Political Economy of Informal Sector

Dev Raj Dahal

The concept

Informal economy involves those economic transactions that are not fully accounted, protected and regulated by the state authorities. The benefits of informal economy are always underestimated despite its meaningful contribution to the livelihoods of the poor people. Obviously, informal sector continues to grow in direct proportion to the decline of formal economy. New technology tends to marginalize once formal economy by expanding the space of new economy. Informal sector does not mean that it is often backward based on what Karl Marx called "petty commodity trade" or modernization theorists dubbed "anti-development" due to its traditional method of production. In Nepal, its contribution to national economy is more than fifty percent.

Development expert Goran Hyden, therefore, calls informal sector an "economy of affection" because of its proximity to family, community and neighborhood, pro-poor, labor -intensive and environment-friendly in nature. Lord Buddha long ago referred to an economy based on the need of society than on the insatiable greed of individuals which has become a base of discourse in the writing of E. F. Schumacher entitled "small is beautiful." In a rapidly changing consumer markets, there is greater incentives on the flexibility, adaptiveness and innovation that only informal sector and small scale industries can provide.

In many developing countries informal economy may be described as small-scale, decentralized and agricultural sector. It involves non-market networks of diversified production of public goods nourishing the livelihoods of a bulk of poor people and ensuring their social and financial security. Micro enterprises, employing less than ten persons, use local pools of knowledge, management, resources, workers, technology and market access and are considered economically very efficient. By economizing the scarce capital, their operations are near perfect competition, which helps to keep prices down so that poor people can afford to buy goods and services in the market. The diminution of large scale smock-stack industries due to their "inflexibility," and growing informalization of formal economy due to deregulation, denationalization and closure of many factories provided spurt for informal sector growth. It has also offered a substitute for developing a high-cost way of creating employment and import of goods from abroad.

Viable or Vulnerable?

While raw materials were basic fuels of agriculture society, energy served as the core element of industrial revolution and information technology remains the motor of post-industrial development. In the industrial society, the state mediated the conflict between the capital and the labor and managed international trade, commerce and communication. The most significant effect of information revolution is the globalization of political economy. For the least developed countries unable to compete in the competitive market, this globalization process is undermining the historical social contract between the capital and the labour. Economic deregulation has weakened the social contract by threatening open economies and open societies, the support base of the life-world of vulnerable population and the political capacity of trade union movement. The corporate world is at conflict with the workers on welfare measures, science over global warming and environmental issues and art over the commercialization of spiritual and human life.

Newly digitized economy has created a new social stratification between white collar and blue collar workers without solving the old division between capital and labour and altering the nature of wealth production. There is a paradigm shift in the mode of production, circulation, distribution and investment. As a result, due to heavy jobs losses, majority of labor force are forced to shift from organized to informal sector. Suddenly, hardcore poor and small-scale entrepreneurs in the developing countries are exposed to national and international competition with the effect of losing safety valve and source of income for the poor. The employer's recourse to flexible employment contracts has further lowered job security for the workers and undermined the position of workers and their unions in free collective bargaining.

The role of national level unions is great in both the policy mediation and human development. Unfortunately, they are also seen unable to cope with the problem of workers layoff, deteriorating working condition, declining job market, growth of child labor, forced labour and denial of rights to workers under Essential Service Act, poor health and safety provisions and many other issues. Especially, for women, artisan caste (Dalits) and indigenous people, participation in the formal sector has become increasingly difficult. Only the informal sector continues to contribute to their food security in rural areas, job security in the marginal cash economy of urban areas and safety valve for the disaffected young populations that make up the majority of the nations' population.

Informal sector is socially embedded, favourable to the production of "economic commons." This shows that economy is not an isolated system with its own internal dynamics. It is deeply rooted in local, national, regional and global power relations. In an unorganized economy, social aspect of transactions (kinship, language, localism and other affinity) provides necessary backward (agriculture) and forward (trade) linkages of the economy, garner broader forms of    social capital and create social safeguard for development that is both just and sustainable. But, in Nepal the government's orientation to revenue rather than production-oriented development model has weakened the economic basis of the state to promote collective welfare. Owing to the weakness of trade unions and small-scale entrepreneurs' associations existing at the unorganized realm, informal sector thus remains outside the sphere of bargaining in the domain of profit maximization and collective action.

