The document discusses the role of the informal economy in Phnom Penh, Cambodia. It finds that the informal economy provides around 90% of employment in Cambodia and is a major driver of the economy, contributing 60-80% of GDP. In Phnom Penh specifically, the informal sector is the primary employer and absorbs most new migrants to the city, as the formal sector cannot accommodate rapid population growth. Many informal workers in Phnom Penh are poor and live in slums, with their livelihoods threatened by harassment and lack of protections. Without formalizing and supporting the informal economy, poverty cannot be reduced and sustainable urban development cannot be achieved in Phnom Penh.

1. Water & Development Publications - Helsinki University of TechnologyAB
THE HIDDEN ROLE OF INFORMAL ECONOMY:
IS INFORMAL ECONOMY INSIGNIFICANT FOR
PHNOM PENH’S DEVELOPMENT?
Ulla Heinonen
Water Resources Laboratory, Helsinki University of Technology, Finland
Informal economy is often stated as a temporary phenomenon which diminishes along economic growth.
The sector is regularly taken as granted and its role for development is not properly seen. Around 80 percent
of the GDP in Cambodia is produced by the informal sector. Informal economy is also important for the
country’s urban areas and particularly for the country’s capital city. The economic development of Phnom
Penh, the capital, is combined with a growth in its non-agricultural informal sector. At the same time the
city’s slum settlements are mushrooming, creating more pressures on the informal sector. As a result, many
of the city’s informal workers have become working poors. Without proper protection and legalization
of the informal sector, these poor citizens cannot be lifted up from the poverty trap and the sustainable
development of the city cannot be achieved.
In the 1970s informal sector became a common
topic in international development discussions.
Informality was identifi ed as a continued existence
of traditional activities and production methods
that would disappear along with industrialization
and modernization (Straub, 2005). The sector
was seen marginal for growth and separate from
the formal sector. However, later on the informal
economy has increased, particularly in the
Corresponding author:
Ulla Heinonen
Water Resources Laboratory
Helsinki University of Technology - TKK
P.O. Box 5200, FIN-02015 TKK, Finland
Email: ulla.heinonen@tkk.fi
countries where income is not equally distributed,
and has become an integrated part of the economy
in many countries (Becker, 2004). Thus, the
informal economy - the refi ned defi nition of the
International Labour Organisation (ILO) - could
no longer be seen as a temporary phenomenon, or
as a phenomenon that straightforwardly decreases
with economic growth.
In the recent decades the sector has grown around
the world and it is currently the largest “economy”
in many countries (ILO, 2002). It seems to be
that if economic growth is not accompanied
by improvements in employment and income
distribution, the informal economy does not shrink.
Instead, it seems to expand, both in urban and in
1 Introduction to informal economy
© 2008 TKK & Heinonen ISBN 978-951-22-9102-1
Kummu, M., Keskinen, M. & Varis, O. (eds.): Modern Myths of the Mekong, pp. 123-132

2. 124
Modern Myths of the Mekong - Part III: Development
2 Economy, employment, and
informality in Cambodia
2.1 Defi nition of the informal economy in
Cambodia
The lack of consistent empirical measurements
is evident in Cambodia, where the impact and
volume of the informal economy has not been
properly analyzed and its role in the country’s
economy is poorly recognized. In Cambodia, the
informal economy is defi ned as actions without
offi cial or solid legal status, regulation or protection
by state institutions, or as actions that are identifi ed
with some of the following characteristics (Amin,
2002; Becker, 2004):
1. No fi rm or postal address
2. Employees are self-employed
or road-side vendors
3. No data through census survey are available
or the activities are not recognised
4. Labour-intensive nature of
operations and quick turnover
5. Use of energy input from
human or animal sources
6. Non-structured premises without
regulations, licences, insurance, or taxes
rural areas. Besides, there exist evident linkages
between the informal and formal economies.
