The Informal Economy and Its Role in Development
- International Academy
- Dec 1, 2025
- 11 min read
Author: Nadia Karim
Affiliation: Independent Researcher
Abstract
The informal economy has long been an essential yet contested component of global development. While early development theories predicted that informal work would shrink as countries modernised, recent empirical evidence shows the opposite trend: informal employment remains widespread, dynamic, and deeply woven into the livelihoods of billions of people. Today, an estimated two billion workers worldwide operate outside formal labour regulation, social protection, and taxation systems. The informal economy contributes significantly to household survival, urban service delivery, small-scale production, innovation, and national growth, yet it is simultaneously associated with persistent poverty, exclusion, low productivity, and vulnerability.
This article provides a comprehensive analysis of the informal economy’s role in development using a multi-theoretical framework combining Pierre Bourdieu’s theory of capital and habitus, world-systems theory, and institutional isomorphism. The article argues that informality should not be viewed as a temporary deviation from development but as a structural, relational, and adaptive field of economic and social practice. Using a qualitative conceptual methodology based on a wide-ranging review of recent literature—particularly articles from the last five years—the study examines the drivers, characteristics, and consequences of informal employment in both the Global South and increasingly in advanced economies.
The analysis explores definitional debates, gender dynamics, global production networks, digital platforms, poverty linkages, state regulation, and the emerging “hybrid” forms of informality in the digital age. Findings reveal that informality plays a dual role: it cushions households against economic shocks while simultaneously reproducing structural inequalities. It enables economic participation for marginalised groups but also exposes them to exploitation. Policymaking, therefore, must shift from “eliminating informality” to recognising and transforming it through rights-based and inclusive approaches.
The article concludes by proposing a development framework that integrates formalisation with empowerment, social protection, gender equality, and institutional adaptation, emphasising that informality will remain central to future work landscapes. This article contributes to development studies by offering a nuanced, theory-driven interpretation of informality as a complex, evolving system that shapes—and is shaped by—global economic transformations.
1. Introduction
The informal economy has become one of the most significant features of contemporary development. Its persistence challenges early modernisation theories that assumed societies naturally evolve from traditional, small-scale, unregulated activities toward formal industrial employment. Contrary to such expectations, informality continues to expand and diversify, even within middle-income and advanced economies. In many developing countries, the informal sector accounts for the majority of employment, often exceeding 60 percent of the labour force. In sub-Saharan Africa and South Asia, this figure frequently rises to 70–80 percent. Such scale reflects labour markets where the formal sector is unable to absorb growing populations, but also where informality provides flexibility, opportunity, and adaptability.
Yet, the informal economy is not a monolithic category. It encompasses street vendors, construction workers, domestic labourers, small-scale transport operators, home-based producers, micro-entrepreneurs, digital freelancers, gig workers, artisans, and agricultural labourers. In some contexts, informal work represents survival strategies; in others, it fuels dynamic entrepreneurial ecosystems.
The informal economy also plays a central role in urbanisation. Rapid population growth in cities across Africa, Asia, and Latin America depends heavily on informal services—transport, food vending, construction, waste recycling, and childcare—to sustain the daily functioning of urban life. Informal employment provides income for migrants, women, and rural-urban newcomers whose access to formal jobs is limited.
Moreover, the growth of digital platforms has transformed informality. Today, gig workers embody a new kind of hybrid informal employment: digitally mediated but lacking stable contracts, predictable income, or formal protection. The boundary between formal and informal work has become increasingly blurred.
This article seeks to answer the question: What role does the informal economy play in development today, and how can theoretical frameworks help us understand its complexity?
To address this question, the article uses a combined theoretical lens of:
Bourdieu’s forms of capital and habitus
World-systems theory and the global division of labour
Institutional isomorphism and state/organizational responses
This integrated perspective moves beyond narrow definitions and recognises the informal economy as a dynamic field shaped by unequal power relations, global economic structures, and institutional pressures.
2. Background and Theoretical Framework
2.1 Defining the Informal Economy
Defining informality is inherently challenging because the category includes diverse activities across contexts. However, most definitions converge around several features:
Work not covered by labour law
Absence of formal contracts
Lack of social protection (health insurance, pensions, unemployment benefits)
Enterprises not registered with tax authorities
Simple production technologies
Small scale, family-based, or self-employment
Cash-based transactions and minimal documentation
The informal economy includes both:
Informal employment in informal enterprises (e.g., unregistered shops)
Informal employment in formal enterprises (e.g., factory workers without contracts)
This broader understanding emphasises that informality is not confined to street corners—it exists across entire supply chains and within formal businesses.
2.2 Bourdieu: Economic, Social, Cultural, and Symbolic Capital
Pierre Bourdieu’s framework provides a nuanced lens through which informality can be understood. According to Bourdieu:
Economic capital affects one’s ability to invest in formalisation, licenses, or equipment.
Cultural capital (education, literacy, skills) shapes the types of informal work individuals enter.
Social capital (networks, kinship, community ties) facilitates access to customers, credit, and informal protection.
