15 Urbanization and the informal economy

Ashima Sood

I.            Introduction

The bewildering variety of “higglers”, vendors, hawkers, waste pickers and rickshaw pullers on city streets and bazaars would appear to be an immemorial feature of urban landscapes in the global South. Yet into the 1970s, policymakers had no term for this group of workers and little comprehension of their unique contributions or tribulations. Policy recognition of the “informal sector” has often been halting and achieved through sustained advocacy by unions, associations and workers’ groups.

This module traces the conceptual evolution of the “informal” as a category of urban livelihoods, both internationally and in India, and relates it to alternative lenses on informality in habitat and as mode of urbanization. These latter perspectives are examined in greater detail in Module 4.2 and 4.3. This module asks: what is the genesis of the idea of the informal sector? How can it be defined and measured? What processes encourage its rise and what are its spatial ramifications? Examining alternative frameworks that seek to explain the informal economy – the dualist, the legalist and the structuralist – this module highlights the salience of processes of informalisation in the Indian context. It places these trends against the larger backdrop of labour history in India, and the longstanding role of labour contractors – jobbers, sardars and the like (Roy 2008, Chandavarkar 2002).

To understand why the informal economy is so central to Indian urbanization, consider that even in 2010, nearly four-fifths of urban employment was informal. Overtime, India’s workforce has been becoming more rather than less informal. An analysis of three rounds of the National Sample Survey in 1999-2000, 2004-05 and 2009-10 data by the economists Martha Chen and G Raveendran (2012) showed that “just under 80 per cent of all urban workers (79% of men and 81% of women) were informally employed” (Chen and Raveendran 2012, p 5). This category included “a) informal wage employment and self- employment in informal enterprises (i.e. unincorporated and unregistered or small enterprises) and b) informal wage employment for formal enterprises and households” (Chen and Raveendran 2012, p 4), according to the internationally accepted definition (see also Sood 2013). Furthermore, Chen and Raveendran (2012) showed that in 2009-10, over 40% of the urban workforce was self-employed (p 8), and even of the wage workers, 67% or two-thirds were informal. Street vendors comprised about 11% of total urban employment in 2009-10 (Chen and Raveendran 2012, p 20).

It is evident that informal employment cannot be ignored in any examination of Indian cities and their economies. The next section sketches out the evolution of the concept from its origins in the 1970s.

Recognizing the Informal

The genesis of the term informal sector can be traced to the ascendance of economic development as a national and international policy priority and the emergence of an international development policy architecture anchored in the United Nations and organizations such as the International Labour Organization (ILO) (Bangasser 2000). To understand why informal forms of work and self-employment took so long to come to the attention of policymakers, it is important to return to the most influential economic development paradigms of this era after World War II and before 1970s.

Structural Transformation and Urbanization

In classic models of economic development, such as those outlined by the noted economist W Arthus Lewis, urbanization is linked to structural transformation, ie, a decline in the economic importance — employment and output — of agriculture, fishing, mining and other primary sector activities and a corresponding increase in employment and output contributions of manufacturing, trade and services activities. The “traditional” sector – ie, the rural or primary sector – was believed to harbour unlimited reserves of underemployed workers. This workforce could be induced to migrate to the modern sector located in urban centre with the promise of a higher wage. In essence, such “dualistic” models predicted the absorption of large numbers of rural migrants into high paying “modern” sector jobs.

However, by the mid-1960s, high levels of unemployment and underemployment were all too visible in third world cities. Contrary to the predictions of the Lewis model and others, analyses of employment data in developing countries showed that “there were many fewer ‘modern’ jobs than there were people wanting to fill them” (Bangasser 2000: 4). Economists such as Hans Singer argued the dualism in labour markets – ie, structural differentials in wages across the modern and traditional sectors – showed characteristics of persistence, with high levels of “casual and intermittent employment, as well as disguised or open unemployment” (Chen 2012, p 2).

It was in response to these empirical anomalies that the ILO’s World Employment Program (WEP) came about. Of the many WEP country missions, the 1972 Kenya country mission of the WEP was the one to give recognition to the “informal sector”. The credit for coining the term “informal”, however, goes to the anthropologist Keith Hart, who offered an extensive analysis of “informal income opportunities”, both legitimate and illegitimate among migrant groups in northern Ghana (1971, p 69).

