban population in 1978 to 88 per cent in 1988.(9) The performance was however uneven between countries with some like Haiti reporting as low as 56 per cent. In Asia and the Pacific two-thirds of the urban population in 1983 is estimated to have had access to water though the figure varied between 43 per cent in Indonesia and 96 per cent in Malaysia in the 1980s. In Africa the corresponding proportion was 57 percent in 1983.(10) The few countries in Africa for which data are available suggest: Ivory Coast, 30 per cent, Kenya, 61 per cent and Ghana, 93 per cent.(11)
The data above, though fragmentary, do provide an indication of the worsening urban situation in developing countries. The causes underlying the above trends have been attributed to one major factor: the unprecedented growth in urban population, especially in Africa and Asia. Urban population in the developing world more than doubled in less than twenty years; between 1970 and 1990 it rose from 653 millions to over 1400 millions.(12) It is therefore not a coincidence that some countries sought to slow down if not arrest the growth of urban population but without success. Some city authorities may have deliberately decided not to act for fear of worsening the urban situation as it would attract more migration from the countryside. One of the main reasons why urban population has been growing more rapidly is that job opportunities are also concentrated there. As long as urban economic activities are growing new income and employment opportunities will continue to emerge and thus urban centers will remain a source of attraction particularly for many poor and youth seeking jobs for the first time. In some countries however dramatic decline in income opportunities in rural areas has caused migration to urban areas.
Though rapid increase in urban population has been the primary cause of worsening living conditions and environment, absence of capacity among city authorities in developing countries to deal with the emerging urban problems is also believed to have played an important role. There is a general recognition now that the correct policy would be to build or strengthen the capacity of the urban authorities to cope with population increases rather than hinder the growth of employment and income opportunities. Capacity building in this context can be broadly classified into two categories: financial and managerial including technical. It was recognized early that unless the urban authorities have adequate financial resources at their disposal their capacity to improve the urban environment and living conditions would be limited.
One way of overcoming the financial constraint has been through external assistance especially from the international development banks. The donor community has sought to ease the resource and technical constraints by designing and implementing what are known as urban development projects in various fields such as the provision of shelter, water, sanitation, urban transport, etc. Between 1972 and 1988 the World Bank lending alone rose from a meagre $10 million to more than $2 billion.(13) As of early 1993 urban and human settlements projects worth over $465 millions covering infrastructure, shelter and services, local government administration and planning, environment and poverty alleviation were being supported by the UNDP.
Despite the impressive amounts spent there is much concern about their limited impact as well as the replicability and sustainability of the approach.(14) A recent assessment of these projects concluded: "Rarely did governments establish programs independent of external donor support. As a result, the direct provision of shelter did not have the broad, long-term impact on the sector that had been expected."(15) It was also noted that the pace of urbanization far exceeded the rate at which urban infrastructure and services were being improved through these interventions. For example, the World Bank policy paper observed, "Typically, household formation in the city grew at a faster rate than did shelter construction".(16)
By mid-1980s it was concluded that a shift in emphasis was necessary; though external financial assistance played an important role what seems more critical is the indigenous capacity to deal with urban development issues. Accordingly the new emphasis has been on building indigenous capacity in (i) management (institutional, infrastructure maintenance, etc.); (ii) resource mobilization; (iii) the creation of an appropriate regulatory and policy environment; and (iv) strengthening financial services. It was in this perspective that several bi-lateral and multilateral agencies have sought to build capacity with in the developing countries. The Urban Management Program launched by the U.N. organizations jointly with the World Bank and interested bi-lateral donors in 1986 is a good example of this effort.(17)
Building capacity along the lines mentioned above to deal with the problems of urbanization within developing countries is however beset with a number of obstacles, and much of which is political. This can be illustrated with the case of urban finance. Studies have shown that urban authorities in developing countries have not only very little revenue of their own certainly far less than what they would require to provide even the minimum basic services. More importantly urban local government revenues have failed to keep pace with the rate of urbanization. According to some estimates the local government spending per capita in the mid-1980s on services and infrastructure were $68 in Nairobi and $5.80 in Dar es Salaam; in 1980 in Sao Paulo and Recife (Brazil), it was estimated at $7.30 and $3.30 respectively per person compared with $1210 for Ontario (Canada) in 1988.(18) Insufficient revenues has forced them to depend on national governments through financial transfers. Further they often lacked access to commercial sources of finance, and indeed financial autonomy. There are indeed a host of other factors including the politics of fixing prices for infrastructure services delivered, taxes on property, local business taxes, national and local government relations, etc., which explain the weak financial base of city governments.
Since about 60 per cent of GNP in developing countries is generated in urban areas one would think that there is considerable untapped potential.(19) One reason for the inelasticity of local government revenue noted above seems to be that an increasing proportion of the urban population, being poor, falls outside the taxable category. Though one can identify several sources through which city government revenues can be raised putting these ideas into practice raise a number of difficult issues. Causes underlying the financial weakness in the urban local governments are even more deep rooted; they hinge on the question of their political autonomy i.e., the extent to which they are politically decentralized (as opposed to administrative decentralization). This also plays a vital role in limiting the capacity of urban authorities to bring about a change in the regulatory and policy environment.
One way of easing the constraint on institutional capacity is to complement the above efforts by placing greater reliance on the communities concerned as well as the non -governmental and private sector organizations in the provision of various urban amenities and services. Their involvement is believed to contribute to several objectives: participatory development, lower cost, reduced management burden in government institutions, employment creation for the poor and so on. Greater emphasis is therefore being placed on such alternative institutional framework.
Urban poverty: A limiting factor
Notwithstanding such efforts, all in the right direction, the prospects of reaching the goal of improved urban environment and living conditions in the foreseeable future looks rather bleak not only because they critically depend on major political, legislative and institutional reforms. More importantly they stress the "supply side" viz., the capacity of urban local governments and other institutions to develop infrastructure and deliver various urban services on a financially viable basis and by creating a favourable regulatory environment. They fail to address the demand aspect i.e., whether the urban residents have the capacity and willingness to pay for the services. Since a large part of the urban population in developing countries lack adequate incomes (see below) the key to improving the urban situation on a sustainable basis lies with the urban poor; unless their real incomes are raised, and hence their ability to pay for the infrastructure and related services is improved, there will be little incentive for the urban authorities to undertake the necessary investment.
Alternatively the cost of providing these urban services must be lowered sufficiently so that they are within the reach of the poor. Much effort has been made in recent years, as mentioned above, to lower the cost of providing shelter and urban services for the poor through for example innovative technologies (e.g., using more labour and less capital) and greater involvement of the communities themselves in the creation of housing and other infrastructure. Though some low cost solutions have been identified the costs still remain rather high in relation to the actual incomes of the poor.(20) Raising incomes of the urban poor is therefore considered essential; it can not only contribute to local government revenues but also to higher effective demand for improved shelter and other services. Reduction of urban poverty should therefore be seen as central to a sustainable urban development strategy.
According to the World Bank there were 330 millions urban poor in 1988 in the developing world distributed as follows: Africa, 56 million; Asia, 137 million; Latin America and the Caribbean, 77 million; other regions, 60 million. These seem to be conservative estimates based on a narrowly defined poverty line which takes into account the minimum food and non-food requirements (see Box 1).
Urban PovertyA word on the concept of urban poverty. Urban poverty in developing countries is often measured on the basis of access to shelter or other urban services. Such a measure indicates the extent to which the urban population is "deprived" of certain basic urban services. It is generally assumed that it indicates the number of poor (viz., those below a certain level of income or the poverty line) because deprivation is deemed to result from lack of income or purchasing power; but this need not always be so. For example where housing supply of adequate quality is not forthcoming even those above the poverty line may have no choice but to live in substandard housing. In other words deprivation may simply be a reflection of a failure on the supply side. If the aim of development is to raise the level of real incomes of the population to a certain minimum level (i.e., poverty line defined in terms of income) at which they can afford the minimum acceptable quality of shelter and other services including environment then what matters is poverty measured in terms of actual income or expenditures. In other words a "headcount" of number of persons (or families) having incomes below this level would indicate the size of urban population lacking the basic services. It is this approach to poverty based on income that guides the analysis below.One problem in using this approach should be noted at the outset: the poverty line defined in nominal money terms would vary between countries and over time. The latter can be dealt with through standard procedures i.e., deflating nominal figures by a price index. Comparability between countries is more difficult though attempts have been made to use purchasing power parity index across countries instead of nominal exchange rates. A more serious problem is that the data sources from various countries do not adopt a common poverty line. In fact most countries have data only on the distribution of population or households by income (or expenditures). If one had an estimate of minimum income necessary per person (or household) to be able to afford the minimum quality of shelter and other services then one could use it with the above data and obtain an estimate of the urban poor. Most available data use a very conservative definition of poverty i.e., income necessary to buy the minimum food (in terms of calories per person per day) plus other non-food items (usually estimated as a fraction of what is spent on food). This measure of income being much lower than what one would consider necessary to obtain minimum acceptable quality of shelter and other urban services, clearly this poverty line would yield a conservative estimate of the number of urban poor.
Box 1
Is poverty higher in urban than in rural areas? With the exception of a few countries (Gambia, Ghana and Egypt in Africa; Indonesia and Republic of Korea in Asia; and Costa Rica in Latin America) the available data suggest that the incidence of poverty in rural generally exceeded that of urban.(21) Such a comparison may be questioned since the poverty line on which these figures are based does not fully take into account the differences in the rural and urban setting. Though the incidence of poverty in urban is lower (23 per cent versus 52.5 per cent in rural) the absolute number of urban poor (69 million) in the Latin American and Caribbean region in 1989 exceeded that of rural (64 million). This is explained by the large share of urban in total population. The situation in Asia and Africa is somewhat different in that the share of urban population is relatively smaller. It does not follow however that urban poverty in these regions is not a matter for concern. Quite the contrary. The absolute number of urban poor in Asia is already high as noted above; added to that are the very high rates of growth of urban population. For example in Bangladesh urban poverty in 1985 was estimated at 58.2 per cent and urban population rose at an annual rate of 6.33 per cent between 1985 and 1990 an addition of three million poor in five years. Urban poverty in Africa would seem to have risen rapidly in recent years not only because of growth in urban population but also as a result of worsening employment situation discussed below.