Symbolic capital (prestige, recognition) influences credibility and bargaining power.
In many informal activities—street vending, craftwork, home-based manufacturing—social capital is often more important than economic capital. Trust replaces contracts. Local reputation replaces formal credit ratings. Informal entrepreneurs convert social networks into economic opportunities.
However, Bourdieu also highlights that capitals are unevenly distributed. This explains why some informal actors succeed while others remain trapped in low-income, low-productivity activities.
2.3 World-Systems Theory and the Global Organisation of Informality
World-systems theory views the world economy as structured around:
Core countries (high wages, advanced industries)
Semi-periphery (industrialising but unstable)
Periphery (low wages, resource extraction, informal labour)**
The informal economy is a structural feature of global capitalism. Informal workers in Africa, Asia, and Latin America often produce goods or services that feed into global supply chains, even if invisibly:
Home-based garment producers stitching for export
Informal miners supplying minerals for electronics
Informal recyclers feeding into manufacturing inputs
Low-cost subcontracted workers in agriculture
Peripheral regions absorb labour that global corporations do not want to employ formally. This flexibility keeps costs low for formal firms in the core.
2.4 Institutional Isomorphism and Policy Convergence
Institutional isomorphism explains why governments adopt similar approaches to informality:
Coercive pressures: development agencies encourage formalisation.
Normative pressures: professional communities promote “best practices.”
Mimetic pressures: governments copy policies that appear successful elsewhere.
This leads to widespread adoption of:
simplified tax regimes
one-stop shops for business registration
microfinance initiatives
formalisation campaigns
social insurance pilots
Yet these policies often fail because they do not consider informal workers’ lived realities, literacy constraints, irregular income, or distrust of government.
3. Methodology
The article employs a qualitative, conceptual research design based on:
A narrative review of development economics, sociology, anthropology, labour studies, and political science literature.
Focus on recent academic papers (2019–2024) to capture new evidence on digitalisation, gig work, and post-pandemic trends.
Integration of classic texts that shaped theoretical debates.
Thematic analysis structured around:
definitions
poverty linkages
gender
global value chains
digital transformations
regulatory responses
This methodology is appropriate for a topic where statistical boundaries are contested and where conceptual depth is needed to interpret patterns.
4. Analysis
4.1 Global Patterns and Scale
Globally, the informal economy encompasses billions of workers. In many countries, it represents:
Over 80% of total employment in parts of sub-Saharan Africa
Around 70% in South Asia
Approximately 50% in Latin America
Around 20–30% even in some developed economies through gig work, self-employment, and undocumented labour
Its scale reflects transformations in global production, limited job creation in the formal sector, and the rise of flexible economic arrangements.
4.2 The Heterogeneity of Informal Work
The informal economy is highly diverse:
Category | Examples | Characteristics |
Survivalist informal work | street vending, waste picking | very low capital, daily earnings, vulnerable |
Informal wage labour | construction, hospitality, agriculture | no contracts, unstable hours |
Home-based production | crafts, garment stitching | piece-rate, gendered, low visibility |
Informal entrepreneurship | small shops, local services | opportunity-driven, variable profits |
Platform-based gig work | ride-hailing, delivery apps | digital intermediation, algorithmic management |
Understanding this heterogeneity is essential for effective policy design.
4.3 Informality and Poverty Dynamics
The informal economy plays a dual role:
a) A buffer against poverty:
Provides income when formal jobs are scarce.
Allows families to combine care responsibilities with earning.
Supports migrants excluded from formal labour markets.
b) A reproducer of poverty:
Low and unstable earnings
Limited social protection
Occupational hazards
Restricted mobility and productivity
Bourdieu’s lens clarifies why some households convert informal work into upward mobility while others cannot: different levels of economic, cultural, and social capital shape trajectories.
4.4 Gender, Care Work, and Informality
Women are disproportionately represented in informal and vulnerable employment, especially in:
domestic work
home-based piecework
petty trade
informal food processing
childcare and elderly care
Informality is deeply linked to gender norms:
Women’s unpaid care responsibilities limit formal employment options.
Domestic work is undervalued due to symbolic capital: tasks seen as “naturally female” are paid less.
Women rely on social capital—community ties, trust networks—for access to markets.
Improving gender equality requires addressing informal work conditions, not ignoring them.
4.5 Informal Workers in Global Value Chains
Informal workers are not isolated from global markets. They contribute in invisible but significant ways:
homeworkers stitching garments for export
small-scale miners extracting minerals essential for electronics
agricultural day labourers producing global food commodities
informal recyclers providing materials for manufacturing
World-systems theory explains why peripheral economies rely heavily on informal labour: it allows global firms to maintain flexible, low-cost production structures.
4.6 Urban Informality and City Development
Informal economies support urban life through:
affordable transport
street food
informal housing construction
waste collection
small retail
Cities in the Global South often function because informal workers provide essential services. Yet these workers face eviction, harassment, and exclusion from urban planning. Recognising them as contributors—not obstacles—is essential for inclusive city development.