The informal sector provides services for formal
actors, offers a fl exible labour market to absorb
the surplus labour and has a signifi cant income
and job generation potential (Becker, 2004). The
studies of the World Bank (2004) showed that the
majority of informal services are sold to individual
customers, commonly to poor and middle-income
urban dwellers (Bhowmik, 2005). The informal
sector supplies products and services, which are
not provided by the formal sector, or are otherwise
unreachable for the poor citizens (Ishengoma &
Kappel 2006).
The informal economy is very heterogeneous in
terms of actors, activities, and scales (Sethuraman,
1997). The sector varies between countries,
economies, and cultures (Thomas, 1995). In some
countries the term ‘informal economy’ refers
to the private sector, in some to grey economy
(Trebilcock, 2005). It is a controversial topic
and as a result there exist disagreements about
its defi nition, estimation procedures, and their
use in economic analysis (Schneider, 2002).
The current defi nition of the informal economy
includes a large amount of heterogeneity instead
of conceptualising the term narrowly (Ishengoma
& Kappel, 2006).
Schneider (2002) defi nes informal activities as
unregistered economic activities that contribute
to the offi cially calculated (or observed) Gross
National Product. Thomas (1995) and Trebilcock
(2005), on the other hand, characterise the
informal economy as economic activities that,
for various reasons, are not fully reported in the
National Income Accounts or are insuffi ciently
covered by formal arrangements. In other words,
the informal economy contributes to the country’s
economy but the activities are informal in terms
of registration, tax payments, operating licences,
conditions of employment, or regulations (Becker,
2004).
A modest progress in measuring the informal
economy is achieved and presently there exist
numerous ways of measurement: working hours,
share of the labour force, percent of GDP,
consumption of electricity and currency demand
(Schneider, 2002). Theoretical understanding of
the causes and consequences is, nevertheless, still
lagging in many parts of the world (Straub, 2005).
Informal activities take place in many forms. The
work varies from part-time jobs after working
hours, to work of immigrants who are not allowed
to work in the formal sector (Schneider, 2002). In
general, informal activities can be categorised into
two sections: self-employed and non-permanent
labour. In all developing countries the self-employed
labour comprises a greater share of
informal employment. This sector includes persons
working as street vendors, taxi drivers, or in home-based
enterprises. In Asia self-employment covers
around 60 percent of the total informal sector
(Becker, 2004).

3. Heinonen - The hidden role of informal economy
4500
4000
3500
3000
2500
2000
1500
1000
500
0
Garment Tourism Agriculture Others
Million US$/
Thousands
GDP and Labour Force by Subsectors ( 2001)
Total GDP by Subsectors
Labour Force
Formal Informal
125
2.2 Employment and informality
A recent civil war, defi cient infrastructure, political
instability, and extensive corruption have hindered
the Cambodian economic development (World
Bank, 2003; 2004). In 2004 around 35 percent of
the 14 million Cambodians lived under the poverty
line (~1,800 riels/person/day) (World Bank, 2006).
Lately the country’s economy has, however, shown
signs of recovery, and the economic growth has
been around 6 percent. Nevertheless, the growth
has not been stable and inequality remains high.
Agriculture is a very important sector in Cambodia
covering 40 percent of the country’s GDP and
employing 70 percent of the population. Service
and industrial sectors are less important. Service
sector employees around 20 percent and industrial
sector 10 percent of the population (Ministry
of Planning, 2001). As a poor agrarian country,
Cambodia is very vulnerable to changes in natural
resources. Drought and fl oods in the recent years,
for example, have seriously affected the country’s
economy. Diminishing agricultural activities and
unemployment in rural areas have pushed people
out of their villages in search of employment in
towns and cities (Heinonen, 2006). Rural migrants
do not often have the necessary skills or education to
allow them to fi nd better paid, secure employment
in the formal sector and hence they often end up
working informally (Bhowmik, 2005).
The informal economy provides around 90 percent
of all employment in Cambodia (Monyrath, 2005).
