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DO CONTEMPORARY APPROACHES TO THE INFORMAL ECONOMY
FOSTER GREATER SOCIAL INCLUSION, OR DO THEY REPRESENT NEW
MECHANISMS OF ADVERSE INCORPORATION? DISCUSS WITH REGARD
TO EMPLOYMENT GENERATION
The informal economy (IE) has been growing considerably in developing world as
well as the affluent OECD economies over the last few decades, despite the
implementation of policies designed to dissipate it. This economy is growing in
importance especially in the developing world in employment generation with about
60% of workers deriving a livelihood directly from this economy (ILO & WTO,
2009). Traditionally, the existence of the IE has been considered a drag on
development due to its inability to generate government revenues, failure to provide
social protection and low wages (Jutting & Laiglesia, 2009) to name a few.
Nonetheless, the persistence of the IE and improvement data has resulted in a gradual
shift in paradigm towards the inclusion of informal workers and their niche into the
wider economy to enhance its contributions to development. Although the new
approaches are capable of providing employment, some consider them as new
mechanisms of adverse incorporation rather than social inclusion. This writing
critiques this debate with particular emphasis on informal employment, following an
elaboration of concept of IE and the contemporary approaches brought to light.
(Jutting & Laiglesia, 2009).
The informal economy is characterized by the presence of informal employment both
inside and outside of the formal sector (ILO, 2002). Informal employment refers to
activities or jobs in the production and distribution of legal goods and services that are
not regulated or protected by the state (Jutting & Laiglesia, 2009). In the new
approach, the presence of opportunities for different stakeholders including the
governments and formal sector enterprises are emphasized. Policy in certain countries
now directed toward supporting growth in the informal employment and expansion of
linkages with the formal economy and the global supply chains (GVCs)1. This shift in
recognition of the organized activities of the IE as a useful resource within the GVCs
1 The full range ofactivitiesthat go intothe production and distributionof a product.

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involves the concept of hybrid governance, which engages both the informal and
formal economies to achieve objectives, especially with poverty alleviation and
employment.
Academics, as well as policy makers, have advocated informal employment as a way
forward to absorb unemployed workers since the 1990s (Cooke, 2008). The most
populous countries in the world, China and India are successfully incorporating the IE
in their GVCs to provide employment and lift millions out of poverty. The Chinese
government in particular has adopted development of informal employment as on the
main mechanisms in its employment strategy (Zhu, 2001 in Cooke, 2008). In African
countries, attitudes towards informal economies in academic as well as policy circles
have shifted markedly in the past decade (Meagher & Lindell, 2013). The transition is
much slower in this case, but hybridization promises increase in dominance into the
future. New movements from organizations such as the Trades Union Congress of
Ghana (TUC) are calling for recognition of informal workers in the policy circle.
The employment generation effect of hybridized societies is evident in sectors of the
informal economy around the world. A good example is the “hawala” informal money
transfer networks where funds are mostly transferred from developed western
countries to developing countries in the south informally. The formal sector financial
institutions aid this network by facilitating bulk transfer of funds. Such a system
creates thousands of remittance companies that informally provide employment and
also keeps vast number of people out of poverty in countries such as Somalia. The
global garments, textiles and horticulture sectors involve labour intensive patterns of
production and presence of informal enterprises and lower tier informal workers
(Nadvi, 2004). The increase in inclusion of such informal sector activities in the
GVCs of these industries is generating poverty-reducing employment for the
vulnerable in those societies. The growth of the informal economy provides a wage
income to millions of people who are likely to be worse off and become an economic
and social burden to the state (Cooke, 2008).