However, while Hart largely equated informality with self-employment, the WEP suggested a bigger set of features to define informal sector activity: small scale of enterprise; self-employment, and/or family ownership; reliance on indigenous resources; labour intensive activity; low capital requirements; labour-intensive technology; low skills; ease of entry into the activity, operation in unregulated, competitive markets, among others (Bangasser 2000: 10).

II.            Perspectives on the Informal Sector

Though this definition captured many aspects of the observed reality, “the informal sector universe remains vague because of multiple criteria: each criterion can be used to define a universe of its own. Consequently one is not certain about the universe to which the term. . . refers” (Sethuraman 1981, p 16). The definitional ambiguity also limited attempts to estimate the size and extent of the informal sector.

Broader conceptualizations of the informal sector, beyond those offered by the ILO WEP, have also been proposed in the literature. For instance, in discussing the contrasting roles of the informal sector in East Asian and Latin American development, Gereffi and Cheng (1992) offer three independent characterizations of the informal sector (see Sood 2008). These include:

Ø  Social marginality: labour dislocation and concentration in service sector activities defines the economic nature of informality.

Ø  Lack of state regulation. The genesis of the informal sector lies in the strategies adopted by employers to avoid state regulation of the labor process.

Ø  Small firms. Both social marginality and absence of state regulation are conditions that more often prevail in smaller establishments.

Other frameworks have also emerged to explain the informal sector. Chen (2012) lists the following as a few of the schools of thought on the informal sector, among others:

•  Structuralists such as Manuel Castells believe that microenterprises serve to reduce input and labour costs and increase competitiveness in their role as a sectoral ancillary to large formal firms.
•  Legalists such as De Soto see informality as a question of lack of property rights for microentrepreneurs, as also a positive way to reduce the costs of regulation.
• Dualists, such as Hart and Sethuraman, started with a view of the informal sector as essentially “marginal”, though unlike the economic paradigm on dualism proposed by La Porta and Shleifer, discussed above, they value itscontribution to the social safety net.

Each of these schools ascribe different causality to the rise of the informal sector, and theorize its linkages to the formal sector differently. Most importantly, they each lead to different policy prescriptions for the future of the informal sector. To understand the implications of these differences, consider for instance the evolution of the dualist perspective. While both Hart and the Kenya Mission saw the informal sector as less a problem in itself and more a solution to issues of employment and productivity (Chen 2012), over the years, however, the perspective has shifted quite dramatically. As Sood (2012) notes, the influential “‘Walmart’ theory of economic development” has come to associate high productivity with formal firms and in particular with large formal firms. This dualist paradigm, empirically upheld by economists such as La Porta and Shleifer, suggests that the “informal (or “unofficial”) economy “with its millions of entrepreneurs” has little to contribute to modern economies (2008: 347) and can be expected to “disappear” over time” (p 96).

Moreover, even this diversity of frameworks fails to encompass the complexity of the informal sector (Chen 2012). Any single perspective is inadequate in its description and policy prescriptions for the informal sector. The next sub-section focuses on Hernando de Soto’s legalist perspective, and shows why this is the case.

Tenure and Informal Sector

The work of the Peruvian entrepreneur Hernando de Soto offers a highly controversial yet influential approach to understanding informality. In books such as The Mystery of Capital and The Other Path, de Soto has offered a legalist and quintessentially neoliberal policy diagnosis and prescription for the problem of informality in developing economies: “formalized” property rights (de Soto 1993, p 3), “embodied in universally obtainable, standardized instruments of exchange that are registered in a central system governed by legal rules”.

What makes property rights or tenure, the system of ownership rights, so important? Consider the case of a street vendor who has been setting up a stall selling hosiery (or fruits) at the same location at a busy bazaar intersection for many years. Though she has certain customary and informal claims over the plot, relative to other street vendors vying over the same location, these claims are not legally recognized. Such a street vendor in fact would likely face constant harassment and threats of eviction from municipal authorities and police. As her rights over the plot are not secure, she cannot invest in a more profitable permanent structure. Nor can she raise capital or obtain credit with the plot as collateral. And should she wish to pursue a different trade in a different city, she cannot sell or monetize her rights over the plot. In all these ways and more, “informal” property right become a barrier to efficient market exchange and the growth of the street vendors’ enterprise (and thereby, of the economy as a whole).

De Soto’s analysis has not focused specifically on urban livelihoods, but he underlines the urgency of reform with reference to the explosion of slums and favelas in the cities of the global South. One policy recommendation emerging this understanding is individual title deeds in recognition of such informal claims be provided (de Soto 2000).