The sector employs the majority of the 200,000 to
250,000 new workers entering the job market each
year, while the country’s formal sector absorbs only
15,000 new labourers annually (USG, 2003; World
Bank, 2004). Agriculture and agro-industry cover
majority of the employment in the informal sector
(Figure 1). However, the non-agricultural informal
sector is twice the size of the formal in terms of
GDP and labour force. It is also a largest employer
in the urban areas. The informal sector provides
around 60 to 80 percent of the Gross Domestic
Product of the country (Monyrath, 2005; USG,
2003). Non-agricultural informal activities mostly
in urban areas cover the greatest share, around
1,653 million dollars (Figure 1).
The garment and tourism industries and public
administration dominate the small formal sector
(Monyrath, 2005; Bajpai, 2004). Formal jobs
provided by the government are few and they are
not well paid (Bhowmik, 2005). Majority of the
formal employment in Cambodia is very poorly
paid, which pushes people to do extra work in
the informal sector. Most of the part-time moto-taxi
drivers in Phnom Penh, for instance, are
government employees (USG, 2003). The formal
private sector in Cambodia is also relatively small
and limited, facing innumerable transaction costs
Figure 1 The GDP from the informal sector is four times higher than from the formal sector (USG, 2003).

4. 126
and barriers to operate (USG, 2003). To start a
business in Cambodia is very time-consuming and
costly, compared to the neighbouring countries.
The taxes and bribes are lower in the informal
sector and this is often the main reason why people
do not register their activities (World Bank, 2004;
Straub, 2005; Ishengoma & Kappel, 2006).
3 Informal economy in Phnom Penh
There are three dominant sectors offering
formal employment in Phnom Penh: public
administration, garment industry and tourism
(Monyrath, 2005). It is evident that these sectors
are not able to offer employment for all of the city’s
new dwellers that the city is gaining by its 4 percent
annual growth. In addition, in many cases the
formal sector is unable to provide enough income
for its employees. Based on this mismatch majority
of the Phnom Penh’s citizens work informally,
at least on a part-time basis (Agnello & Moller,
2003).
Even though Cambodian formal sectors are
primarily located in the towns and cities,
particularly in Phnom Penh, informality runs the
city’s economy. The informal economic activities
– micro- and small enterprises, market sellers,
non-permanent labour workers, moto-taxi drivers,
and domestic helpers - have a major role in the
economic performance of the capital city.
The informal economy tends also to absorb most
of the growing labour force related to rural-urban
migration when the manufacturing industry
and off-farm activities do not grow with the
same rapidity. The sector also answers the needs
of the seasonal migrants coming to the city to
earn supplementary income particularly in the
dry season. And it also attracts rural migrants
to Phnom Penh to provide low-cost goods and
services for those employed in the formal and
informal economies (Becker, 2004). The growth
in the city’s garment industry couple of years
ago, for instance, led to an increase in informal
activities such as transportation, food, beverages,
and accommodation to serve the people working
in the formal sector. This also encouraged rural
dwellers to migrate to the city (Monyrath, 2005).
Modern Myths of the Mekong - Part III: Development
3.1 Informality and poverty
Urban poverty and informal employment are
closely connected. Poor people in developing
countries are often forced to work in the informal
economy because of lack of capital and skills,
gender, or ethnicity, which make them insignifi cant
for the main labour force (Etherington & Simon,
1996). The studies of the International Labour
Organisation show that informal status often
means a greater likelihood of income variability,
decline, and insecurity (Trebilcock, 2005).
Informal economy attracts workforce from diverse
backgrounds and, as a consequence, the labour
force is very heterogeneous. Initial capital, gender,
domicile, education, and contacts all infl uence
the capabilities of informal employees to survive
in their jobs. Often the rural migrants tend to fall
into the lowest category of the informal economy
(Trebilcock, 2005).
