Universität Bielefeld

Informal Sector or Informal Economy

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The term 'informal sector' (IS) has been one of the most hotly debated socio-economic concepts of the past 40 years. Etymologically, one can only define it with respect to the formal sector as it derives from and is intrinsically defined by its comparison to this term. Taking this cue, the IS can be understood as all income-generating economic activities not authorized or regulated by the State in social contexts where other similar activities are monitored and authorized (Castells & Portes, 1989: 12). Widening this definition to encompass socio-cultural aspects, one can perceive the IS as contravening State regulations but not social moral codes (De Soto, 1994). The character of what is informal or formal is always defined in the ever-fluxing relationship between the State and civil society. The IS must also be differentiated from the illegal economy. While the first term entails the production, distribution and sale of goods that are socially perceived and normatively defined as licit, the second involves goods that are deemed illicit.

History of the Concept

In the 1960s it was becoming clear that the wage-based societies of industrialized countries were not being replicated, as predicted by orthodox development models, in underdeveloped countries. Instead, the cities of the Third World were seemingly entrapped by severe and structural labor market segmentations and vast levels of urban unemployment. In this context, the ILO, in 1969, launched its World Employment Program, which sought to develop a more detailed understanding of the workings of the labor markets of such countries. This Program revolutionized labor market theory and brought together a group of researchers from both North and South, who combined an assorted mixture of theoretical and methodological tools, assuring that their findings would display a broad array of perspectives and policy responses.

This rethinking of how labor markets evolved and were structured in underdeveloped economies led to a growing consensus regarding the inadequacy of the term 'unemployment'. An array of new terms soon propped up in the literature: “underemployment”, “hidden employment”, “visible and invisible underemployment”, “urban marginality”, etc.

The term 'informality' was first used by the British anthropologist, Keith Hart, in a paper presented in 1971 at the Conference on Urban Unemployment in Africa, held at Sussex University. Hart’s broad and fluid understanding of informality was soon fused within a more dualistic understanding of economic activity, entailing the separation of the formal and informal sectors. Over time, the term IS was gradually displaced by the informal economy (IE). Along the way, three broadly-grouped interpretations of what created, constituted, reduced or expanded the IE were developed: the ILO-PREALC approach, which perceived the IS as being highly segmented, unproductive and caught in the poverty trap (Souza & Tokman, 1976); the legalist perspective, which saw the IS as embodying entrepreneurial vigor which had been repressed by a mercantilist State (de Soto, 1994); and finally, the structuralist take, which emphasized the manner in which informality was incorporated into specific social relations (Bromley & Gerry 1979; Castells & Portes, 1989).

The Informal Sector in the United States and Canada

At least until the 1980s, debate concerning the IS was notorious for its absence in North America, as labor market experts focused on examining informality in Africa, Asia and Latin America. Nonetheless, while for much part debate in the Third World was for a long time weakened by strong normative components, in industrialized countries, interest focused on empirical investigations as a means for developing a better understanding of this concept (Centeno y Portes, 2006). Indeed, particularly from the early 1990s, numerous US-based academics led the way in examining the heterogeneous relationship between State action and its diverse institutional structures and the size and manifestations of the IE (see: Centeno & Portes, 2006; Fernández-Kelly, 2006; Portes 1994).

The Informal Sector in Latin America

In Latin America, research into and policy approaches focusing on the IE have been perhaps more dynamic than anywhere else. In the late 1960s two sociologists, José Nún and Anibal Quijano, took Marx’s concept of the Industrial Reserve Army of Labor and rejuvenated it, bringing it into the context of the urban sprawls of the 1960s to examine the way in which the dislocation of industrialization-urbanization in the region, coupled with the reconfigurations of capital accumulation, led to the expulsion of a vast mass of urban laborers from capitalist wage work, a population termed the 'marginal mass'.

Following on from this pioneering attempt at understanding what would later be termed informal laborers came the PREALC studies of 1975, which examined informality in the urban settings of Asunción, Guayaquil, San Salvador, and Santo Domingo. Taking a legalist turn, De Soto and his collaborators from the Institute for Liberty & Democracy (ILD), turned the debate upside down, promoting the “informals” as the key agents for socio-economic development in underdeveloped economies, if only there could be a resolute retreat of the State from economic intervention. Latin American governments in general combined a dual approach to informal-centered policy initiatives: they encouraged the integration of formal workers into the formal economy while also coordinating training programs and micro-credit initiatives as a means of tapping into the large productive potential that existed in the IE. Such efforts went furthest in Mexico and Colombia with the latter country, via the Carvajal Foundation, developing an informal sector policy that focused on technical administration and training for a number of years (Bromley, 1990; Rakowski, 1994b).


During the various decades since the term 'IE' first emerged, a number of important developments have taken place. Over time a gradual re-appreciation of the nature of the IE surfaced; its growth, both in developing and industrialized countries, has led to a consensus that sees it as being a permanent feature of capitalist development (Chen, 2005). Such a view has since permeated research and policy initiatives. Whereas initially, research into the IE and policy directive follow-ups stressed the need to instigate State-led processes of formalizing the most productive sectors of the IE as a means of expanding employment possibilities; more recently, attention has turned to the effects of informality on informal workers and informal subsistence enterprises, specifically the decent work deficits that permeate the IE. This development turned policy attention, particularly at the multilateral level, to the vast “protection gap” that permeates the IE. In line with this redirection, in 2002 the ILO published its definitive definition of the IE, and more recently it has promulgated the concept and policy initiative of decent work, which goes beyond the formal / informal divide to center on ensuring worker protection and dignified working conditions in all spheres of economic activity.

Daniel Hawkins

Please cite as:
Hawkins, Daniel. 2012. “Informal Sector.” InterAmerican Wiki: Terms - Concepts - Critical Perspectives. www.uni-bielefeld.de/cias/wiki/i_Informal_Sector.html.


Bromley, R. 1990. “A new path to development? The significance and impact of Hernando de Soto’s ideas on underdevelopment, production, and reproduction”. in Economic Geography (66), pp. 328-348.

Bromley, R. & C. Gerry (Eds.). 1979. Casual Work & Poverty in Third World Cities, Chichester / New York: John Wiley.

Castells, M. / Portes, A. 1989. “World underneath: the origins, dynamics, and effects of the informal economy”. in Portes, Alejandro / Castells, Manuel / Benton, Laura (Eds.), The Informal Economy: Studies in Advanced & Less Developed Countries, Baltimore/London: John Hopkins University Press, pp. 11-37.

Centeno, M. & Portes, A. 2006. “The informal economy in the shadow of the State” In Fernández-Kelly, Patricia / Shefner, Jon (Eds.) in Out of the Shadows: Political Action & the Informal Economy in Latin America. Pennsylvania: Pennsylvania State University Press, pp. 23-48.

Chen, M. 2005. “Rethinking the informal economy: linkages with the formal economy and the formal regulatory environment”, Research Paper N°2005/10, EGDI & UNU-WIDER; Helsinki.

De Soto, H. 1994. El Otro Sendero: La Revolución Informal. Bogotá: Tercer Mundo Ediciones.

Fernández-Kelly, P. 2006. “Introduction”. in Fernández-Kelly, Patricia / Shefner, Jon (Eds.) in Out of the Shadows: Political Action & the Informal Economy in Latin America. Pennsylvania: Pennsylvania State University Press, pp. 1-22.

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