An important contribution of de Soto’s framework lies in its ability to cut through the definitional ambiguities surrounding the idea of the “informal” that we discussed in the previous section. By basing the conceptualization of formal/informal solely on property rights, de Soto avoids the issue of multiple criteria highlighted by Sethuraman (1981).

Yet, while the power and appeal of de Soto’s ideas should be evident, they rest on value assumptions that have come under sustained critique. Examining the claims advanced by de Soto, on the basis of empirical evidence from another South American city, Bogota in Colombia, Gilbert (2002) questioned many of the benefits of such legalization. In Bogota, and elsewhere, formal land markets worked effectively even without formal property rights. Moreover, investment in housing improvement by the poor remained independent of the formal legal status of the land. A key finding was that “possession of a legal title [made] little or no difference to the availability of formal finance” (p 14).

In the Indian context, scholars such as Ananya Roy (2005) have delivered a far more scathing assessment of the de Soto approach. Roy (2005) argues against the neoliberal “self-help” underpinnings of legalization as a panacea. But her contention goes deeper: in her view, “state power is reproduced through the capacity to construct and reconstruct categories of legitimacy and illegitimacy” (p 149), or in other words, to demarcate the boundaries of the formal and informal. In this case, “legalization of informal property systems is not simply a bureaucratic or technical problem but rather a complex political struggle” (p 150).

Similarly, the work of Benjamin and Raman (2001) does not directly address de Soto’s analysis but by highlighting the remarkable density and diversity of tenure arrangements on the ground in Bangalore – ranging from “outright sale”, “partnership deals between plot owners and entrepreneurs” to types of leasing, among many others (p 61), it challenges simplistic promotion of “homogenised tenure” because of its role in “effectively excluding poor groups” (p 24). Benjamin’s theorization of “occupancy urbanism” is examined in greater detail in Module 4.3.

Statistical Definitions

It may be useful at this point to turn from conceptual approaches to ask: how is the informal sector defined for purposes of identifying and measuring it? The revised statistical definition adopted internationally by the International Conference of Labour Statisticians (ICLS) in 2003 used an expanded understanding of “informal employment”. This included both self-employment and wage employment that does not receive legal and social protection. Chen (2012) enumerates the following elements as part of “informal employment” (p 8):

§  Informal self-employment including:

• employers in informal enterprises

• own account workers in informal enterprises

• contributing family workers (in informal and formal enterprises)

• members of informal producers’ cooperatives (where these exist)

§  Informal wage employment: employees hired without social protection contributions by formal or informal enterprises or as paid domestic workers by households. Certain types of wage work are more likely than others to be informal. These include:

• employees of informal enterprises

• casual or day labourers

• temporary or part-time workers

• paid domestic workers

• contract workers

• unregistered or undeclared workers

• industrial outworkers (also called homeworkers)

The informal economy is then a broad concept that goes beyond both the “informal sector” and “informal employment” to include all such enterprises, workers and activities (Chen 2012).

III.            Informal Economy in India

After looking at some of the conceptual and statistical approaches to the informal economy, this section turns to the Indian experience, and attempts a more historical – empirical understanding of the informal sector.

In India, the informal sector has been known by several names, but a commonly used term has been the “unorganized sector”. In 2004, the central government set up the National Commission for Enterprises in the Unorganized Sector (NCEUS) with a broad mandate to recognize and support workers in the unorganized sector. Extending social protections to unorganized workers was central to the mission of the NCEUS (Kannan and Papola 2007).

For purposes of the Indian data, the NCEUS modified and tailored the internationally accepted ICLS definitions of the informal sector and informal employment. It defined the informal or unorganized sector thus: “The unorganized sector consists of all unincorporated private enterprises owned by individuals or households engaged in the sale and production of goods and services operated on a proprietary or partnership basis and with less than 10 total workers” (Kannan and Papola 2007, p 323).

As far as informal or unorganized employment was concerned, ““Unorganized workers consist of those working in the unorganized enterprises or households, excluding regular workers with social security benefits, and workers in the formal sector without any employment/ social security benefits provided by the employers” ( p 323)

A few features of these definitions are interesting to note. First, the NCEUS only partially incorporated the terminology of “informal” in its work. Second, the NCEUS definition of the unorganized sector did not distinguish between agriculture and non-agriculture, rural or urban. Thus, this was one of the broadest definitions ever adopted and the NCEUS estimated that in 2004-05, informal workers were an overwhelming 92% of India’s workforce. Taking the sector approach, workers in the informal sector comprised 55% of the non-agricultural and 86% of the total workforce (p 324).