This is also common in Phnom Penh, where rural
migrants and poor people dominate the labour
force of the informal economy. The surveys of
Etherington& Simon (1996) showed that in Phnom
Penh the rural migrants often end up working as
cyclo-drivers or temporary labourers. For example,
over 70 percent of waste pickers in the city are poor
rural migrants (Amin, 2002), whereas poor urban
dwellers more often work as service sector workers
or street vendors. This kind of division indicates
that the rural migrants have low social status in the
city and thus they have problems in exploiting of
the informal credit systems.
The informal economy is the most important
employer for the poor inhabitants of Phnom Penh.
At present, 80 percent of the city’s 400,000 slum
dwellers are employed in the informal economy
(SUPF, 2003; URC, 2004). In addition, many
children are involved in informal activities,
working as shoe cleaners, rag pickers, sellers
or beggars. The customary informal works in
Phnom Penh are: mototaxi- and cyclo-drivers,
food, gasoline and vegetable sellers, construction
workers, electricity and water sellers, motorcycle
repairers, rubbish collectors, brick workers and
house servants (USG, 2003). There is an evident
linkage between the work types in the informal

5. 127
Heinonen - The hidden role of informal economy
sector, and the work types of the slum dwellers.
Hence, relation between poverty and the informal
economy, as a result of poor working conditions,
and low income levels, is obvious (Sethuraman,
1997; Ishengoma & Kappel, 2006).
Figure 2 presents the obstacles that a poor private
sector worker faces when trying to reach Phnom
Penh’s formal sector. Most of the poor workers live
in slums. They do not have secure tenure, proper
housing or public services. They need informal
products and services because they cannot reach
the formal ones. As rural migrants, the workers
often have a low social capital and do not have an
interest in other activities than earning income
(particularly seasonal migrants). These people
mostly work in the informal sector because the
formal jobs are limited and they do not have skills
for these jobs. In addition, they do not have initial
capital to start a proper business, the access to
formal credit services is limited, and they do not
have know-how about the registration activities
and the forms that the formal sector could support
them.
Informal activities are often targets of extortion and
harassment by the public authorities. The work of
the informal workers is disturbed by fi nes, different
payments (e.g. hygiene), and violations, and due to
all this emotional stress (Figure 2). Phnom Penh’s
informal activities are not regulated. However,
there are many regulations in the places where
informal workers operate, and not following these
guidelines (e.g. selling restrictions) leads to fi ning
(USG, 2003). Bribes for the public authorities are
also common, particularly for street vendors and
micro-enterprises. All these stresses have an impact
on the workers ability to survive in the city. As most
of the informal workers are rarely organised, this
hinders their ability to negotiate with the public
authorities (Monyrath, 2005).
The regulation jungle drives the informal activities
out from the authorized structures and, as a result,
people work in the informal sector. The studies
of the Urban Sector Group (USG, 2003) among
Phnom Penh’s informal workers revealed that
there are: a lack of information about registration
methods, regulations and costs; not enough
benefi ts compared to the amount of money that
is needed for registration; wide opinion that
small companies cannot be registered; and lack
of information about where, when and how to
register.
Formal Sector
Formal Services
Regulations
Fines
Payments
Violations
Emotional Stress
Informal Employment
Formal Employment
Informal Sector
Worker
Lack of:
Skills
Capital
Credit
Know-how
Informal Services
Lack of:
Secure Tenure
Proper Housing
Social Capital
Figure 2 The informal worker faces many obstacles. Broken lines illustrate the barriers along the way.

6. 60
50
40
30
20
10
0
Modern Myths of the Mekong - Part III: Development
water sources and resell it to poor and middle-income
inhabitants (USG, 2003). The survey
of the Urban Sector Group (2003) reveals that
an informal water seller earns roughly 346,000
riels monthly (87 US$), which is twice the salary
that the government can offer. However, these
activities are not regulated, which creates great
challenges in terms of providing safe water supply
particularly for the Phnom Penh’s poor citizens
(Heinonen, 2008).
Education of the Informal Sector Workers
in Phnom Penh
128
4 Discussion – How to legalise
informal sector?