What is perhaps more disturbing is that urban poverty in the developing countries is expected to increase, and increase more rapidly than in rural. According to the Human Development Report 1990 the number of urban poor in the developing world is projected to rise by 76 percent by the year 2000. In the Latin American and Caribbean region the incidence of poverty increased more rapidly in urban than in rural areas.(22) Another estimate based on data from ten Latin American countries suggest that between 1980 and 1986 the number of urban poor rose from 53 to 80 millions or by over 50 percent.(23) In sub-Saharan Africa where many countries are currently implementing structural adjustment programmes, and where the rate of urbanization is also high, the prospects of reducing urban poverty does not look very encouraging. Data on change in urban poverty are available only for two countries: in Egypt, it increased from 30.4 per cent to 34.0 per cent of urban households between 1981 and 1984; in Ivory Coast, incidence of urban poverty doubled between 1987 and 1988 to 46 per cent. In parts of Asia (especially in east and southeast) however, the number of urban poor may have decreased in recent years following rapid economic growth. For example in Indonesia urban poverty dropped from 29 per cent in 1980 to 20.1 per cent in 1987; Republic of Korea, from 10.4 per cent in 1980 to 4.6 per cent in 1984. In the Philippines urban poverty appears to have declined slightly from 52.5 per cent in 1985 to 48.2 per cent in 1988.(24)But in South Asia, which accounts for a large number of urban population, the rate of economic growth as well as reduction in urban poverty during the 1980s seem to have been rather modest and consequently the absolute number of poor appears to have risen. In India, urban poverty decreased slightly from 39.7 per cent in 1983 to 37.1 per cent in 1988; in Bangladesh, from 62.3 per cent in 1981 to 58.2 per cent in 1985.
The evidence above, especially on Asia and Africa, though limited, generally seem to bear out the hypothesis that poverty tends to decline with economic growth. This suggests that there is a clear link between growth and reduction of poverty; but the mechanisms through which growth leads to poverty reduction are however unclear. This is an issue that requires further exploration. In sum, a substantial part of the urban population is poor viz., lack the minimum income necessary to buy food and other basic necessities. If one considers shelter and related urban services of minimum acceptable quality as also part of this basket then the income required to pay for them would obviously be still higher. Judged by this level of income many more would fall under the category of poverty.
Alleviating urban poverty: Role of employment
It is obvious that if poverty is to be reduced incomes of the poor must rise. Who are the urban poor? What are the sources from which they derive their incomes? What is the scope for raising their incomes? Incomes of the poor consist of returns to their own labour since it is the main, and often the only, income generating asset at their disposal. All studies confirm that they obtain their income either from self-employment (i.e., individuals operating on own account with or without hired workers) or from wage employment (be it in the public or the private sector); some however receive income through transfers such as remittances from relatives. There are of course some who do not receive any incomes at all because they are not employed i.e., unemployed. A strategy to reduce urban poverty would then imply that all those unemployed should be able to find jobs that yield incomes equal to or in excess of the minimum income mentioned above. And further all those already working and yet poor should be able to improve their incomes at least to the minimum level suggested above. Viewed against this background it is clear that the aim of policy makers in these countries should be to generate more employment and, more importantly, to ensure that they are productive, and yield incomes that are reasonably high. What has been the actual performance? Urban unemployment, it would seem, is substantial in many countries; and in some it may in fact be increasing. Also the number of working poor appears to be rising in many cities of the developing world, as the evidence below shows.
Urban unemployment rates (i.e., the number of unemployed as a percent of the labour force) during the 1980s have been rather high in much of Africa as can be seen from Table 1. Further the number of urban unemployed in sub-Saharan Africa is estimated to be growing annually at ten per cent.
Urban unemployment in Asia in contrast has been rather modest, with the exception of Sri Lanka where it was estimated to be 17.2 per cent in 1986-87. Urban unemployment rate in Asia has however tended to rise in recent years in India, from 4.8 per cent in 1972-73 to 5.9 per cent in 1983-84 for males; Malaysia, 5.0 per cent in 1980 to 6.2 per cent in 1985; Sri Lanka, 14.2 per cent in 1981-82 to 17.2 per cent in 1986-87; Philippines, from around 8 per cent in the 1970s to 12 per cent in the 1980s. In certain countries like Malaysia more recent data would probably suggest that the unemployment rate has declined following growth.
| Botswana
Ivory Coast Ethiopia Kenya Nigeria Senegal Sierra Leone Somalia Tanzania Zambia Zimbabwe |
1984-85
1985 1981 1986 1985 1985 1988 1982 1984 1986 1986-87 |
31.2
20.0 23.0 16.2 9.7 17.3 14.8 22.3 21.6 19.0 18.3 |
| Source: ILO/JASPA, African Employment Report 1990, Addis Ababa, 1991, p.25. | ||
In Latin America urban unemployment rate varied between 6.6 per cent and 10.1 per cent during the period 1980- 92. It also varied between countries, from a low of 2.6 per cent in Mexico to 19.0 per cent in Panama in 1991, for example.(25) The rate however increased during the 1980s in Panama and (to a lesser extent) in Argentina; decreased in Brazil, Mexico, Chile and Costa Rica; and in the remaining it fluctuated. These findings suggest that in Africa, and to a lesser extent in the other regions, a substantial part of the urban work force is unable to find jobs. Typically these are the youths and educated, who are sometimes supported by other earning members of the family during their period of job search; but in recent years main breadwinners in other age brackets also seem to have joined this category and to the extent this is true unemployment is directly related to poverty.
One of the reasons why urban unemployment rates have been lower in the Latin American region is the relatively lower rate of urban population growth. It is also true that many in the labour force prefer to be underemployed especially in the informal sector rather than remain totally unemployed. In Asia and Africa in contrast the worsening employment situation is partly explained by the rate of urban population growth which, as already noted, is quite high.
Creating jobs: Diminishing capacity of the formal sector
A more important reason for rising urban unemployment seems to be the failure of the formal sector (viz., government plus modern private sector) traditionally an important source of employment generation to generate adequate employment. In Asia there is strong evidence to suggest that the capacity of formal sector to generate employment has weakened in recent years. Elasticity of employment with respect to output has been decreasing: in Malaysia (for all sectors), from 0.53 in the 1970s to 0.45 in the 1980s; in India (for all sectors), from 0.51 in the period 1972-78 to 0.28 in the period 1983-87.(26) Though similar data are not available for other countries studies by researchers confirm this trend.(27)
In Africa, wage employment in the modern sector is reported to have fallen in absolute terms: Central African Republic (1986-90), -33.6 per cent; the Gambia (1979-86), -27.5 per cent; Niger (1980-85), -13.4 per cent; Zaire (1980-84), -8.5 per cent; Côte d'Ivoire (1980-83), -8.0 per cent; and Zambia(1980-88), -5.4 per cent. In the public sector employment growth not only slowed down during the 1980s; in many countries several thousands have been retrenched mainly due the structural adjustment programmes.(28)
Since much of the formal sector employment in developing countries is concentrated in or around urban locations they have a clear repercussion on the urban employment situation. The reasons behind this sluggish or even negative growth in employment or what the UNDP Human Development Report 1993 described as "jobless growth" are many, chief among them being (a) cut in government expenditures as a result of structural adjustment programmes; and (b) rising capital intensity in the production and distribution of goods and services in the modern private sectors.
The main consequence of the failure of urban employment in the modern private and public sectors to keep pace with urbanization has been that an increasing proportion of the urban work force is turning to what is known as the "informal sector" (see discussion below). It is this sector which bears the brunt of adjustment that is currently taking place in these countries. If open unemployment in urban areas of developing countries has shown little increase despite massive additions of urban population it is largely due to the presence of the informal sector.
Informal sector: The emerging focus
The informal sector in Latin America accounted for about a quarter of urban jobs in 1990.(29) It varied considerably between countries, from about 20 per cent in Costa Rica and Venezuela to over 50 per cent in Bolivia and Ecuador in 1980.(30) Estimates of informal employment share in total urban employment in selected cities are: Tegucigalpa, 29.9 percent; Guatemala city, 33 per cent; Managua, 48 per cent; San Salvador, 28 per cent; and San Jose, 23 per cent.(31) In sub-Saharan Africa in 1990 the share of urban labour force in the informal sector was estimated to be around 61 per cent and it showed little variation across countries. The share of urban employment in this sector in Asia is estimated to vary from under 10 per cent in the newly industrializing countries to 65 per cent but typically it seems to be in the range of 40 to 60 per cent. It seems clear that a large proportion of those working in urban areas of developing countries, particularly where GDP per capita is low, derive their income from the informal sector.