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However, to understand the real impact of the new paradigm, it is important to
understand the reasoning behind this approach and what is distinctive about the
informal economy. From the definition of informal employment, it is easy to see that
it creates room for adverse incorporation, where informal workers are included but on
worse terms. Given that informal employment is not protected by legal framework of
governments, firms can source labour that is cheaper and more flexible. No minimum
wage scheme exists in the informal economy and regulation does not limit working
hours. Many of the workers are vulnerable actors such as migrants who have no
livelihood alternatives and are, therefore, flexible with employment terms. Such
characteristics of the IE provide avenue for lower production costs in the GVCs.
The competitive logic of the GVCs dictates that corporate practices are shaped by the
tension between codes and standards and the competitive pressure on profit making
enterprises. As a result, their employment practices are skewed towards adverse
incorporation of workers by providing low wages, longer working hours, adverse
working conditions and other product of cost minimization motive of firms. Such
practices help lead multinational firms to capture a higher share of final value along
the GVCs (Kaplinsky, 2006 in Barrientos & Kritzinger, 2004). These contradictory
commercial pressures help to explain the employment strategies of suppliers in global
production networks (Barrientos, 2008). In addition, informal employment generation
is skewed towards sectors that are of value to the formal economy. As Yusuff (2011)
puts it “hybrid governance in countries focus on the productive units of the society…
where structural support is provided” which means, inclusion is highly selective.
Such are reasons why adverse incorporation exists where employment is generated
through the informal economy. Such a narrative applies to East Asian Economies
where, inclusion with adversity manifests itself through direct incorporation into the
GVCs, outsourcing of production and subcontracting of labour.
In certain countries in Africa, inclusion of the IE into the GVCs manifests itself at the
end of the chain through waste recycling. This is especially prominent in countries
such as Ghana (e.g. Amoyaw-Osei et al., 2011) where electronic waste such as
obsolete and defected electronic appliances are “dumped” for the informal economies
to assimilate. Although they provide employment for workers at the lower tier of the

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IE, negative consequences are immense. Recycling of metals from the appliances
often involve open-air combustion, which has serious negative health implication for
the workers as well as environmental impacts. Such avenues of inclusion show clear
indication of incorporation of IE with adversity by corporate actors in order to take
advantage of the cost minimization opportunity available.
It is often cited that code of labour practices implemented by corporations in their
GVCs as part of corporate social responsibility (CSR), alleviates the presence of
adverse incorporation, but evidence indicates that such codes are not abided by.
According to Barrientos (2008), research indicates that the benefits of codes for
workers are limited and fail to reach the most vulnerable, particularly those employed
by labour contractors who face the worst employment conditions. Research also
shows that children are recruited through informal networks of labour subcontractors
or subcontracting arrangements without knowledge of the buyers (Barrientos, 2008).
The reasons for such outcomes can be, as a result of difficulty in monitoring activities
as in the case of labour subcontracting as well as prioritization of low production
costs over ethics by the corporations.
The gender distribution of the effect of the new approach to informality is also of
interesting insight especially in assessing the impact of this new approach. In most
developing countries, women have a higher representation in the informal economy
and they are often the ‘weakest links’ in the GVCs (Chant & Pedwell, 2008). In the
new highly active Africa-China trading network, women are largely disadvantaged
(Meagher & Lindell, 2013), showing that they are the stakeholders that experience
adverse incorporation the most. It is not very surprising, given that of the approximate
1.3bn people living in poverty, 70% are women (Clancy & Skutch, 2002), but also
shows that social inclusion can greatly reduce female poverty.
This writing acknowledges the undeniable inconsistencies in the informal economy
and its potential as a drag on growth, but focuses on the opportunities it creates when
included, especially in providing employment that the governments and their formal
economy fails to do. Nonetheless, quality of the employment generated has shown to

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be questionable with adverse incorporation persisting in the informal environment.
The flaws in the informal economy system show that only the sectors of benefit to the
GVCs will be promoted and others most likely neglected or even repressed. Biggest
challenge for social inclusion without adverse incorporation is the need for striking an
ideal policy balance that would protect workers and also preserve the competitive
edge the IE has which is essential for employment generation, but this in reality seems
far-fetched. The new paradigm has shown the capability of social inclusion in
employment but given the actors the IE is serving (business enterprises), adverse
incorporation is a result that is here to stay. Thus, an economy with socially included
IE, generating the much-needed employment, with a tolerable adversity in conditions
is the only feasible ‘win-win’ outcome in the horizon.

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