Informal Economy - Expansion

Expansion

The informal sector has been expanding as more economies have started to liberalize. This pattern of expansion began in the 1960s when a lot of developing countries didn’t create enough formal jobs in their economic development plans, which lead to the formation of an informal sector that didn’t solely include marginal work and actually contained profitable opportunities. In the 1980s, the sector grew alongside formal industrial sectors. In the 1990s, an increase in global communication and competition lead to a restructuring of production and distribution, often relying more heavily on the informal sector. Over the past decade, the informal economy is said to account for more than half of the newly created jobs in Latin America. In Africa it accounts for around eighty percent. Many explanations exist as to why the informal sector has been expanding in the developing world throughout the past few decades. It is possible that the kind of development that has been occurring has failed to support the increased labor force in a formal manner. Expansion can also be explained by the increased subcontracting due to globalization and economic liberalization. Finally, employers could be turning toward the informal sector to lower costs and cope with increased competition.

According to SIDA, the key drivers for the growth of the informal economy in the twenty-first century include:

• limited absorption of labour, particularly in countries with high rates of population or urbanisation;
• excessive cost and regulatory barriers of entry into the formal economy, often motivated by corruption;
• weak institutions, limiting education and training opportunities as well as infrastructure development;
• increasing demand for low-cost goods and services;
• migration motivated by economic hardship and poverty; and
• difficulties faced by women in gaining formal employment