This sector has attracted attention in recent years because it has been expanding rapidly. In Latin America the sector's share in total employment has risen from 19 per cent in 1980 to 24 per cent in 1992 an increase from 16 to 28 million.(32) Such an increase is noticeable in most countries of the region. In Venezuela it is estimated to have risen from 22.8 per cent in 1979 to 31.7 per cent in 1987.(33) For three cities in Mexico it increased from 24 per cent in 1980 to 33 per cent in 1987.(34) The share of informal sector employment in Bolivia rose from 51.7 per cent in 1985 to 57.8 per cent in 1989. The share of public sector in urban employment dropped from 22.7 per cent to 16.8 per cent during the same period. And incomes in the informal sector are believed to have declined partly due to the influx of dislocated miners and government employees.(35)
This seems to be the case in Asia too though data are available only for some cities: Dhaka, from 57 per cent of total urban employment in the early 1970s to 65 per cent in the early 1980s; Jakarta, 41 per cent to 65 per cent; Metro Manila, 43 per cent to 50 per cent; and Bangkok, 43.4 per cent to 49 per cent during the same period.(36) Similar evidence is also available from several African countries where it is estimated that informal employment expanded at an annual rate of 6.7 per cent; in fact it is not only the new entrants to the labour force but also the older ones retrenched from the government and the modern private sector are joining this sector in increasing numbers, which raise disturbing questions about the level of remuneration for workers.(37) Exception to these trends seems to be certain countries such as the Republic of Korea (and more recently Thailand) where the size of this sector has shown a tendency to decline (see discussion later).
Urban poverty and the informal sector
There is overwhelming evidence to suggest that urban poverty and informal employment are closely related. In Latin America, the proportion of urban poor (i.e., bottom 20 per cent ranked by per capita income) working in the informal sector was estimated to be as follows: Bolivia, 66.2 per cent; Brazil, 66.4 per cent; Costa Rica, 63.5 per cent; Guatemala, 93.3 per cent; Honduras, 84.9 per cent; Panama, 87.1 per cent; Paraguay, 64.7 per cent; Uruguay, 18.3 per cent; and Venezuela, 57.4 per cent.(38) According to another source 46.7 per cent of the "extremely poor" in urban areas in 1987 were in the informal sector; in contrast 37 per cent of the "poor" and 28.9 per cent of the "non-poor" were in this category.(39) In urban Costa Rica in 1982 it was found that 75.8 per cent of the poorest among the poor were in the informal sector compared with 53.5 per cent for the "not-so-poor" and 31.7 per cent for the "non-poor".(40) In the Metropolitan area of Panama in 1983 the proportion of urban poor (defined in terms of the legal minimum wage) in the informal sector was 67 per cent.(41) This clearly suggests that the poor have a higher probability of being found in the informal sector. But there are exceptions such as Panama where in 1983 almost two-thirds of the urban poor were working in the modern sector.(42)Scattered evidence from Asia and Africa also support the existence of a strong association between incidence of poverty and participation in the informal sector.
The above trends imply that urban employment in these countries must grow faster in order to reduce open unemployment. The scope for enhancing the rate of growth of employment in the formal sector, which is not only desirable but also essential from a long term point of view, seems rather limited. Promotion of employment in the formal sector implies higher capital investment per work place and thus total capital requirements would far exceed the resources available at their disposal. For these and other reasons it is almost certain that the burden of employment generation will fall on the informal sector, where incomes of labour are relatively low. The challenge is therefore how to improve the productivity and incomes of workers in this sector. In other words any strategy to reduce urban poverty in the developing world must place due emphasis on the informal sector. Efforts to raise incomes and employment in this sector should however be viewed as complementing other measures to increase productive employment and urban poverty alleviation in developing countries rather than as a substitute for them. This raises two questions. First, is it possible to sustain the high rates of employment growth in this sector observed in recent years (especially in Africa) without a decline in the real incomes? Second, what are the prospects for increasing the real incomes of workers in the informal sector? Clearly both are necessary if urban poverty in these countries is to be reduced. Before answering these questions it would seem necessary and desirable to discuss briefly the term informal sector as well as the conditions under which employment and incomes are being generated in it.
The meaning of the term "informal sector" has remained somewhat elusive despite the voluminous research and literature. It has been the subject of controversy despite the fact that it has gained wide currency during the last two decades in the development policy debate. In order to develop a strategy for the sector one however does require a practical and working definition. One could perhaps begin by describing the multiple role that this sector plays in developing countries.
First, the sector is heterogeneous in terms of actors, activities and scale. Actors in this sector include those who are own account workers operating own business with or without family workers, employers in small businesses with "few" hired workers, wage workers and apprentices. Activities in this sector range from shoe shine service and petty trading, which contribute very little to output, to those involving substantial investment in skills and capital such as manufacturing, construction and transport. Agriculture provides little employment in the urban context owing to land scarcity; but in certain cities it can play an important role as for instance in the production of vegetables on small farms in the periphery of the city. Some doubt exists as to the inclusion of self-employed service workers like domestic servants and itinerant casual labour. Though they are all small in scale measured in terms of capital used and persons employed many are indeed very small having insignificant amount of capital and operated by a single person (viz., the own account workers). The essential character of these units is that they produce and distribute goods and services for sale in the market.
Second, the very small units in this sector, or "microenterprises" as many prefer to call them, have diverse objectives. Inadequate understanding of this has often been a major source of confusion, and has led to contradicting policy prescriptions. It was initially believed that most of those in this sector are there by default i.e., in the absence of jobs in the public and modern private sectors they had no where else to go but to set up their own small business to earn their livelihood a survival strategy. It was therefore argued that the focus of policy interventions should be to assist those in the sector to help themselves i.e., enable them to maximize their incomes. But further studies have shown that this is not entirely true. Motives for participation in this sector vary:
These appear to be mutually exclusive categories, but over a period of time the informal sector units straddle between them as they discover new opportunities. Though the motives for participation vary they do have a single common characteristic each of these units is independent in the sense that it is free to make its own decisions about business. The policy implication of this is of course that the incomes and productivity of these units can be influenced through direct assistance programmes aimed at strengthening their productive capacity as well as by changing the business environment in which they operate. (See later for more discussion).
Further research on the informal sector has shown that not all the units in the sector are in fact truly independent; many choose to operate on a sub-contracting basis for another firm (or individual) either because they prefer to do so for various reasons, or because they are obliged to do so i.e., involuntary. For instance some of these informal operators prefer to avoid taking managerial decisions and / or assuming entrepreneurial functions such as taking risks, determining the response to market variations, etc. This behaviour can be justified if the operators feel they do not have the requisite skills or it is simply a matter of personal preference. But a vast majority who choose to enter into this sort of sub-contracting relationship seem to belong to the other category viz., lack of other alternatives. For example women in many developing countries are engaged in the production of goods for other firms or middlemen on a contract basis, and operate from their homes commonly described as home workers. Likewise some opt to operate by leasing equipment from others and thus do not enjoy total freedom in decision making (e.g., rickshaw operators in Asian cities). These "seemingly independent" units belong to a different category altogether though in the first instance it would appear that they are no different from others. This is so because their incomes, productivity and conditions of work can not be influenced either by direct assistance or by changing the business environment; their fortunes are uniquely determined by the nature of sub-contracting relationship. Their welfare is largely governed by the presence or absence of regulations concerning contractual relationships. Alternatively their incomes can be improved by "freeing" them from such contractual work through for example changing the institutional environment (see discussion below).
It is clear from the above that the urban informal sector is not one homogeneous category; there are different kinds of activities, different sizes of business, with different motives for participation. It is also evident that both poor and non-poor participate in the informal sector. Any strategy to raise incomes of workers in this sector should recognize these differences.
Finally it should perhaps be stated explicitly that the scope of the informal sector covers only the gainful economic activities that are considered socially desirable, and it thus excludes activities such as criminal, begging, prostitution and drug trafficking which most societies consider as anti-social. In some countries the activities may themselves be legitimate in the sense described above but the authorities consider them otherwise because they violate existing regulations: examples blackmarketing, smuggling, illegal cross border trade, production of counterfeit or fake products. Insofar as these are not criminal but genuine activities aimed at exploiting certain market opportunities the remedy seems to lie in the conditions that give rise to such activities in the first place.
The informal sector accounts for a substantial share of the urban regional income estimated to vary between a quarter and a half. Reliable estimates are however lacking. Many poor have benefitted by gaining access to incomes through employment in this sector. Millions have been able to improve their capability by acquiring skills on the job who otherwise would not have had access to training. Job creation on this scale was made possible through the mobilization of considerable resources by the micro units in this sector on their own. They have expanded with out any subsidy from the government and in fact in a hostile policy environment. Capital investment required to create a job in the informal sector is only a small fraction of what is needed in the formal sector. Many units are engaged in recycling of materials through collection and disposal of garbage in cities and thus contribute to a better environment. The bulk of the low-income housing in developing countries is produced by the informal sector. These and other arguments have been put forward to promote employment and incomes in the urban informal sector.
Some of the salient features of the sector:
In other words the physical and human capital endowments of the small units or microenterprises in the informal sector are indeed very limited though they vary considerably between units. There is overwhelming evidence to suggest that these small scale units face a variety of constraints including lack of access to resources and markets as well as to land and basic infrastructure. They are also confronted with a hostile political, social, economic and institutional environment, and are consequently unable to participate in development as effectively as the formal sector. These are discussed below.
Poor access to resources and markets
Limited schooling, skills, technical know-how and capital need not be binding constraints so long as they have the option to augment their capabilities through easy access to education, training, information, technical know-how and credit. But there is overwhelming evidence to suggest that they lack such access, especially to training and credit from "formal" institutions. It is for this reason they are obliged to start their business with their own savings supplemented by borrowing from friends and relatives. Since most of the operators are poor they start their business with very little capital. A few meet their capital requirements through informal credit mechanisms that exist within the community, but rarely from the formal sector institutions. Likewise skills are acquired through on-the-job training within the informal sector or, as in the case of Africa, through informal apprenticeship systems; it is rare to see those who obtained their skills through a formal training institution. In other words these operators overcome the resource constraints to a certain extent by relying on "informal" mechanisms that exist within the concerned societies generally through solidarity measures.