The municipality of Phnom Penh seeks for poverty
reduction and aims for economic development.
When aiming to urban poverty reduction the
problems of the city’s poor informal workers are
those to be addressed (Monyrath, 2005). Every
day around 300 000 slum dwellers work in Phnom
Penh’s informal sector (SUPF, 2003). In addition,
the slums absorbs majority of the city’s increasing
population. Addressing this group would thus have
an infl uence on almost half of the city’s informal
workers.
The poor informal workers face many barriers in
their daily existence and they carry a high risk of
becoming working poor with earnings insuffi cient
to raise themselves and their families above the
3.2 Other side of the coin
There is also another side in the Phnom Penh’s
informal economy. And therefore it is too one-dimensional
to associate informality directly with
poverty. The studies of Chantly (1999) showed that
the informal economy also provides employment
for educated workers with entrepreneurial
potential and skills (Figure 3). This indicates that
the formal economy is unable to provide adequate
employment for educated persons and thus they
choose the opportunities that the informal sector
has to offer (Amin, 2002).
The fi gure below is a clear evidence of inadequate
governance and regulations, and the fact that the
Phnom Penh’s formal sector is unable to provide
enough income for its workers. One of the country’s
challenges is thus to create productive jobs in the
formal economy. Otherwise there is little hope for
city’s sustainable economic growth. Phnom Penh
cannot afford to lose the capabilities of educated
citizens with potential skills (Chantly, 1999).
Phnom Penh’s informal sector also offers a
playground for private companies that do not
want to register because of the costs. The city’s
informal private water services, for example, offer
employment for thousands of informal workers.
The private vendors buy water from city water
offi cials or obtain water from ground or surface
Figure 3 The informal economy of Phnom Penh also attracts educated people (Chantly, 1999; Amin, 2002).

7. 129
poverty line (ILO, 2004). Even though the work
in the informal sector is the way to earn some
food on the table, the jobs are poorly paid, have
poor working conditions, no social protection
and excludes workers form social dialogue and
decision-making, trapping its workers deeper into
poverty (Ishengoma & Kappel, 2006).
To push informal workers from this trap, however,
is easier said than done. Already, in the Urban
Poverty Reduction Strategy of Phnom Penh in 1999,
many good ways to improve the situation of urban
poor were stated (Municipality of Phnom Penh,
1999). Nevertheless, the results have been weak.
The city’s poor informal workers have worked very
hard, often in unhealthy conditions and facing
many obstacles. Still they remain poor either
poorer than before. These workforces have made
signifi cant contributions to the city’s development.
The sector has kept down the urbanisation cost
of the city by promoting fl exible labour market,
absorbing extra labour from the formal sector and
promoted the city by services such as water, energy
and solid waste collection (Amin, 2002; Monyrath,
2005). But still, the signifi cance of the sector is not
adequately recognized by the municipality.
To be able to guide the poor informal workers
for better achievements and have a real impact
in their level of livelihood, there is a great need
for appropriate regulations, laws and policies.
Regulating the activities of the informal sector,
however, is an immense challenge. There is no one
policy intervention that could address such a diverse
entity. Additionally very often the increasing fi scal
and regulatory burden leads to the enlargement
of the informal sector or puts more troubles on
informal workers activities (Palmade, 2002). To
be able to legalize and regulate the sector, more
information and dialogue with the informal sector
is needed. The regulations need to be sensitive
so as to be able to increase the productivity,
quality, and working conditions of the informal
sector (Becker, 2004). Only by understanding
the needs and identifying the obstacles, that the
informal sector is facing, proper and sustainable
regulations can be established. Just putting extra
pressure on the informal sector turns development
in an unwanted direction (Palmade, 2002). The
regulations cannot be the same for poor informal
workers and the informal companies that just want
to avoid the extra burdens of registration.
