Informality remains widespread in South Asia despite decades of economic growth. The low earnings and high vulnerability in the informal sector make this a major development issue for the region. Yet, there is no consensus on its causes and consequences, with the debate polarized between a view that informality is a problem of regulatory evasion and should be eradicated, and another which equates informality with economic exclusion. These views are at odds with the heterogeneity observed among informal firms. Recent advances in analyzing informality as the outcome of firm dynamics in distorted economic environments can help reconcile them. Building on these advances, the approach adopted in this volume clarifies that there are different types of informality, with different drivers and consequences. Using this approach, the papers in this volume revisit old questions about the relationship of informality to regulation and taxation, and also pose new ones, such as how digital technologies and multi-faceted policy designs can improve prospects in the informal sector. They have four main messages. First, informality in South Asia is dominated by firms that happen to be outside the purview of regulations because they are small, as opposed to those that remain small to escape regulations. Second, reforms of business regulations tend to have small direct effects on the informal sector, though they could have sizable indirect impacts on it if they succeed in removing major inefficiencies in the broader economy. Third, e-commerce platforms (and similar technologies) offer new opportunities to informal firms and workers, but many of them lack complementary skills or credit to benefit from such technologies. Fourth, a combination of contributory and non-contributory programs recognizing the heterogenous saving capacities of informal workers may be necessary to achieve more universal coverage of social insurance. A multi-pronged strategy is needed to tackle the developmental challenges presented by informality.
"This edited volume represents an important step forward in rethinking informality in South Asia and elsewhere. First, it highlights the sheer size of the informal economy and the complex vulnerabilities of the informal workforce across South Asia. It also highlights the heterogeneity of the informal economy by sectors of the economy, income and wealth quintiles, ability to save, and more. Second, it recognizes that the development challenge associated with informality has less to do with a low tax base and more to do with vulnerable jobs and low productivity. Third, it interrogates the relationship of informal workers and informal firms to regulations, taxation, social insurance, and e-commerce platforms. Given the heterogeneity of the informal economy, the empirical findings often challenge dominant theories and assumptions about informality, notably, by showing that most informal operators are not seeking to evade or avoid regulations and taxations. In so doing, the volume shifts the focus to distortions in labor and product markets. Fourth, and most important, the editors call for a policy shift from a focus on reducing informality toward “the removal of the underlying constraints” in order “to improve the lives of informal workers and the growth opportunities for informal firms.” Such an approach is particularly timely, given the significant negative impact of the COVID-19 pandemic-recession on informal workers. In conclusion, the contributors and editors of this volume call for more such in-depth analyses of informal labor market mechanisms and associated policy implications."
- Marty Chen, Senior Adviser, WIEGO Network, and Lecturer in Urban Planning and Design, Harvard Graduate School of Design
"South Asia has some of the most restrictive labor regulations in the world; it also has a large informal sector. If you thought there was a simple relationship between these two facts, this book will “rock your priors.” And for e-commerce platforms to mobilize the informal sector, this book shows what else needs to happen to make it a reality. A shining example of rigorous empirical analysis shedding new light on one of South Asia’s oldest problems."
- Shanta Devarajan, Professor of the Practice of International Development, Edmund A. Walsh School of Foreign Service, Georgetown University
"Informality is a central obstacle to inclusive growth in developing countries. Bussolo and Sharma have put together an excellent collection of essays to help understand its determinants in South Asia. They present fresh evidence on standard topics like the impact of taxation and social insurance on firm and worker behavior; and they open new areas of research, including the impact of COVID-19 and online sales on informality, and the role of socioemotional skills. Policy makers and researchers interested in that region will find this volume to be very useful."
- Santiago Levy, Senior Fellow, Brookings Institution