A number of factors explain this lack of access to formal institutions. Training and credit from formal sources are not only governed by government regulations but often they also form part of public sector monopoly, and hence administered by a bureaucracy that is generally unfriendly to the poor, illiterates and semi-literates in the informal sector. Similar attitudes prevail in the private sector too; the private banks for example rarely find it profitable to deal with these units, though a few exceptions are emerging (see discussions later). Training, if it is provided at all by the formal institutions, tends to be supply-driven, and are rarely sensitive to the needs and circumstances of those in this sector and this generally means their irrelevance. The cost in terms of money and time may be too high. Resources in the form of training, credit, or other similar inputs, if allocated at all for the informal sector, tend to be so meagre that they are subject to rationing which means that many of those needing assistance are disqualified through a process of screening based on different criteria (e.g., minimum schooling required for training, collateral for credit, etc.).(43)
Not having free access to credit and training has no doubt its consequences. It implies that these units can improve their production capabilities only with considerable difficulty (viz., time consuming) and cost, by resorting to "informal" credit and training mechanisms which are often governed by imperfect market conditions (i.e., access may depend on ethnic and social considerations, personal contact, etc.). If their production capability can not be augmented then it means that their incomes are pretty much determined by their initial endowment base, which almost by definition is zero or close to it. Lack of access to credit and training also explains why the units in this sector function the way they do i.e., use simple technology, scale of operation remains small, avoid paying rent by choosing unauthorized locations, avoid compliance with regulations to save cost and so on all of which have a negative influence on productivity and investment. It also explains why many new entrants to the sector, mostly with little schooling, skills and capital, choose those informal activities where there are few barriers to entry such as petty trading or services which require simple skills and little or no capital investment but which also yield low incomes.
In order to overcome these constraints, especially credit, many of these small operators voluntarily choose to enter into various kinds of dependency relationships, notably sub-contracting arrangements. This is often the case particularly with women who choose to operate out of their homes. By agreeing to sell their output at predetermined prices (i.e., agreeing to work on a piece rate basis) they obtain credit in the form of raw materials, etc. In the case of men it could take the form of leasing a "rickshaw" (three-wheeler taxi operated manually) from its owner in return for a daily payment. Such relationships represent more than simple arrangements to alleviate capital constraints; often they are accompanied by other binding conditions (e.g., a rickshaw operator may be held as hostage because the owner keeps the license for operation) (see Box 2 below on rickshaw pullers in Asian cities). Many other examples can be cited. This form of employment has been the subject of controversy since it is believed to involve exploitation of labour.
In short, lack of access to resources enhance the vulnerability of those in the sector. They also inhibit the response to new opportunities that might arise from the growth process, except through ingenious means ( for example using second-hand equipment, recycling waste, etc.,) and assuming risks (e.g., violation of regulations). It also restricts mobility from low income and marginal activities to those with high productivity, since such a move almost always calls for additional investment in skills and equipment.
These constraints are particularly severe for women in the informal sector because they generally possess on the average less schooling than men and they are faced with insurmountable social, cultural and political obstacles when it comes to acquisition of skills and capital. For example in certain countries women are discriminated against in the inheritance laws; socio-cultural practices deny women equal access to education and skills or even prevent them obtaining credit unless they have the support of men. Prevailing prejudices may also limit the choice of skills open to women. These and other factors explain why women, whose participation in the sector is quite substantial though not as high as men, are concentrated in certain low skill, low capital and low income activities like petty trading, simple manufacturing and processing, particularly homebased.
Basic infrastructure: Missing?
Another feature of the urban informal sector confirmed by all studies is that the proportion of units in this sector that either do not have a fixed location (i.e., ambulante) or operate in temporary structures in open spaces or locations that are considered illegal or unauthorized is quite substantial often exceeding 70 per cent. Many also operate from their residences in slums and squatter settlements. Several factors seem to explain this situation. It is mainly a reflection of the non-availability of capital and other resources discussed above. In large cities it is also quite natural that land is scarce, and hence beyond the reach of the poor. More importantly, existing regulations regarding land use, transfer of title, ownership, rental and so on also make access to it difficult or even impossible.
Rickshaw pullers in Asian citiesThe number of manually operated rickshaws in Asian cities is estimated to be over three millions. The number employed as rickshaw pullers/operators is much higher since the same vehicle is operated by more than one person in shifts. Typically the vehicles are not owned by the pullers but rented from the owners on a daily basis. Over decades attempts have been made to improve the conditions of pullers by improving the vehicle design and by facilitating access to finance so that they can own the vehicle. In India and Indonesia the daily rent is estimated to account for between 25 and 30 per cent of daily earnings. In Dhaka (Bangladesh) it was estimated at 22 per cent. Similar figures obtain for other cities. This implies that a policy to assist the pullers to acquire their own vehicle through loans could result in an increase in their income to the tune of 25 to 40 per cent. Many city governments have sought to ban ownership of rickshaws by individuals other than pullers or limit the number of vehicles they may own. But these attempts have not been successful. This is illustrated by the case of Nagpur (India), a city with 1.7 million population in 1992. The rickshaw pullers' unions, fifteen of them based on caste, geographic origin of pullers or other considerations, campaigned for a government programme to have the ownership of rickshaws transferred to the pullers, with the help of a local NGO (Industrial Service Institute). As a first step the NGO organized them into one union which took about three years. Through collective action the union was then able to exert pressure on the State government. After several repeated efforts over a period of two years the government amended the Public Vehicle Act 1920 which made it illegal for any one to own a vehicle unless he is also the puller. The government even created a special fund to enable pullers obtain loans through banks for the purchase of rickshaws.
What happened subsequently is even more interesting. Though the law did not favour the owners they were nevertheless able to sabotage the movement; the two producers of rickshaws in the city, the only ones to produce, doubled the price of rickshaw. At that price it was not profitable for the pullers to own; neither can they afford the loan it implied. Once again the union, with the help of the NGO, decided to fight back; they set up their own plant to produce rickshaws, 20 per day. The owners attempted to sabotage this effort by organizing a raid by the tax department but without success. The owners then decided to take their battle to courts to have the law overturned but again without success. The pullers nevertheless lost the battle in the end not because of the owners but because of the failure within the government to coordinate relevant policies and regulations. The local government refused to give licenses to the pullers, and without a license a puller could not obtain the loan. The union did not give up at that. The pullers were able to exert pressure on the Police Commissioner and were finally able to get a license, issued at the rate of 25 per day. After almost ten years, in 1988, the situation was that the number of pullers had nearly doubled but only a fifth or so of the vehicles were owned by the pullers the law had not been implemented.
Source: Compiled by S.V. Sethuraman based on information in Gallagher, R. (1992), Chapter 3. Box 2
One should not however forget the desire of most participants in the informal sector to save on costs and this includes saving on rental; for them higher disposable income now is more important than a better quality premises. They therefore prefer to operate either from homes or from other "rent free" locations even if it means violation of existing regulations (e.g., occupying public space in central city locations, squatting on public or private property). Since incomes of the units depend significantly on where they do their business within the city (for instance those located in the inner city tend to have much higher incomes than those on the periphery) it is quite normal that they choose to operate under the conditions described above but closer to inner city or other locations despite the risks involved in violating the regulations where purchasing power, and hence demand for their output, is concentrated. This means that for individual units it is profitable to operate in congested locations even though such a congestion may be socially undesirable owing to its negative consequences on environment and living conditions.
The prevailing situation can therefore be explained in part by the existence of unhelpful and unimaginative regulations that impede the functioning of the urban land and property market and by the absence of infrastructure such as roads and transport to improve market efficiency and ease congestion. Dealing with these issues is not simple as they are entangled with major institutional and legislative reforms. Even if these can be resolved there remains the question: whether the small operators in the informal sector have the capacity to pay even a reasonable rental for the premises should they be made available. Clearly this is one of the most difficult issues as it calls for the resolution of the conflict between private versus social costs and benefits i.e., efficiency versus equity.
Poor access to land and infrastructure has several consequences to incomes and productivity of the informal units. It discourages mobility; few units want to move out of their current locations perhaps due to lack of choice. Obviously this means there is little scope for additional investment or improving the business. Further it discourages investment as the title to the land is unclear. Ambiguous legal status means that they can be forcibly re-located elsewhere. Both the above factors limit the scope for expansion through investment in machinery and equipment, and hence higher productivity and income. Business carried under such conditions is also exposed to greater risks resulting from fire, flood and theft besides confiscation of assets by the authorities concerned. Another consequence has been that these units are deprived of access to urban infrastructure such as power which also negatively affects their productivity. Because they are in unauthorized locations they are generally denied any form of assistance if available. Location of production units in slums and squatters deprive them of access to markets where they can dispose of their products. It also explains in part why many units prefer to operate on a sub-contracting basis because under such arrangement they need not worry about direct access to markets to dispose of their output. Such "invisibility" also implies appalling conditions of work and environment.