4.7 Digital Platforms and the New Face of Informality
Digitalisation has created platform-mediated informal work, including:
ride-hailing drivers
food delivery couriers
online freelancers
social media micro-entrepreneurs
online craft sellers
Gig work exhibits features of informality:
no contracts
no labour rights
algorithmic surveillance
worker-paid equipment
irregular earnings
Digital platforms create a new configuration of capital:
Symbolic capital through ratings
Cultural capital through digital skills
Economic capital via access to customers
Social capital through online networks
However, platforms often centralise power, controlling pricing, access, and visibility. This creates new dependencies and inequalities.
4.8 Formalisation and Regulation
Governments have attempted to formalise informality through:
simplified tax regimes
business registration drives
microfinance programs
social insurance schemes
urban zoning rules
digital identity systems
However, formalisation often fails when it:
imposes unrealistic administrative burdens
increases costs without benefits
ignores livelihood realities
excludes the poorest groups
Institutional isomorphism explains why many countries adopt similar formalisation policies even when unsuitable. Policymaking borrowed from international models must be adapted to local contexts.
4.9 The Corona Pandemic and Its Impact
COVID-19 was a turning point for informal economies:
Lockdowns devastated daily income earners.
Many gig workers lost access to markets.
Informal traders faced movement restrictions.
Women bore greater burdens in care and home-based work.
However, informal networks also demonstrated resilience:
neighbourhood food systems adapted quickly
small traders used mobile phones to organise deliveries
digital micro-enterprises expanded
community groups mobilised mutual aid
This resilience highlighted the need for social protection policies that include informal workers.
4.10 Productivity, Growth, and Structural Transformation
Development economists long debated whether informality hinders or aids growth. Evidence shows:
Informality lowers aggregate productivity due to lack of capital investment.
But it supports structural change by absorbing excess labour during transitions.
Certain informal enterprises—particularly medium-sized ones—exhibit high innovative potential.
Thus, informality is neither purely a constraint nor purely an opportunity. It depends on the structure of the economy and on access to various forms of capital.
5. Findings
Finding 1: Informality is a permanent structural feature of development
The informal economy is not a temporary stage. Global labour markets increasingly rely on flexible, precarious arrangements, including in rich countries. Informality is deeply linked to global capitalism’s need for cheap and adaptable labour.
Finding 2: The informal economy is heterogeneous and stratified
Understanding informality requires recognising internal diversity. Street vendors, gig workers, informal artisans, domestic helpers, and micro-entrepreneurs operate under vastly different conditions. Bourdieu’s theory explains these variations through the distribution of capital.
Finding 3: Informal work can both reduce and reproduce poverty
Informality provides essential livelihoods but often keeps workers at the edge of survival. Poverty and informality form a reinforcing cycle. Policy responses must break this cycle through rights-based interventions.
Finding 4: Gender shapes informal labour patterns profoundly
Women dominate the most precarious segments of informality due to care burdens, low symbolic value of “feminine” work, and limited mobility. Gender-responsive policies are integral to improving working conditions.
Finding 5: The rise of digital platforms is transforming informality
Gig work represents the “new informality”: mediated by technology but lacking labour rights. Digitalisation creates both opportunities and vulnerabilities. Regulatory frameworks must evolve accordingly.
Finding 6: Formalisation without inclusion fails
Registration and taxation strategies are insufficient. Effective formalisation requires:
worker participation
simplified processes
affordable compliance
social protection
recognition of informal worker organisations
Finding 7: Informal workers are key actors in urban and national development
Informal workers sustain urban systems, contribute to global value chains, and cushion economies during crises. Their role is vital, not peripheral.
6. Conclusion
The informal economy is a cornerstone of development, not a relic of the past. Its persistence reflects:
global economic structures
unequal distribution of capital
demographic and urbanisation trends
technological disruptions
institutional pressures
Formal employment is not the universal default it was once imagined to be. The future of work—across all regions—is increasingly fragmented, flexible, and hybrid. The informal economy offers opportunities for livelihoods and innovation but also exposes workers to vulnerability and exploitation.
A development strategy for the future must embrace the following principles:
1. Recognise informal workers as legitimate economic actors
Governments should provide:
legal recognition
urban space and infrastructure
access to justice
protection from harassment
2. Extend social protection to informal workers
This includes:
health insurance packages
pension schemes
maternity benefits
unemployment support
Such programs must reflect irregular income patterns.
3. Promote gender-responsive development strategies
Policies should address:
childcare services
safety in public spaces
equal pay
recognition of domestic workers
4. Strengthen collective organisation
Unions, cooperatives, and informal worker associations are crucial for improving bargaining power and enabling policy dialogue.
5. Regulate digital platforms
New laws are needed to define employment relationships, ensure fair pay, and provide social protection for gig workers.
6. Foster productive upgrading
Support micro-enterprises through:
business development services
access to credit
training
technology adoption
7. Develop context-specific formalisation pathways
Formalisation must be:
gradual
inclusive
affordable
beneficial
co-designed with workers
Informality will remain integral to development processes. The objective is not to eliminate it but to transform it into a dignified, productive, and equitable component of the economy.
Hashtags
References
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