An exploration into the nature of informal—formal sector relationships

Abstract

In this paper the question raised by Hart of whether the reserve army of unemployed and underemployed really constitutes a passive, exploited majority or whether their informal economic activities pose some autonomous capacity for generating growth in the incomes of the poor is discussed in the light of the literature. Two approaches are distinguished. First, one which assumes that benign relationships between sectors prevail, and second, one which assumes that subordination is the main characteristic of informal activities. An additional distinction can be introduced in each case according to the degree of integration of economic activities. The paper offers an intermediate conceptual framework of heterogeneous subordination which implies a subordinated relationship for the sector as a whole, but resulting from different processes occuring within it. It is suggested that given such a theoretical framework, we should expect a declining trend in the share of income for the informal sector as a whole, but this will not imply that the sector will disappear. This, together with the anticipated expansion of labour supply for the sector, allows that if no measures are taken, involutionary growth will occur.