Regulations: A major constraint
A vast majority of the units in this sector has been found to be operating under semi-legal or illegal conditions in the sense that they do not comply with one or more existing regulations. Regulations essentially define the framework within which the enterprises conduct their business. It was earlier mentioned that regulations pertaining to land use (e.g., zoning regulations), land transactions, rental, tenure, etc., affect the informal sector in a significant way. Similarly labour related regulations are known to affect the informal sector in a number of ways. It may involve reduced labour mobility; alternatively it could mean compliance with a host of other regulations dealing with working conditions and environment, trade unions, closure of business and dismissal of workers, legal minimum wage and contributions to social security. There are also regulations which essentially define the framework within which business is conducted and are wide ranging: those concerning establishment and operation of business such as location, registration, licensing, bookkeeping, hours of operation, holidays, and tax obligation. In addition to these there may be regulations which intervene in the purchase of inputs, use of power, transport and marketing of outputs. Branch-specific regulations may exist too; in transport, operation of rickshaws and traffic regulations; in construction, building codes for example; in trade and restaurants, health and environmental regulations, etc. According to one study in India the microenterprises even in small towns may be subjected to control by up to 35 different authorities /agencies from various parts of the government.(44)
The consequences of not complying with regulations are many. It could mean paying a penalty in the form of a lump sum fee to the authorities concerned suggesting a reduction in incomes. In extreme cases it could mean closure of business or confiscation of business assets. More often than not the regulations are not strictly enforced either because they are not clearly defined (and hence subject to varying interpretations by enforcing officials) or due to weaknesses in the institutional capacity to enforce them uniformly; often they are used as a threat. The net result is to create uncertainty and discourage business investment. Since regulations affect profitability of different branches differently they also distort incentive structures and hence choice of activity and resource allocation. Certain labour regulations are known to distort choice of technology. Because the units do not comply with regulations they are often labeled as "illegal" and hence disqualified from having access to certain resources or markets notably that are under state control. In some countries the formal sector lobby has accused the informal sector of posing "unfair" competition (i.e., able to sell at lower prices because of non-compliance) and hence keen to see the regulations extended to it.
There are at least three reasons for non-compliance with regulations: (a) many, particularly very small units, headed by those with little or no schooling, are mostly unaware of them; (b) some are aware but can not afford to comply unless they wish to close their business; and (c) those who take refuge in this sector in order to avoid compliance even though they can afford to bear the cost burden. Some units see non-compliance of regulations as a means of reducing unit costs, enabling them to reach new markets and increase their sales. Compliance with regulations often involves lump sum expenditures (e.g., investment in proper facilities in workplace) which, in the absence of access to credit, may not be possible. In actual practice many do pay various kinds of local taxes or fees which, according to studies, is not an insignificant amount in relation to their income. Some studies have estimated that full compliance with all regulations which even many modern sector firms fail to do could mean closure of business. For instance in Latin America the cost of remaining legal varied between 17 and 70 per cent of annual profits of the unit.(45) In Bujumbura (Burundi) it was estimated that the revenue of microenterprises would be reduced by 48 per cent if all regulations are strictly enforced.(46) This suggests the existence of trade-off between employment and regulations. Most would admit certain regulations are essential or even desirable in the larger interest of the society and indeed the workers themselves. Further the cost burden of complying with various regulations need not be the same.
The root of the problem seems to lie in the fact that there are many unnecessary regulations or those that are badly conceived and implemented; in some they are just the remnants of colonial times and fail to reflect the current reality. Few countries have examined the cost and benefits of such regulations; the cost of complying with some of them can be quite exorbitant, well beyond the means of a typical informal unit.(47) Consequently many in the informal sector and indeed some in the formal sector too have opted to remain outside the framework of the law, which has led some observers to define informality in terms of compliance with regulations. These considerations have led to the suggestion that the regulations in place, particularly those having an influence on the informal sector, need to be reviewed. Eliminating constraints derived from labour regulations often call for a review of labour market instruments.
The various constraints discussed above are generally known as "supply" constraints since they limit in one way or another the capability of the informal units to generate goods and services, and hence incomes. Most studies on the informal sector also show the existence of "demand" constraints. Demand constraints limit the opportunities for production. Most of the units in this sector are engaged in the production and distribution of consumer goods and services; between half and three quarters of the activities is in the tertiary sector consisting trade and services. Most studies on informal sector show that a substantial proportion of the units are faced with a stagnant or declining demand for their output; many also reported facing "too much competition" another way of saying the existence of limited opportunities. These findings are indicators of overcrowding; by the same token they can be interpreted as failure of demand to grow, at least not as rapidly as the supply. Development policies, if properly conceived and implemented, could ensure greater demand for informal sector output and thus open up new opportunities for participation.
Opportunities in growing and stagnant economies vary
In a stagnant economy where incomes of households are not expanding clearly the demand for goods and services, whether produced by the formal or the informal sector, will be stagnant too. This underlines the need to promote macroeconomic policies that would stimulate income growth in the urban economies. In the absence of such policies any attempt to promote the informal sector would only be at the expense of the formal sector since it implies a redistribution of existing demand from one sector to the other. Such a redistribution of demand can be brought about through fiscal policies, for example (i.e., subjecting the output of one sector to taxes or subsidies) (see discussion below). Similar results can also be obtained through policies influencing the income distribution since consumption of informal (and formal) sector output is strongly associated with the level of income of household (e.g., choice of restaurant, shops, transport, etc., by lower and higher income groups are typically different).
This battle for "economic space" within the city between the formal and the informal sectors is not confined to stagnating economies only. It is equally relevant and important in growing economies i.e., how the two sectors are able to share the growth opportunities. Most studies show that the two sectors offer similar goods and services but cater to different markets, segregated by incomes, since the quality and price also differ between the two sectors. Even though the two sectors coexist and operate in different markets for reasons of differences in quality and price one should recognize that the informal sector is constantly endeavouring to penetrate into the markets held by the formal sector. For instance they try to improve the quality of their output by upgrading technologies and skills so that they can compete successfully with the formal sector; alternatively, as in the case of trade, they encroach upon the formal sector territory by putting up shops.
With rapid economic development new demand opportunities appear. For instance consumer demand rises with rise in household incomes. Because households tend to choose formal rather than informal sector goods and services as incomes rise, the microenterprises may be under some pressure to improve its quality of output in order to reach out new markets. There are of course exceptions such as automobile repair services in which informal sector holds a comparative advantage and attracts customers from higher income groups as well. In other words with a rise in real incomes of households one can expect, in the long run, diminished opportunities for the informal sector. This in part explains why the importance of the informal sector tends to diminish with economic growth as has been observed in recent years in some southeast Asian countries e.g., Thailand. Under the circumstances the informal sector's response is typically to transform its production capacity and move closer to the formal sector. The policy goal would then be how to accelerate this transformation process so that the sector could respond effectively to new opportunities arising out of development. Such a transformation would diminish the importance of the sector and facilitate its gradual integration with the mainstream, and thus improving the chances for its workers to realize higher productivity and incomes.
Formal-informal sector linkages in the market
In contrast to the above where the informal sector seeks to expand its markets there are also situations in which the sector is fighting a battle simply to hold on to what it has already established. In certain branches its ability to retain established markets is threatened by the formal sector e.g.,food processing in India. There is evidence to suggest that the formal sector has in a few cases expanded its market share (sometimes by lowering the product quality and/or prices) in order to make its output affordable to low income groups, and in the process destroyed the market held hitherto by the informal sector (e.g., processed food, ready made clothing, footwear, etc.).
It is not always the case that the two sectors produce similar goods and services and hence are in a situation of competition with each other. There are two other possibilities: (a) the output of the two sectors may in fact be complementary; and (b) there is neither competition nor complementarity between the two. A good example of the former is informal sector unit operating on a sub-contracting basis with formal sector firms which can be production sub-contracting (e.g., supply of parts for automobiles) or commercial sub-contracting (e.g., selling formal sector output through petty trading and retailing). These two represent a situation of "no conflict". With economic growth new opportunities for participation in production by the informal sector present themselves. For instance increased production in the formal sector is likely to create new sub-contracting opportunities for the informal manufacturing and construction enterprises (e.g., Thailand). The latter can exploit such opportunities successfully only if they have a supportive regulatory environment combined with necessary access to resources. Increased opportunities to work with the formal sector often contributes to diversification of informal sector's output, notably a shift away from production and distribution of consumer goods and services.
What is the policy significance of the above? It is a widely known fact that most developing countries created a bias in the policy framework in favour of the modern or formal sector.(48) Such a bias naturally makes it more difficult for the informal sector to compete with its formal counterpart. In other words the battle for economic space is not being fought on fair grounds. The bias may be attributed to the belief of governments that modernization is synonymous with development and hence the formal sector needs to be promoted on a priority basis; or it may have been guided by other considerations such as the substitution of imports (or promotion of exports). It is also perhaps true that few governments believed that the informal sector is capable of contributing to national output; this may be attributed to insufficient awareness and information on this sector.
The bias is sometimes attributed to the existence of a formal sector "lobby" which has a privileged access to policy making in the government. A striking example of this is the banning by the government of Ivory Coast in 1974 of a'bakas (popular informal transport) in Abidjan from operation within city limits at the urging of the formal transport system SOTRA (Societč de Transport d'Abidjan) because of their "unfair competition". Similar steps were taken in Dakar.(49) Whatever may be the reason the existence of such a bias is well documented in the literature. It is reflected in one or more of the following policies: exchange rate, import, export, price, labour, monetary and fiscal policies. For example overvalued exchange rate often make foreign goods artificially cheaper and thus cut the competitive edge of the informal sector in selected branches. Access to cheaper imports or tax holidays or lower interest on loans, all of which are generally available to the formal sector firms alone, may render informal sector output less competitive where the two compete.
Thus, even though policies are not specifically designed for the informal sector, they can nevertheless have a negative effect on it; they can not only limit their participation and constrain their response to opportunities for expansion but also distort the incentive structures e.g., by lowering returns to investment they can discourage expansion. In addition to those mentioned above one should note that the State often plays a direct role in the allocation of resources in many developing countries: allocation of certain key raw materials or inputs under state control may be biased, based on predetermined price and quantity; certain production facilities or markets may be reserved for certain types of firms (e.g., small firms may not bid for public contracts). Though there are no serious studies analyzing the quantitative impact of various policy distortions on employment and incomes in this sector most evidence seem to suggest that unfavourable policies can not only depress current incomes but also future growth potential.
