Policy opportunities and challenges from the Covid-19 pandemic for economies with large informal sectors
Rajneesh Narula
#2020-024
In the developing world, the informal economy can account for as much as
80% of the population. I focus on the urban component of informality,
where both informal employment and informal enterprises are especially
vulnerable to the pandemic-induced economic shock. I explain the complex
nature of informality, some of the reasons for its persistence, and its
interdependency with the formal economy, especially in the manufacturing
sector, through global value chains. Large firms (whether MNEs or
domestic firms) sub-contract considerable activity to informal
enterprises, but this is precarious in character. I suggest the crisis
provides the circumstances for greater active engagement with informal
actors, by placing informal enterprises on par with formal firms within
industrial policy. I propose integration and registration, as opposed to
formalization, and the provision of state support without taxation. The
role of the state is also crucial in matchmaking, creating incentives
for GVCs to engage with informal actors systematically, and to reduce
the transaction costs for informal actors in such engagement. These
actions are likely to provide benefits in the longer run, even if
they prove costly in the short run.
JEL Classification: E26, 017, 019, 025
Keywords: Informal enterprises, dual economies, urban poor, linkages, employment, policy