The fi rst requirement in integrating Phnom
Penh’s informal sector into the formal is providing
land (Amin, 2002). Land and housing are not only
the place to accommodate, they are often also the
places to generate income. Hence, including poor
people in the urban planning both in terms of
their housing as well as of their income generation
is vital for legalizing and regulating informal
activities. The city’s slum settlements as well as
the informal workers have been excluded from
Phnom Penh’s development strategies and there
have not been clear processes of city zoning and
land use planning, which would also address the
needs of the urban poor. In addition, the city does
not have land-banking system for development
purposes and when the demand for land is high
due to the growing population and increasing
investments, the poor have had a little room in
the development discussions (Sophy, 2002). The
study on Land Availability for City Development
(2002) identifi ed, that there is a great need for
reserving and allocating land for poor as well as set
up a land development bank for reserving land for
future community projects and investments.
The living conditions of the poor do not improve
without decent work and income (Amin, 2002).
This is also a reason why many slum upgrading
processes have not led to long-term development.
As a consequence, the upgrading processes of poor
settlements that are taking place in the Phnom
Penh needs to include also other aspects than just
upgrading the housing and services (Heinonen,
2008).The city-wide and bottom-up participation
approach of Asian Coalition for Housing Rights,
for instance, could be one effi cient approach to
also address the Phnom Penh’s informal workers
(Heinonen, 2008).
To make the development sustainable in the long
run, education, training schemes and support to
workers’ organisations are essential for the capacity
building of the informal workers. Via workers’
Heinonen - The hidden role of informal economy

8. 130
organisations the informal sectors’ workers will get
information about the regulations as well as the
ways of registration. To avoid extra burdens, the
means of registration need to be clear, transparent
and simple. Micro-credits and saving groups are
also essential part of the improvement process,
which also builds believe and strength among the
poor citizens.
The Municipality of Phnom Penh stated in the
Poverty Reduction Strategy (1999) that they do not
have enough fi nancial opportunities to support the
urban poor. Supporting saving groups or micro-credit
schemes do not, however, need enormous
funds because already the small seed money can
have a great impact. In addition, the possibilities of
the formal private sector need to be search for.
5 Conclusions
The informal economy acts as a crucial part of
the economy in Phnom Penh and it is extremely
important for the city and its development,
providing employment, income, and services for
the majority of the citizens. Around 80 percent of
the city’s 400,000 slum dwellers earn their income
from informal sources. The informal economy has
also attracted educated people when the formal
sector has been unable to offer proper employment
and income. This has distorted the balance
between the informal and formal economies
and thus informality cannot be straightforwardly
associated with poverty.
When trying to identify, legalize and regulate
the city’s informal economy, there are two
sides to address. On the other side there is the
educated pool of workers that are working in the
Modern Myths of the Mekong - Part III: Development
informal sector since the formal sector (e.g public
administration) is unable to pay enough income.
And, then those who feel that registration of the
company mean just extra burdens and cost, and
gives only little in return. Another side of the coin
is the city’s poor informal workers mostly living in
slum settlements. These people do not have skills,
capacities or capital to register their activities. And,
as a matter of fact these people are disturbed by the
formal arrangements such as regulations, fi nes and
emotional stress that hinder their activities and
possibilities to earn decent income.
The informal economy is not regulated, which has
created many obstacles for the city’s development.
To achieve sustainable development of the city’s
economy and services, the municipality needs
to co-operate with the informal sector, develop
services to support, monitor and regulate informal
activities, and lighten the registration process. To
be able to create an effective legal framework for
informal activities, more information about the
sector and its needs, obstacles, and behaviours is
needed.
The informal sector of the city has a lot of potential
capabilities, good ideas, entrepreneurial skills, and
education, which need to be exploited for Phnom
Penh’s development.
Acknowledgements
This study is funded by the Academy of Finland
(project 211010) and the Helsinki University of
Technology. I would like to thank Prof. Pertti
Vakkilainen and Dr. Olli Varis for their good
comments and fruitful discussions.

9. 131
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Modern Myths of the Mekong - Part III: Development