Policies may not only distort the production structure in favour of the formal sector; often they are also used to influence the demand structure. In some countries lower taxes or tax exemption or even subsidies may have favoured the informal sector in certain branches. Taxes on factors of production may influence choice of technology and hence favour the formal sector (e.g., making capital artificially cheap will encourage capital intensive activities and since formal sector alone has access to loans it would favour formal sector at the expense of informal). Policies having scale related advantages will also encourage formal sector. Structural adjustment policies introduced in several developing countries in recent years also seem to have a significant negative effect on the urban informal sector.(50) Finally one should also note that policies pertaining to land use and infrastructure services play a vital role in the urban context, particularly for the informal sector.
Clearly in the absence of supportive macroeconomic policies, easing the supply constraints will have only a limited effect on the urban informal sector. To avoid involutionary expansion of the informal sector, which implies higher employment accompanied by falling incomes of workers, it is essential that policies be so designed as to encourage the effective participation of the sector in development. Though equity is a major concern the primary reason for creating a supportive policy framework lies in the promotion of efficiency and growth in the economy. It is thus argued that the policy framework should be made at least neutral, without bias in favour of either the formal or the informal sectors. The task however may not be simple, for in specific branches of economic activity there may very well be conflict between equity and efficiency objectives. For instance should informal transport be encouraged because of its employment and poverty alleviation character at the cost of mass transport systems which may be less costly and more environment friendly? Such issues no doubt should be resolved on a case by case basis. Where such conflicts exist their resolution is likely to be influenced by the presence of various interest groups; to combat them the informal producers must have a voice of their own. (See discussion below on organizations.)
It seems equally important to forge complementary linkages between the informal and the formal sector firms through appropriate government policies and thus avoid situations where the two are in conflict.(51) It may not be easy but possible. In certain countries the governments have been endeavouring to promote a symbiotic relationship between the small and large enterprises through appropriate policies. In pursuing these policies due attention needs to be paid to the unequal bargaining strength viz., that of the formal firms tend to outweigh that of the microenterprises; and consequently suitable provisions must be made to ensure that the contractual arrangements between the two are fair and just. This would imply strengthening the organizations of microenterprises and backing them up with appropriate legislations or regulations.
Some of the policies, besides increasing the demand potential for informal sector output, may also contribute to faster transformation of the units concerned: policies favouring technology transfer and upgrading, closer linkages with modern sector firms, training policies and so on. For example labour market policies aimed at improved mobility of workers through better labour market information, elimination of discriminatory practices and the like can make a significant contribution to workers' incomes in this sector but very little research has been done on this. Viewed in this optic policy environment plays a central role in raising productivity and incomes of workers in the informal sector through more effective participation.
The above discussion suggests that the scope for informal sector participation in development is significantly influenced by the presence of the formal sector and its size as well as the policies, which tend to favour the latter. In many poor countries, especially in sub-Saharan Africa, the formal sector may be less important as a provider of goods and services either because they are still in transition or because the modern firms did not find it profitable to establish themselves (e.g., too small a market). Consequently many of the goods and services are either imported or produced in the informal sector. This implies that the opportunities for participation by the informal sector are critically dependent on trade policies. Where restrictions on import prevail the informal sector may enjoy natural protection and thus be able to produce and sell wide range of commodities. In contrast in parts of Asia and Latin America where the formal sector is well established the informal sector may find it difficult to compete unless it improves the quality of its output. In other words the opportunities for informal sector participation vary with the country or region depending on the stage of development viz., the importance of the formal sector in the national economy. Clearly this has implications for designing development strategies.
Development policy and the informal sector
The brief review of evidence above suggests that those participating in the informal sector have sought to overcome the various constraints facing them in different ways: some seek work on a sub-contracting basis, some resort to leasing equipment or the use of recycled materials, and others choose to violate existing regulations. In addition to these mechanisms they accumulate savings and invest in business as much as they can and thus attempt to increase the scale of operation; but the performance is not uniform since it depends on how well one is "connected" in the society. This is confirmed by a number of studies which show a large increase in capital investment when compared with start up capital. They also rely on informal credit mechanisms where they exist. Many improve their skills or acquire new ones through informal apprenticeship system or on-the-job training. Likewise they obtain technical know-how through informal means, enhance their technological capability by acquiring new or second hand machinery or even constructing one by self, and improve the product range and quality. They try to improve their incomes by using recycled materials where possible. They frequently violate regulations at considerable risk and improve their business. They put in long hours of work and expose themselves (in certain branches or occupations) to serious health risks. These efforts have doubtless improved incomes for many; but the process remains inefficient and inequitable for it takes too long and not every one can be assured of the same degree of success.
There are at least four reasons why the policy makers in developing countries should pay greater attention to this sector: resource allocation, income disparities due to market imperfections, poverty and rapid expansion of the sector. These are briefly discussed below.
Misallocation of resources: The evidence discussed above points to the existence of significant misallocation of resources in the sense that the units in this sector are unable to maximize output and employment owing to in access to resources and markets. Policy induced distortions also explain why the sector functions in a sub-optimal manner. The effect of such distortions and constraints is not only to reduce current incomes of informal units but also to discourage their investment and hence the growth prospects.
Income disparities: The various constraints discussed above also explain the considerable variation in the amount of capital per worker, productivity and incomes of these informal entrepreneurs that is found in all studies. Doubtless some units, given sufficient time, do manage to overcome the constraints and expand their current business or move into new lines of business and thus improve their incomes. Some of the income differences are explained by imperfections in the labour market including discrimination based on ethnic, sex or other characteristics; for instance women's earnings are substantially lower even after making allowance for variations in age, education, capital, activity in which they participate, etc. Incomes of wage workers are substantially lower than that of the heads of units, and mostly below the legal minimum wage. Owner-operators generally earn incomes above this minimum, often comparable to incomes in the formal sector or even better because their income includes returns to own labour plus returns to business assets owned by them. These findings underline the existence of other factors which depress the incomes in this sector.
Poverty alleviation: For the poor, to be able to improve their living standard, they must have the income necessary to acquire the goods and services. Without such income they are excluded from participation in the market. For most of the poor labour market is the entry point for integrating themselves with the mainstream economy; labour being the only asset at their disposal they gain access to income by offering their services in the market in return for a wage i.e., wage employment. If they can not find wage employment the next best alternative is for them to integrate through commodity markets i.e., by producing and offering goods and services for sale. Viewed in this perspective much of what is happening in the informal sector can be seen as a struggle by these individuals to integrate themselves with the market economy and to improve their situation despite the fact that they are mostly ill prepared in terms of schooling and skills.
Rapid expansion of the sector: Notwithstanding the various constraints including the hostile environment the number of units in this sector has been rising at a considerable rate in most cities of the developing world, which explains the rapid employment growth in this sector noted earlier. Most of this increase has occurred through increase in the number of units rather than the number of workers within the existing units. Such a lateral expansion has been a source of concern since it implies multiplication of very small units of doubtful economic efficiency. For example in Manila, according to a recent study, 47 per cent of the sample units were reported to have emerged within the twelve preceding months. Rate of expansion however was greater in certain branches like trade and services than in manufacturing, which may reflect the skill and credit constraints discussed earlier or the difficulties in competing with established larger firms. Similar evidence is also reported from elsewhere. But given the conditions under which the sector operates this should come as a surprise to no one.
The governments of developing countries and the international donor community have responded to the above challenge, namely, increasing the employment and incomes of workers in this sector. National authorities in many countries were initially reluctant even to recognize, let alone support, this sector; it was believed that with modernization and economic growth the sector would disappear. But over years they have come to realize that this sector is unlikely to disappear in the foreseeable future. Since this sector has acted as a safety valve and ensured political and social stability, and since it is contributing to reduction of unemployment and poverty most governments have become more tolerant, and some even supportive, of this sector.
A major response of the donor community and the national authorities has been to treat the sector as a "target group" needing and deserving resource support. A critical appraisal of the development performance in the developing world during the early 1970s led to the broad conclusion that the benefits of development failed to "trickle down" to the poorest and vulnerable groups in the society. This in turn led to the formulation of what may be called a target group oriented development approach pioneered by the World Bank; since resources failed to reach these groups and since they failed to participate in the development process effectively it was felt that a conscious attempt to allocate resources to specific target groups and to encourage their participation would make development more equitable. It was within this framework that the informal sector came to be identified as one among several target groups deserving support.(52) It was recognized that "the economic conditions of the poorest sections cannot be improved simply by distributing some purchasing power to them through short-lived welfare schemes. Any long-term improvement requires increasing the productivity of the poor by restructuring the pattern of investment through fundamental institutional reforms".(53)
Notwithstanding this the object of donor interventions has been limited to the provision of missing inputs and services through direct allocation via newly established or strengthened institutional capacity or through project-based activity. This is based on the assumption (also supported by evidence) that neither government programmes nor markets have been successful in reaching the poor, particularly with regard to provision of credit, training, inputs and services. Few interventions did provide infrastructure (e.g., construction of markets) or facilitate its access to those in the informal sector.(54) This approach to ease specific supply constraints paid little or no attention to the question of "participation"; it was probably assumed that once the missing resources or inputs are made available those in this sector would automatically be able to grab the opportunities that become available in the development process and participate in it. But the evidence discussed above do not lend support to this view. They suggest that for these vulnerable groups to effectively participate, appropriate changes in the macroeconomic environment also need to be put in place. But unfortunately this aspect has been ignored as the following discussion shows.
Current efforts to assist the urban informal sector
A number of initiatives to assist the informal sector have been underway in a number of countries for almost two decades now. Some of them have focused on the broader objective of microenterprise development while others have sought to ease one or more specific constraints at the enterprise level. In Dominican Republic for instance the Dominican Development Corporation started a microenterprise development programme in 1981 to assist the street vendors and other small entrepreneurs, which included training, technical assistance and finance.(55) But much of the effort has concentrated on credit access.