Third, the centrality of the social protection perspective to the work of the NCEUS is evident in its definition. Kannan and Papola (2007, p 325) highlighted NCEUS findings showing the “high congruence between the proportion of workers in the unorganized sector and this general state of poverty and economic vulnerability: 79 per cent of informal workers were found to be among those living on less than US$2 per day”. The latter is an internationally accepted poverty line.

Further, the NCEUS also found that 57% of urban informal wage workers “received wages below the nationally recommended minimum” (p 325). Kannan and Papola (2007) also reported the unsanitary working conditions, long hours and exploitative relationships that characterized the informal economy. Moreover, only 6% of informal workers had any kind of government-provided social security.

The NCEUS’ policy recommendations reinforced the need to expand the social security net as well as stricter enforcement of labour regulations. Yet, the question remains: what explains the poor quality of labour protections even for those in wage employment? Here, the idea of “informalization”, which parallels the approach of the structuralist school discussed by Chen (2012) becomes relevant.

Informalization

Authors such as Breman (1994, 2001) have argued powerfully against the dualist paradigm of the informal economy. Focusing at the repercussions from the 1991 textile mill closures in Ahmedabad, Breman (2001) challenged the notion that workers preferred self-employment in the informal sector. Instead, he argued that the workers who lost jobs in the mills were forced into informal employment in the absence of good opportunities for formal employment.

The growth of such informal employment as a share of the total workforce or “informalization” was also analysed by Unni (2001), who traces two major pathways for the shift. First, the spatial setting of work has been transformed by sub-contracting: workers move from factories where they had some degree of labour protection to small workshops and homes. Home-based workers are in fact a substantial part of the urban informal economy. There is a second dimension of informal employment in formal enterprises: even those workers who stay in factories face casualization, ie, looser contracts and fewer protections.

Breman’s (2001) study of Ahmedabad highlighted how these processes work. He noted that mill owners had reduced the size of the permanently employed workforce even in the 1980s, by not replacing retired workers or replacing them with workers on more casual contracts. In other cases, work was contracted out to informal jobbers.

As Unni (2001) noted, such informalization has a clear gender dimension, with women being less represented in the formal sector and dominant among home workers. Breman (2001) highlighted how caste and communal networks determined the probability of obtaining high quality employment, as evidenced by the increasing exclusion of Muslim workers from formal jobs in Ahmedabad mills.

Gooptu’s study (2007) of the declining jute mills in Kolkata in 2000-05 showed how increasing casualization and precariousness of work in these factories was accompanied by overcrowding in the petty trade and services sectors, and small manufacturing, the archetypal informal sector, as workers sought alternative livelihood niches. While Unni (2001) and Breman (2001) focused on contemporary transformations, providing a historic perspective, Harriss-White and Gooptu (2009) asserted that from the time of Independence and before, formal employers in the capitalist sector were able to avoid strict enforcement of labour laws, partly through implicit sanction from state actors. Moreover, as the Ahmedabad case also showed, “the state acted in the interests of capital whenever organized labour sought their enforcement. Employers’ responses to radical trade unionism ensured informalization through subcontracting, putting out and casualization in ‘organized’ firms” (p 90).

   Thus, a focus on the processes that foster the rise of the informal sector through the structuralist lens of informalization brings to the forefront questions of political economy – the  relative power of capital and labour in shaping outcomes for workers. The informal economy then can be seen as a side effect of decisions made by large capital.

In fact, some of these processes have counterparts in labour history, in the role played by jobbers, sardars, kanganies and maistries of early industrial India (Roy 2008, Chandavarkar 2002, Mishra 2015, Sen 2002). As Chandavarkar (1981,

608)  notes, in Mumbai’s textile industry, “the jobber… straddled the boundaries between workplace and neighbourhood”. His functions included not only shop-floor discipline but also the power to hire and fire. In a context where daily employment was a significant component of the workforce, the jobber served as the enforcer of a regime of casualization. Further, through his influence in the chawls and on his recruitment strategies, the jobber also worked to undermine the possibility of collective action by workers.

It is evident that the looming presence of labour intermediaries in Indian industry has helped undercut labour protections, and foster casualization, much like the contemporary migrant contractors discussed in Module 2.2.

