Martha Chen on the Informal Economy

Interviewed by Molly Lanzarotta on June 17, 2008

The term “informal economy” describes the large share of economic activities, units, and workers globally that remain outside the world of regulated economic activities and protected employment relationships. Martha Chen, lecturer in public policy and a faculty affiliate of the Hauser Centerfor Nonprofit Organizations, Carr Centerfor Human Rights Policy, and the Women and Public Policy Program, studies the informal economy and specializes in the areas of gender, poverty, and employment. She is coordinator of the global research policy network Women in Informal Employment: Globalizing and Organizing (WIEGO).

Q. Who are the workers in the informal economy?

Chen:The informal economy is comprised of the self-employed in small, unregistered enterprises, and wage workers who have unprotected jobs. There is a small, entrepreneurial class in the informal economy as well as a very broad base of the working poor. In urban areas, the working poor include street vendors, waste pickers, informal transport providers, construction workers, and people who work in sweatshops or from their homes. In rural areas, the working poor in the informal economy include very small farmers, agricultural day laborers, artisans, people who rear livestock or poultry, fisher folk, and forest gatherers.

Q. You have described economic conditions in a globalized economy that can create a “race to the bottom” for those in search of cheap labor. Are workers in the informal economy particularly vulnerable in a globalized labor market?

Chen:Globalization is associated with outsourced production through very long subcontracting chains, and the informal wage workers at the bottom of those chains are paid very low wages. They also receive few if any benefits and are not assured steady work. This includes people who work in small workshops or from their homes producing a range of consumer goods such as garments, shoes, soccer balls, and electronic goods. They also produce automobile and even airplane parts. This also includes seasonal and day laborers working on large commercial farms who pick flowers and fruit for export. However, there are also people who are very small producers trying to compete in global markets. They grow cocoa, coffee, cereals, and other commodities and they find it very hard to compete, especially for fair prices, in global markets.

Q. Your research has informed your work with the research network WIEGO. Describe WIEGO’s goals and impact on policy.

Chen:WIEGO [Women in Informal Employment: Globalizing and Organizing] is a global research policy network. We seek to improve the status of the working poor, especially women in this informal economy by raising their visibility in official statistics, mainstream research, and policy planning.

We do so by trying to improve statistics, research, and policy analysis on the informal economy. We work closely with international development agencies as well as researchers and data analysts in a range of countries. I can safely say that we have helped expand the official international definition of the informal economy to include informal wage workers in unprotected jobs, not just the informal self-employed in informal enterprises. We have been able to compile national statistics in a number of countries on informal employment so defined. We have also developed and added a new background indicator on the structure of employment by sex for the Millennium Development Goal 3. We have developed and tested a multi-segmented model of the informal economy that illustrates that there are different causes and consequences of working in different segments of the informal economy. We have also been able to promote fair and inclusive approaches to global trade, social protection, and urban policies for the informal workforce.

Q. In developing countries there is often a concern that promoting workers’ rights will make a country a less competitive destination for global capital and foreign investment. How do you respond to these concerns?

Chen:I agree that globalization and local competition create disincentives for national governments to offer the range of protections that they might have offered in the past in the interest of attracting foreign investment. I would also say that it, therefore, becomes very important to promote regional and international initiatives to try to overcome these disincentives that national governments face. Kennedy School Professor John Ruggie has been an architect of one such effort, the [United Nation’s] Global Compact. The Realizing Rights Global Equity Initiative of [former President of Ireland] Mary Robinson, who spoke at the Kennedy School recently, is also one of these global initiatives.

Q: There are many industrialized or developed countries where the informal economy is actually larger than the formal economy. Is there a tipping point where the informal economy becomes the overwhelming driving influence over the economic activities of a country and determines its viability on a global scale?

Chen:The informal economy is the dominant share of employment certainly in most developing countries. It is anywhere from 60-90% of total employment. It is not, however, often the dominant share of GDP or production. So there’s a worry that the informal economy needs to become more productive. What I would say in terms of those who model what the economy should look like into the future is that I cannot envision an economy in countries like India – or even China or Ghana –where 90% of the workforce is informal that suddenly or even in the long term are going to become predominately formal. I think we have to accept that economies of the developing world, particularly, are hybrid. We need to come up with models that allow the street trader to coexist along with retail shops and along with the large malls. But our models are tending towards encouraging the large retail and the malls and eliminating the street trader and I just don’t think that this is tenable for these countries.

Q. Is there anything else you’d like to add?

Chen: I think it is important that our economic models and our economic policies take into account the informal economy. One of our concerns is that the informal economy is not visible to the official planners or they choose to turn a blind eye to it. We seek, therefore, to increase the visibility of these kinds of workers - what they produce, how much they contribute to GDP - in official statistics so that the policy makers will take them into account when making their policies. This is why one of the major goals of the WIEGO network is to improve statistics on the informal economy as a key strategy for mainstreaming the informal economy into economic theory and policy.

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