Formal provision of products and services such as housing, healthcare, education, transport and food increasingly coexists with informal and unregulated systems, especially in the rapidly growing cities of the Global South.
These informal systems typically arise when exclusionary policies, a lack of investment, or poor infrastructure make it difficult for certain groups to access formal ones. Both systems are delicately interwoven: people living in informal settlements often work in the formal economy, and vice versa; they also tend to engage with both formal and informal systems on a daily basis.
People’s reliance on informal systems may lessen as cities develop; but rapid urbanisation can also overwhelm a city’s planning capacity. The informal world may therefore be a significant provider of products and services for many decades. In some cities it could even become a permanent feature of urban life.
The internet is also acting a platform for increased sharing and collaboration, which could foster more reliance on informal systems – even in the Global North, where the rise of the ‘sharing economy’ could be framed as a shift in this direction.
- The informal economy is estimated to account for as much as 40% of GDP in cities of the Global South, while informal transport provides mobility for more than 60% of the populace. 1 The share of non-agricultural informal employment varies from 30.6% in Turkey and 32.7% in South Africa to 72.5% in Indonesia and 83.6% in India. 2
- The number of people living in informal settlements has increased due to accelerating urbanisation. About 33% of the developing world’s urban population (863 million) lived in slums in 2012, compared to 12.5% (760 million) in 2000 and 12.3% (650 million) in 1990. 3
- The informal sector is by no means limited to developing countries. However, in most OECD member countries currently it mainly consists of small-scale activities and marginal employment, and therefore has relatively little impact on overall society. In many transition and developing countries, however, the informal economy has become a major feature of life. 4
- The informal economy is also a creative and entrepreneurial economy. Innovation models that have arisen from informality include Jugaad in India and Shanzhai in southern China. Shanzhai, which refers to the rapid prototyping often used to produce knock-off brands and goods, accounted for 150 million, or one tenth, of the 1.15 billion cell phones sold worldwide in 2007. By 2010, this figure had risen to 200 million phones sold annually, or a quarter of the global mobile phone market. 5
- Over the last decade the sharing economy has grown from deals between friends and family to a pool of global businesses, which are increasingly valued in the billion dollar range. PricewaterhouseCoopers estimates that the US$15 billion of global revenues in the five most prominent sharing economy sectors – peer-to-peer (P2P) finance, online staffing, P2P accommodation, car sharing and music/video streaming – could rise to well over $300 billion by 2025. 6
- 1. OECD statistics (last updated in 2014).
- 2. International Labour Organization (2013, based on most updated statistics from 2009-2010). Women and Men in the Informal Economy: A Statistical Picture, Geneva.
- 3. UNHABITAT (2013). “State of the World's Cities Report 2012/2013: Prosperity of Cities".
- 4. International Labour Organization (2014, May).Global Employment Trends: Facts and figures.
- 5. World Economic Forum Blog (2014, Oct). How to benefit from China’s innovation boom.
- 6. PricewaterhouseCoopers (2014, Aug). Five key sharing economy sectors could generate £9 billion of UK revenues by 2025
- Informal, low-quality jobs are sometimes the only form of work women, migrants and other vulnerable groups can access. 1 At best, the informal world is treated with benign neglect by formal institutions, employers and policy makers; at worst, the relationship between the two systems is marked by open hostility and violence. 2 In general, wage protection laws rarely cover informal workers, and they often lack social benefits such as pensions, sick pay and health insurance. 3 However, informal systems can also be a rich source of community resilience and entrepreneurial energy. 4 Acknowledging that informal systems exist, and working with them, can even form the basis of sustainable urban development policies. For governments, this might mean bringing people from informal sectors into the decision-making process – particularly with regards to the planning and provision of services. While for business, informal systems can be a great source of ideas and markets, as long as this is achieved sustainably.
- Informal businesses often share market space with formal corporate businesses, and may even pose a challenge to them. They are typically embedded within the local culture, and can therefore make decisions and react to changing market conditions with great speed; this in turn gives them a head start when it comes to introducing innovative products or business models that better suit the needs of local users. Nevertheless, big businesses can turn the apparent threat from informal businesses into an opportunity by becoming more adaptive, harnessing the elasticity of informal enterprises and finding ways to learn from, enable and share value with them.