Slum economies?

So far we have discussed the informal sector in a framework largely divorced from its spatial context. If spatial agglomeration is at the heart of urbanization, (Module 1. 6) how can we locate the informal sector within the city?

Indeed informal economies, livelihoods and labour markets are deeply interconnected with questions of informal shelter and habitat discussed in Module 4.2. Breman’s (2001) account from Ahmedabad reveals how processes of informalization have shaped the “spatial contours” of the city over the last four decades (p 4808). For one, the central parts of city, which housed the mills, were increasingly dilapidated and abandoned as the locus of economic activity in the city shifted elsewhere. This process also consolidated the social segregation of Muslim communities (See also Module 3.6).

The economic transformation of the city thus shifted its spatial axis. Petrochemicals companies, cement manufacturers, textile powerlooms and diamond processors set up in industrial areas outside the eastern boundaries of the city. Their workers, often rural migrants, came to be housed in informal settlements in this part of the city. On the other hand, the expansion of the services sector on the western banks of the Sabarmati generated new forms of informal employment – “regular or ambulant domestic servants, street vendors, repair and odd- job men, cleaners, day or night guards” (p 4808) – in the apartment complexes, trading and IT companies and shopping malls that came up in this part of the city.

Other manifestations of the economy-settlements linkage become visible in studies of slum economies (Module 4.2). The many studies of Dharavi, Mumbai’s emblematic basti, show how caste networks have shaped its economy and fostered the rise of a vibrant and largely informal leather goods sector. Leather work has traditionally been associated with Dalit communities; in Dharavi, the Tamil Adidravidas were the first to set up tanneries. Other caste groups included the Marathi Chambhars, cobblers by occupation and the Dhor tanners (Saglio-Yatzimirsky 2013), in addition to Muslim communities.

According to Saglio-Yatzimirsky (2013), although all the leather workshops in Dharavi continue to remain small-scale and informal, they in fact work as sub-contractors for formal companies. Thus, Dharavi’s workshops pass on the cost savings they generate from avoiding labour protections on to these organized sector outlets. These contracts remain informal and verbal, with little legal backing; they attenuate the bargaining power of leather artisans. When prices fall, other workers are available and willing to work at lower prices.

Saglio-Yatzimirsky (2013) argues that Dharavi represents a “globalised informal sector”, with a significant proportion of its output going to exports ( p 208).. Although casualization hits workers hard, it provides production flexibility to leather products traders and companies. For the worker, it trades off unemployment or underemployment for under- and uncertain payment (p 212). Once again, a structuralist analysis that recognizes the cost-saving and labour-regulation evading functions of the informal economy seems most applicable to the nature of Dharavi’s leather sector.

Dharavi, despite its undeniable success, is not unique in connecting the informal economy to the setting of informal habitations. In Hyderabad, for example, Bholakpur basti has similarly played host to a globally connected waste processing industry (Maringanti 2013, Maringanti and Jonnalagadda 2015). The economic dynamism of the informal economy further calls into question dualist discourses that describe it as marginal or waning (Sood 2012).

In the context of greenfield urban development, Kennedy and Sood (2016), as well as Vijayabaskar and Babu (2016) underline the strong linkages between the formal and the informal. We return to this discussion in Module 4.3.

IV.      In Brief

Though it is often missing from policy debates, the importance of the informal economy in India’s cities cannot be gainsaid. This module has aimed to provide a conceptual overview of the informal economy, and to examine alternative explanations – dualist, legalist and structuralist – that explain its trajectory. In this process, the module has explored and challenged many misunderstandings of the sector – that it only includes self-employment, that it remains marginal and disconnected from the formal and global economy. Instead, the discussion here demonstrates that the informal economy has clear spatial correlates and is deeply enmeshed in national and international trade and economic circuits.

Most importantly, the concerns of informal livelihoods remain firmly embedded in the larger trajectory of industrial and labour relations in India since colonial times. Contemporary processes of informalisation appear to find historical echo in the role of labour intermediaries in the factories of pre-Independence India.

Looking ahead, this module has examined the nature of informality in livelihoods in Indian cities. The next two modules examine manifestations of informality in settlements and as a mode of urbanization. However, the informal economy and the struggles around it will also emerge as salient in other modules, for example on transit, where questions of the regulatory burden on informal transport providers such as rickshaw come to the fore (intermediate public transport, Module 3. 4) and in discussions around public space and street vendors (Module 6.7).

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