30, May, 2017

Rethinking Informality: Addressing Different Types of Informality to Achieve Inclusive Growth

An exploration of the different types of economic informality, and a discussion on the impact of informality on inclusive growth, reviewing successful practices and policy examples from Latin America and Africa, leading to possible policy conclusions.

Participants of the Online Learning Alliance on Informality and Inclusive Growth came from 31 different countries across five continents. The Learning Alliance explored concrete ways to address informality in different contexts, taking account of the structure of the labour market in each particular country. The following document highlights the key lessons obtained from that discussion.

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Key Conclusions:

  • The impact of informality on inclusive growth varies significantly among different types of informal workers. It is useful to have a taxonomy of informality, not only to understand the relationship between informality and inclusive growth, but also to formulate more accurate policy recommendations to face informality in both regions. According to our taxonomy, informality can be grouped into three categories according to the reasons why the worker is informal: voluntary informality – where informality is a choice; subsistence informality – where informality is a default option due to very low levels of productivity; and induced informality – where informality is caused by excessive labour protection or by discrimination.
  • As per the comments received in the Learning Alliance, it seems that the taxonomy of informality developed in the ELLA project can be easily applied to most Latin American and sub-Saharan African countries. However, the shares of each type of informality vary significantly between regions. In fact, most African countries show strong signs of subsistence informality. For induced informality, regulatory issues are more of a concern in Latin America, whereas discrimination was an important issue in both regions, but particularly in sub-Saharan African countries. Finally, voluntary informality is a new concept, particularly in the sub-Saharan African region. However, the Learning Alliance revealed that that although voluntary informality is not the prevalent type of informality among most developing countries, it is not an insignificant portion of the informal population that is included in this group.
  • Participants concluded that effective public policies for dealing with voluntary informality include: enforcement, correction of failures in social benefits programmes, the single tax policy, and increasing flexibility of work and pension schemes. Regarding induced informality, the recipe for reducing this type of informality in Latin America is more related to reducing payroll taxes and controlling the setting of and increases in the minimum wage. Meanwhile, in sub-Saharan Africa, and also to a certain degree in Latin America, it is very important to increase awareness surrounding discrimination against women and induce behavioral changes.

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