The distinction between the formal and informal sector is a concept that is sometimes difficult to differentiate due to the fluid nature of their interactions. The multiple definitions of the informal sector have often not been precise, especially whenever it is looked at in relation to the formal economy, and not as a distinct entity. It is with this in mind that the authors of the research paper “Informal Sector Dynamics and its Role in the Capital Accumulation Process” interestingly point out that the central meaning and relevance of this phenomenon of informality as a sector or workforce become clear only when considered in the light of the global capital accumulation process.
A significant part of the informal sector in the contemporary world is essentially an outgrowth of the formal economy in more ways than one. The activities in the informal sector are directly linked to and often constitute an essential part of the processes of production, exchange and accumulation in the capitalist economy both at the national and, increasingly, at global levels. In certain cases, the sector consists of industries that originated from basic units of production that are cemented in simple manufacturing processes and have evolved into factory forms with informal production and labour processes. It is common knowledge that in today’s world, this sector is an essential part of the global commodity chains.
What is at the core in the interaction and dynamics between the two sectors is a range of flexibilities that can be ascribed to the informal sector or processes. In the current production and distribution networks, there is an array of operations that can be observed. These informal processes are visibly notable in global commodity chains whereby important stages of production and supply are located in third world countries. Factors that are common in informal circles such as the lack of a regulatory environment, the flexibility or absence of labour contracts and the ability to stretch hours of operation at ease are adopted by formal firms when they subcontract informal firms to perform some of their production and distribution jobs. It is this flexibility and managing to keep transaction and labour costs to the minimum, which is at the core of the dynamics of small enterprises that allows them to survive and provides them the competitive edge. This advantage is made use of by large multinationals in their pursuit of global profits.
As per the document, another way in which formal firms create informality is through their restructuring processes. This is done in whereby the formal firm downsizes its labour force and thus forcing people into the informal sector as a means of survival and source of livelihood. There are two distinct processes in which informalisation of employment takes place in formal sector firms. One is to employ labour without any permanent wage or employment contract or provide any employment benefit. The other is to contract out operations that were earlier performed by employees of the firm to smaller or ‘specialised’ enterprises. A particular form of this is to contract out operations to labour contractors or suppliers, where even if particular employees are regularly working in the principal firm, they are not considered the employees of the principal firm and are therefore denied any rights, which they would have otherwise got. The suppliers of such workers are often informal sector enterprises.
It is vital for policy makers and parties that are involved in drafting strategy to have a clear understanding of the definition of the informality as a means to getting to its root causes in a way that will enhance their engagement processes with the sector. This will assist them in moving away from instances where they rely on traditional definitions of the sector that have since evolved and thus be more specific in their goals for it.
Informal Economy Analyst.