The Informal Economy: An Invisible Engine of Sustainable Development

What is the Informal Economy?

The informal economy refers to activities and income that are partially or fully outside government regulation, taxation, and observation. According to World watch Institute, conservatively, informal employment accounts for half to three quarters of all nonagricultural employment in developing countries: 48 % in North Africa, 51 % in Latin America, 65 % in Asia, and 72 % in sub-Saharan Africa. Informal economy aka slum dwellers account for more than 30 % of the developing world’s urban population.

Smart Cities — Global Challenge

According to World Bank “Cities are growth escalators, but smart cities are more than that. Smart cities make urbanization more inclusive, bringing together formal and informal sectors, connecting urban cores with peripheries, delivering services for the rich and the poor alike, and integrating the migrants and the poor into the city. Promoting smart cities is about rethinking cities as inclusive, integrated, and livable.” With more than half of the world’s population living in urban areas, and that percentage expected to rise to 75% by 2050, the path to sustainable development no doubt must pass through cities. Thinking globally, we have the challenge to embrace the idea of “smart cities” as a way to reconcile growth and sustainability.

Paul Hawken in the book Ecology of Commerce wrote “If you look at the science about what is happening on earth and aren’t’ pessimistic, you don’t understand data. But if you meet people who are working to restore this earth and the lives of the poor and you aren’t optimistic, you haven’t got a pulse”. With 2015 around the corner, one question dominates- what we are doing to eliminate poverty from this world while we are making a herculean effort towards sustainable development and investing in smart cities.  This is a world of challenges, but these challenges can also present opportunities, if they kindle a new spirit of innovation, mutual respect and mutual benefit.

Urbanization offers opportunities to reduce poverty with a high degree of efficiency and enables municipalities and governments to leverage economies of scale in education, health care, and basic service delivery like waste collection. In most of the developing world, for example, informal waste pickers perform more than half of all waste collection activities, and their services benefit urban communities and the environment as a whole.

Case Study — Pune, India

In countries like India, driven by high levels of rural-urban migration and booming birth rates, rapid population growth within cities has contributed to rising levels of urban poverty and in the growth of informal slum settlements. In 2012, the Planning Commission reported that 21% of all people in India fall below the international poverty line of US$ 1.25 per day. Half of India’s GDP is from informal economy. While the pace of formalization of this economy that drives low tax revenues and deters individual risk-taking is slow, it is in the interest of the Indian government to leverage this informal economy towards growth and expansion of cities while providing opportunities to the slum dwellers to earn a living.

In 1993, a collective called Kagad Kach Patra Kashtakari Panchayat (K.K.P.K.P.) was established in Pune, India to organize waste-pickers. Waste-pickers are often uneducated, rural migrants who sift through trash heaps or landfills, looking for plastics and glass that they sell to middlemen by weight, who send them to be recycled.  This informal economy results in recycling rates of almost 50% for plastics (as compared with 6.2% in the United States in 2012).

In 2007, the K.K.P.K.P. and Pune’s government got together to create a cooperative called Solid Waste Collection and Handling (SWaCH) by organizing 9000+ waste collectors and created a sustainable de-centralized, waste management model in the country. The goal was to engage waste-pickers to handle almost all of the growing city’s waste. This was a remarkable departure from the operation in other cities like Mumbai, where private contractors haul waste to landfills with trucks. Through its 2300 members, SWaCH services over 4, 00,000 households across 76 centers in 15 municipal administrative departments of the Pune Municipal Corporation (PNC) and the number is growing.

A Broader Perspective

This more optimistic experiment of using information economy to support the development and expansion of cities in developing countries maintains that any urban area with good management capabilities can absorb large population growth and promote sustainable development at the same time without diminishing human welfare or the quality of the environment. The key to success is a commitment to adopt policies and programs that maintains infrastructure and alleviate poverty. This perspective may be less than realistic. Maintaining infrastructure in situations of rapid population growth creates huge demands on financial capital that are impossible to accommodate in most developing countries like India which is battling high population growth. Connecting residents to economic opportunity is also about providing an opportunity to survive.  It’s about giving basic services to our citizens. It’s about livability. It’s about how we are using our resources. It is how a city functions on a day-to-day basis.