Among the various types of interventions perhaps the most widespread has been the provision of credit. Since credit is not accessible from formal sources the focus has been on the creation of alternative sources and developing alternative delivery mechanisms. Most of these interventions have focused on alleviating credit constraints for the rural poor but some have also targeted the urban poor. Among these the following are widely known: Grameen Bank in Bangladesh; Bank Rakyat Indonesia (BRI); and Prodem (the Fundación para la Promoción y Desarrollo de la Microempresa) in Bolivia.(56) The Grameen Bank is estimated to have, as of June 1993, 1.6 million members (mostly women); the other two were able to reach, as of 1991, 1.8 million and 20 000 borrowers respectively, the last one being exclusively urban.(57) The average loan amount varied from $70 in Bangladesh to $252 in Indonesia and $227 in Bolivia. By linking credit with savings these group-based lending mechanisms in Bangladesh and Bolivia have proved to be financially viable and yet do away with collateral requirement. The BRI experience suggests that the public sector banks can, through appropriate reforms in financial sector policies and regulations, reach the poor. The other two in contrast emphasize the scope for creating financial institutions from the grassroots level, adapted to the needs and capacities of the informal sector. They have demonstrated that the poor can afford unsubsidized credit, can repay the loans, and can save.
Access to credit has been made easier by opening a number of local branches ( 3600 for BRI in 1991 and 1030 for Grameen Bank in 1993; Prodem which covers only urban, had four branches in 1991), by simplifying documentary procedures and repayment terms, and by reducing the time for loan disbursement. These interventions have successfully managed to cover the very high overhead costs (two to three times what a normal bank loan for a larger amount would entail) of handling a large number of very small loans by charging a rate of interest well above the commercial rate.(58)
Self-employed women's association (SEWA) in Ahmedabad and the Working Women's Forum (WWF) in Madras, both in India, have created their own banks along the lines of cooperatives to cater to the credit needs of poor women; they follow the mechanisms similar to those described above and reach well over half a million. Many other credit interventions are much smaller in scale and managed through ad hoc projects. Some large schemes such as the Jawahar Rozgar Yojana launched by the Government of India for the urban poor have sought to channel funds through existing bank branches and are not destined exclusively for those in informal business. It is evident from this brief discussion that both government and non-government organizations have sought to ease the credit constraints for the urban poor.
Easing access to training and technology
Efforts to alleviate other constraints such as lack of access to training through formal institutions have been few and mostly through ad hoc projects. Some non-governmental organizations in Bangladesh have been trying to make skills accessible to underprivileged youth in urban areas by organizing training courses, paying due attention to their aspirations, constraints and capacity. Project based training in the informal sector generally emphasized training on-the-job. In some cases, mainly in Africa, they have sought to improve the existing informal apprenticeship system. In some cities in India quasi-governmental organizations have attempted to provide skills to youth in slums so that they can move into better jobs. Leaving aside these few efforts it would seem that there has been no systematic attempt to improve the skills of workers in the urban informal sector. Further skill upgrading through ad hoc projects invariably included an element of subsidy since the beneficiaries were rarely asked to pay for the training cost.
The situation regarding technology is no different. With the exception of a few cases such as Kumasi in Ghana virtually no attempt has been made to improve the technological capacity of the sector. In Kumasi, the University of Science and Technology has been assisting specific manufacturing and repair activities in the informal sector to develop prototype products, improve product quality, etc.(59) The other channel for upgrading technology in this sector has been through sub-contracting arrangements with formal sector firms.
Access to land and infrastructure
Turning to infrastructure, attempts have been made by some city governments to create market places by allocating land and by constructing low cost structures where traders might locate themselves. In some cities they have provided kiosks to informal trading and servicing units. In exceptional cases like Jakarta multi-storey buildings have been constructed to relocate street traders and thus provided them legal recognition and support and perhaps greater visibility. For informal manufacturing units industrial sheds have been constructed and made available on a rental basis in some countries. Only in a few cases such as Kumasi town in Ghana did the city plan provide land for selected informal sector activities and thus attempted to integrate it with the mainstream urban economy.
With regard to regulations very few attempts have been made to modify them and simplify their application to the informal sector. In Mexico a legislation known as the "Special Statute for the Promotion of Microenterprises" was passed in 1988. Similarly Brazil adopted a "Microenterprise Statute" in 1985.(60) Both these have been estimated to be effective and helpful even though the system of registration in Brazil remains rather cumbersome owing to bureaucratic requirements. In addition in Bolivia, Chile and Brazil tax reforms were simplified to facilitate the microenterprises. A similar attempt was made in the Philippines where a bill known as "Kalakalan 20" or the "Magnacarta for country side and Barangay enterprises" aimed at exempting the informal sector from certain regulations was prepared in the late 1980s but failed to receive adequate political support. In a few other cities informal sector projects have successfully persuaded the city governments to give legal recognition to workers in it (e.g., Rwanda).
Few interventions, if any, have focused on policy changes that would enhance the opportunities for participation by the microproducers. Certain countries no doubt explicitly stated their support for the informal sector in official documents such as national development plans. In a few cases the governments even created special units or agencies to oversee the policy implementation (e.g., following the publication of the Sessional Paper No. 1 in 1986 and 1992 the government of Kenya established a special unit within the government). Though the question of enhancing the demand for informal sector goods and services was addressed in one or two countries by changing the prevailing procurement practices of the government the emphasis has been by and large on easing the supply constraints. In most cases the changes were aimed at assuring the informal sector that they may continue their activities without being harassed by the police or local authorities which no doubt reduced the legal risk and uncertainty for many but contributed little to improving their incomes.
Building capacity among self-help organizations
One of the innovative approaches to raise the incomes of workers and to improve their conditions of work in this sector has been to strengthen the capacity of grassroot organizations to defend their interests. Non-governmental organizations have sometimes successfully provoked policy changes using this approach. For example during the 1970s a local NGO in Nagpur city in India successfully organized the rickshaw pullers, about 18000, into an union. Since one of the major reasons for their low incomes was that the vehicles were not owned but instead rented by them, and consequently they were obliged to pay a quarter of their daily earnings as rent, they were keen to obtain government support in obtaining ownership of the vehicle. The union was able to persuade the State government and change the law the Public Vehicle Act 1920 was amended in 1979 and it became illegal for anyone other than a genuine puller to own a rickshaw. The government even facilitated access to loans on concessionary terms so that they can acquire a vehicle. This experiment in Nagpur had a salutary effect elsewhere; the law was amended in Rajasthan state and similar initiatives had been launched in Tamilnadu, Haryana and Bihar states of India. Despite these significant achievements through group action the results were not entirely satisfactory since few pullers actually benefitted (see Box 2 above).(61)
In contrast to the above certain NGO interventions have been quite successful. For instance the Self Employed Women's Association (SEWA) and Working Women's Forum in India have successfully organized women in the urban informal sector and strengthened the capacity of grassroots organizations to deal with various problems such as access to resources and markets and regulations and thereby were able to improve their income and conditions of work. For example SEWA has assisted women garbage pickers in Ahmedabad city to obtain higher incomes through organizations of their own by increasing access to recyclable materials, by teaching them on recycling methods, by helping them to establish their own production and distribution network. Similar experiences can be found in other countries though the scale of operation may be smaller and the degree of success variable. The interesting and unique feature of these isolated efforts by NGOs is that they not only provided missing inputs such as credit, training and technical advice; more importantly they sought to create opportunities for participation and to insert the poor into mainstream development.
Have these interventions been effective in raising the incomes?
Though interventions in favour of the urban informal sector have been taking place only during the last two decades or so there is a considerable literature assessing their effectiveness.(62) It reflects the growing concern among the donor governments as well as multi-lateral agencies about the problem of urban poverty in developing countries and the effectiveness of solutions proposed thus far. Credit to microenterprises being the most widespread and popular form of intervention these studies have focused on this aspect. Most of them agree that interventions designed to ease access to credit have been by and large successful, particularly those based on Grameen Bank and other similar experiences since they have demonstrated that the poor are bankable and that they can be reached; and the financial mechanism can be self-sustaining notwithstanding the increased costs of administering very small loans.
Three points are worth noting. First, these targeted interventions appear to have contributed to increase in incomes. But one should guard against exaggerating the impact of credit interventions because the average size of loans has been quite small; additional income generated through loans may seem quite substantial when compared with initial incomes which are very low indeed. It is debatable however if this increase would enable the poor beneficiaries to pull themselves out of poverty. Second, since the borrowers are charged well above the commercial rate of interest clearly returns resulting from investment must be reasonably high high enough to cover the actual cost of borrowing. But the key question is whether subsequent rounds of credit to the same borrowers would find equally profitable investment opportunities. In other words is there a limit to the capacity of the poor to absorb credit? There is very little evidence on this issue. Other things equal, one would expect diminishing returns to investment. By alleviating constraints such as access to infrastructure, training and technology, and by removing restrictive regulations and policies discussed earlier one should expect improved investment opportunities; returns to investment would be higher and hence the capacity to absorb credit would be greater. In the absence of other complementary measures to ease these constraints, notably the absence of a supportive macroeconomic environment, credit could only play a limited role. As one study put it: "Credit and savings will only assist the clients served by allowing them a greater range of choices to survive in the informal sector based on their abilities and hard work. As such, this type of intervention should not be construed as a panacea for the poor."(63)Most of these credit interventions at the grassroots level ignored the macroeconomic environment; it was taken as given. Another weakness of these schemes for microenterprises has been their failure to distinguish between activities (or individuals) since the capacity to absorb credit and the rate of profitability vary. Third, the other concern expressed in the literature has been that even the best credit programmes are able to reach only a fraction the potential beneficiaries owing to institutional or other constraints. It has been expressed in this context that the institutional capacity should be expanded through for example by setting up "microenterprise" banks.