Problem Seen through the Eyes of Workers

About 90 per cent of the Nepalese work in the informal economic sector.  Poor working conditions, gender discrimination, lack of social protection, low productivity, hazardous work, non-recognition of work done, poor incomes, long working hours, unsafe working environment, meager benefits, no leave or holidays, inadequate social security benefits, and poor unionization to protect the rights of workers characterize the basic features of informal sector in Nepal. These and many other challenges pose problem in unionizing the informal sector. Violent conflicts have further affected this sector causing the alienation youth force from its social roots.

In this informal sector, a trade union federation can be organized with 500 or more workers engaged in the same nature of work. In the case of self-employed workers and agricultural workers they were granted the right to unionize under an amended Act 1999. The association of 5000 agricultural workers, covering at least 20 districts and with a minimum of 100 members in each of the district is entitled to constitute a national federation in agricultural sector.

Low level of literacy, lack of modern skills for bulk of work force, poor nutrition and health facilities contribute to their low productivity. Investment in social sectors is, therefore, absolutely essential to improve the economic performance. Likewise, high population growth relative to economic growth has increased demands for social services and basic infrastructure facilities while the quality and coverage of health services up to the village levels are grossly insufficient. Why did this happen? Obviously, problems were not seen through the eyes of people. If economy does not work for the people, it will lose its legitimacy.

Social deprivation remains very high in the country despite some improvement in health care, regular immunization campaign against communicable diseases, literacy and education. Majority of people in both urban and rural areas are still without safe drinking water and sanitation. Pollution is increasing. Welfare outcome of the social expenditure of the government is highly skewed because of urban bias in planning and development. The working environment, medical facilities, conditions of work is so inhuman that they also militate against the protection and security of workers. Irresolution of violent conflict has decreased economic activities, reduced the value of workers and even flexibalized the working environment. Without social competence economic efficiency cannot be achieved. Legal property rights do not exist for the poor in Nepal despite the constitutional recognition of the fact that sovereign power lies with the people. Fundamental Questions

The crucial questions to be addressed are: How to provide property rights to the poor in an informal sector of the economy? Are labor laws sufficient to guarantee the basic rights of workers for their essential human needs and freedom? Under condition of liberalization and globalization where the roles of government have been downsized how can the government address the workers' demand for social accountabilities? Does the private sector seem willing to undertake this responsibility? How to establish a complementarity of interest between informal and formal economies to empower the poor through policy measures, concrete programs and organizational solidarity? What are the essential measures to transcend local customary rules for the creation of efficient market? Is there a possibility for small-scale informal sector entrepreneurs and workers to become joint enterprise holders able to compete in a competitive economy? How far their collective experience of neglect by the government helps them to act rationally in terms of maximizing profits?

Solution

Sustainable solution of the management of informal sector lies in the legislation of proper laws, building of vibrant unions and participatory culture whereby societal interests prevail over private greed and gain. Informal sector economy must respond to the legitimate aspirations of workers constituted as citizens and human beings and cluster around networks with like-minded enterprises for production, supplies and market services so that it can achieve financial stability, economies of scale and social integration. Due to its closeness to society and local self-governance institutions, it can evenly distribute employment benefits to the people. But, the local self-government has the responsibility to training, financing and other services to this sector so that it can increase its productive functions.  Only productive jobs can ensure them the necessary conditions of freedom, equity and dignity.

Implementation of the ILO Declaration on Fundamental Principles and Rights at Work has made important contribution to the new architecture of social and economic development. On this architecture extension of social security schemes, implementation of laws on fair wages and incomes and development of mechanisms by which workers in the informal economy can be provided access to and control over productive assets and resources are possible.  The cohesiveness of unions counts a lot to exert pressure for policy reforms, organization, solidarity, communication and collective action on behalf of its members and the society at large.  It is also important to attract the attention of national policy makers on the plight of informal sector workers-- Kamaiyas, child laborers, Dalits, disabled persons and weak groups and define a viable strategy of formulating an integrated approach and the roles of various social partners working to foster decent work in the informal sector of Nepal.

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