Informality and the capitalist economy: A perspective from the Global South
1 Introduction
Linking Road in Mumbai has been a favourite destination of shoppers from all over India for decades. Located in the suburb of Bandra, it is a typical Indian street market. The pavement is lined with stalls selling clothes, footwear, watches, jewellery, and other consumer goods. The shops range from a sheet spread out on the pavement manned by one person to semi-permanent structures made of wood and covered with tarpaulin, staffed with four or five workers. On the opposite side of the street from the makeshift stalls are air-conditioned retail stores of Indian and multinational brands with salaried sales staff. Mobile carts vending fresh squeezed sugarcane or lemon juice can be found dispersed in the crowd of pedestrians and shoppers. Peek behind the stalls and you might see head-loaders busy unloading goods arriving from wholesalers.
This scene may be familiar to those of you who have visited an urban marketplace in a low-income or middle-income country. Perhaps you have wondered: Why are there so many tiny shops all selling the same things? How do they exist along with large stores selling similar items, with neither type outcompeting the other? And perhaps the biggest question of all: Why do marketplaces in low- and middle-income countries look so different from those in high-income countries?
One possible answer to these questions is that in low- and middle-income countries, there are just too many people relative to jobs, and people without jobs are forced to earn their living somehow. If you arrive at this conclusion, you are on the right track. But there are still lots of questions to ask and answer. What makes an economy change from one that has hundreds of thousands of tiny enterprises to one that has far fewer market stalls and small family shops and much larger capitalist firms? Is this process a result of market forces or government policy? Or both? How long might such a transition take?
In this Insight we will learn what economists have had to say about such questions. We will use two key concepts to do so: the dual economy and structural change.
- dual economy
- A dual economy has two parts to it—a capitalist sector consisting of firms employing wage workers and an informal sector consisting of self-employed individuals.
A dual economy, as the name suggests, has two parts to it. One part consists of firms that employ wage workers, and the other consists of individuals or households that are self-employed and do not hire wage workers. The former is the capitalist part of the dual economy. The latter is the non-capitalist or informal part. Dualism exists not just in the retail industry, as in our example above, but in almost every part of the economy—in agriculture, manufacturing, and many services. Family farms exist alongside large plantations, small weaving workshops exist inside the home alongside factories running hundreds of looms, and roadside tea shops jostle with international chains like Starbucks.
- gig economy
- An economy made up of people performing services matched by means of a computer platform with those paying for the service. Workers are paid for each task they complete, and not per hour. They are not legally recognized as employees of the company that owns the platform, and typically receive few benefits from the owners, other than matching.
In most low- and middle-income countries, the size of the informal sector exceeds the size of the capitalist sector. Figure 1 shows the proportion of the workforce that is self-employed for a select set of high-income and low- and middle-income countries for the most recent year for which cross-country data is available. Lower-income countries tend to have a larger proportion of workers who are self-employed and the share decreases as we move towards higher-income countries. The recent rise of the gig economy worldwide has increased the proportion of self-employed workers even in high-income countries. But it has not changed the basic picture very much.
- firm
- Economic organization in which private owners of capital goods hire and direct labour to produce goods and services for sale on markets to make a profit.
- structural change
- Structural change or structural transformation refers to a process by which a dual economy loses its informal sector and becomes a fully capitalist economy.
Figure 1 is only a snapshot in time, but behind it lies a story of change. Over time, capitalist firms expand by accumulating capital and introducing new technologies. In doing so, they outcompete informal enterprises. Sometimes this process can also take the form of dispossession, for example, of farmers from their land. The process by which the capitalist sector expands to absorb resources engaged in the informal sector is known as structural transformation or structural change. It is a part-peaceful, part-violent process that lies behind the spectacular rise in GDP per capita with the advent of capitalism.
To learn more about the connection between structural change and ‘history’s hockey stick’, read Unit 1.9 of The Economy 2.0: Microeconomics.
Figure 1 Share of the workforce that is self-employed in selected countries (2021–2022), ordered according to GDP per capita (lowest to highest).
ILOSTAT (for all countries except India); India: Periodic Labour Force Survey.
In this Insight, we will build a theoretical understanding of this inverse relationship between a country’s average income (GDP per capita) and the prevalence of self-employment. This relationship exists because it is not just the presence or absence of wage labour that differentiates the capitalist and the informal sectors from each other. The two also differ vastly in levels of capital accumulation, technology, and labour productivity. Countries with a larger capitalist sector tend to have higher levels of labour productivity and higher per capita incomes (a larger per capita GDP).
First, we will discuss the Lewis model of the dual economy comprising the capitalist and the informal sectors. We will show how these two sectors are connected to each other, and describe the process of structural transformation. Using data from countries at different stages of development, we will demonstrate how structural change is measured and how this process has evolved over the years with economic growth. Finally, we will examine public policy and civil society actions that promote the welfare of informal sector workers and facilitate structural change.