Training and other forms of assistance
Regarding interventions designed to ease access to other resources or markets there has been very little critical evaluation. There are no quantitative assessments of projects designed to improve skills and technology in the informal sector. But few projects aimed at these objectives as noted earlier. Since the beneficiaries were rarely asked to pay for these services it is not clear if the benefits generated were adequate to cover the cost. Further many of these projects had multiple interventions viz., provision of credit, upgrading skills and technology, etc., and consequently it is difficult to assess their individual effectiveness. In isolated cases where projects or government authorities have sought to make specific inputs or imported materials available to specific activities in the informal sector they seem to have been quite successful. In fact a survey of the literature suggests that projects adopting a minimalist approach viz., aimed at alleviating one or two specific constraints based on a limited coverage have been generally successful.(64)
With regard to the provision of infrastructure the main problem has been one of excess demand; the facilities created were insufficient to satisfy total demand and consequently they had to be rationed on the basis of certain criteria. In many cases the rental charged for the facilities automatically served as a screening device. Besides financial and space constraints which limit the number of facilities that can be created in a city, considerable excess demand, especially from petty traders, can be explained in terms of the legal recognition that accompanies the process. For instance a petty trader who gains access to such facilities immediately obtains legal recognition too. Where mini industrial sheds were attempted they seem to have had a very low rate of success either because they were too costly to rent or they were in inappropriate locations, usually far away from central markets. There have been instances where the microentrepreneurs deliberately avoided occupying the facilities because it implied immediate conversion into formal sector, drawing the attention of various regulatory authorities and hence the threat of additional cost burden. These lessons suggest, as in the case of credit, there are strong interdependencies between different types of interventions; success or failure of an intervention depends on what is being done to alleviate other constraints. It underlines the need to have an integrated approach to the informal sector promotion in which micro interventions are complemented by other macro interventions like improved policy and regulatory environment.
A number of lessons seem to have emerged from the experience during the last two decades. First, since most interventions were aimed at channeling resources through ad hoc projects designed to reach specific target groups such as women or youth (or other categories) in the informal sector which may be labeled as "supply driven" they tended to be costly and time consuming. In Kigali for example the average project cost was estimated at $455 per artisan and it covered about 1000 artisans during 1982-85 period; incomes of those assisted with credit were estimated to have risen by 54 per cent and for those who did not receive credit, it was 35 per cent. These increases in income were estimated at 53 per cent of the project cost.(65) Evaluation of projects in Latin American cities also suggest that incomes of those in the informal sector increased and the cost of creating an additional job may have been in the neighbourhood of $1000. In Honduras income increase was estimated at 27 per cent in Tegucigalpa and at 60 per cent in Choluteca, a secondary city.(66) The experience of Carvajal Foundation's programme for the development of small enterprises in Cali (Colombia) suggested that the average real monthly income of families borrowing increased by 13 per cent over a period of three years. And the average number of jobs per microenterprise increased from 3.8 to 5.1 between September 1982 and September 1983.(67)
These figures are only illustrative since there are formidable problems in measuring the costs and benefits of similar interventions. For instance if one includes indirect benefits in addition to private benefits accruing to the beneficiaries these interventions look more attractive. Benefits resulting from such interventions seem to be very sensitive to the type of activities supported presumably because the policy and regulatory environment affected them differently. In Honduras, for example, microproducers in carpentry increased their sales by 49 per cent compared with 28 per cent and 27 per cent in food processing and tailoring respectively. In other words it is difficult to generalize, based on the current experience, whether such interventions will result in an increase in income across the board, and to the same extent, in various types of informal sector activities. This is understandable because not only the initial endowment of microproducers vary; but also the regulatory and policy constraints vary between activities. The credit interventions also showed that what mattered most was how easily credit is accessible and not the rate of interest charged on loans.
Second, these interventions also raise questions about sustainability. Provision of credit and other forms of assistance imply that the beneficiaries must not only repay the loans with interest (to cover the cost of funds) but also other operating costs such as the establishment and operation of support institutions or organizations, be it governmental or non-governmental. Though some of the credit programmes discussed earlier demonstrated the feasibility of full cost recovery, based on data from 19 programmes in seven countries Accion International/AITEC, an NGO, estimated that "on the average these programs cover close to 50 per cent of their operating costs, after two years of operation."(68) In many cases where ad hoc projects are used as a vehicle for extending various forms of assistance (e.g., training, technology, marketing, etc.) this question is important since they are funded only for a limited period; will the benefits continue to flow even after they cease to exist? More importantly it would be difficult for governments of developing countries to sustain such interventions if they are not able to recover the costs fully, particularly when many of them are under pressure to cut public expenditures.
Third, there may be problems relating to replicability. The AITEC study in Latin America noted that the major bottleneck in replication may not be funding but "the capacity of local institutions to expand their programs." The latter implies capacity to manage, train its staff, conceptualize the issues and solutions clearly as well as its ability to operate in a decentralized manner.(69) This explains why most of the interventions around the world have been able to reach only a tiny fraction of the informal sector - usually accounting for a few thousands but under 10,000, of microproducers.
Fourth, these interventions have been less than comprehensive in terms of coverage, mainly due to the limited availability of funds and institutional capacity. They reached specific groups or activities only, and often pursued varied objectives. (For example the Working Women's Forum in India aimed at empowering the poor women and giving them the self-respect and confidence.)
Fifth, many of these interventions stressed equity rather than productivity increase as their objective; credit interventions were often seen as a means of empowerment of the poor. Few recognized the production potential or the need to raise productivity of workers in this sector on a sustained basis.
Sixth, though some of the interventions, notably by NGOs, sought to consult with the beneficiaries and offered them a tailor made programme of assistance respecting their needs and priorities, the same can not be said for many government sponsored programmes that failed to consult with the beneficiaries.( e.g., training courses may be offered by government institutions which may not meet the aspirations of the potential beneficiaries). In other words they were not demand driven.
Seventh, these interventions paid little attention to the factors which govern profitability. By focusing exclusively on supply constraints they tended to ignore the macroeconomic policy and regulatory environment or the physical infrastructural facilities which are so necessary to ensure a good return on investment (see discussion above).
By focusing on supply constraints at the enterprise level they may have given the misleading impression to the donors and governments that by designing and implementing a credit programme providing a few hundred dollars (or for that matter assistance in the field of training or technology) to the microproducers, poverty can be banished and growth promoted. Or it may be that these interventions were never intended to be anything more than palliatives, their main concern being "alleviation" of poverty in the short run. It is evident from the discussion earlier that if the goal of interventions is to eliminate poverty by raising the productivity of the poor on a permanent basis then they must go beyond easing specific supply constraints at the enterprise level to include measures to improve the environment in which the microenterprises function.(70)
The evidence also suggests that in dealing with the problems facing the urban informal sector not only the national but also the regional/local governments are involved. Generally speaking the national governments have emphasized employment and poverty issues in their action while the local governments (at the city level) have stressed the urban physical environment. The latter plays an important role in enforcing various regulations on the informal sector. But there is hardly any coordination between the different levels of government. Often there are overlapping responsibilities between them. Though the local governments have to deal with the sector on a day to day basis they rarely command the resources they need, partly because they lack the necessary political authority. These issues, mostly pertaining to the question of urban governance, suggest that there are indeed formidable obstacles to informal sector development in developing countries.
A key characteristic of the urban informal sector is that its participants endeavour to improve their incomes by interacting with the markets directly viz., acquiring the inputs they need, transforming them into final product and disposing them off in the market - all on their own effort. They identify the income opportunities, though the process of identification may have certain shortcomings (e.g., they rely on their own network such as neighbours, ethnic groups, migrants from the same village, etc., for information). They venture into business knowing full well their own capacity limitations. They do everything possible that is within their power to overcome the internal constraints be it acquisition of capital, skills, premises, knowhow or information about markets and opportunities. But there is little they can do to overcome external constraints i.e., factors which are beyond their control. Through collective action they may be able to influence the "environment" in which they operate.
The process of employment and income generation in this sector is far from optimal and could be made more efficient. There are also significant inequities arising out of various forms of discrimination. A strategy to develop this sector should therefore promote both efficiency and equity. A central element of such a strategy would seem to be the creation of a more positive and friendly environment so that the microenterprises would find it easier to acquire the necessary resources, and to exploit the opportunities that become available. It should also ensure that the incentive structures are not distorted so that the growth potential of the sector is not wasted. No doubt the potential for growth varies between different units in the sector depending on a number of factors noted earlier.
Past and current interventions are based on the correct diagnosis that those in the informal sector, especially the poor, lacked access to resources, notably credit. They therefore sought to improve their access. Besides this concern for allocative efficiency it was also guided by the general belief that such measures would result in "empowerment" of the poor since it could enable them to acquire productive assets viz., enhance their capacity to generate income. Provision of credit and training are expected to result in greater physical and human capital. These efforts can therefore be interpreted as a move in the direction of equity objective.
Current strategies to assist the informal sector: A critique
Missing link between micro and macro levels
These interventions ignored, or at least failed to emphasize, the link between micro level projects and macroeconomic policy, regulatory and institutional environment. They failed to emphasize (or recognize) that the assets created at the micro enterprise level would yield higher incomes only if the macroeconomic environment in which it functions is appropriate. There are at least three factors that deserve the attention of policy makers: (a) policy, regulatory and institutional environment; (b) nature and extent of linkages between the formal and the informal sectors; and (c) macroeconomic performance of the country in question. If the policy, regulatory and institutional environment is unfavourable to this sector as has been argued in this paper it would inevitably have a dampening effect on the returns to investment. Returns may be so low that the poor may not even have an incentive to acquire the assets. For example if the very existence of the microenterprises is under threat why should they bother to invest and expand? This does not mean that they do not benefit from credit or other similar assistance; in fact credit does help to alleviate working capital constraints. Likewise the returns to investment in the informal sector - be it vending, transport