The informal sector should be encouraged and not repressed.

The informal sector is defined as work that is not regulated or

legal (Desoto).

This essay will discuss the reasons why the informal sector should
be encouraged.

First, it will discuss the characteristics of the informal sector.

Then, it will discuss why the informal sector should be encouraged.
Finally, it will discuss reform options available to encourage the
informal sector.

The informal sector accounts for ~40% of the non-agricultural

workforce in developing countries according to the International
Labour Organisation (ILO).

Informal sector employment generally consists of 1-5 people

operating in a firm, activities of informal firms range from
carpentry, masonry, distribution of drinks to prostitution or
begging.
One common characteristic of informal sector employment is that it
is unregulated by the state.
Informal sector firms generally face high competition due to easy
market entry.
Workers within the informal sector generally lack any worker rights
or protection under the law.

The informal sector continues to exist because it provides a safety

net for people (Hart).
Structural adjustment since the 1980's exacerbated number of
unemployed thus increasing the number of people who went into the
informal sector.

People go informal to escape government red tape( Desoto), in most

developing countries, government regulations are so burdensome that
people choose to go informal as a way to escape government red tape.

Formal firms subcontract to informal firms (Biles), some choose to

go informal to reduce the cost of doing business. This phenomenon is
not limited to developing countries, in fact, the "gig economy" in
developed countries today is the result of big companies
subcontracting work to workers under informal employment
arrangements.

Since the informal sector constitutes such a large proportion of the

non-agricultural labour force in developing countries, it is logical
that the sector is encouraged to formalise.

By formalising the informal sector, governments can gain increased

revenue from taxation which otherwise will not be available.
Efficiency can be increased by the productive units of the economy
if informal firms are formalised by providing them with training,
machinery and skills to increase their efficiency.
Informal firms generally do not offer protection for workers, thus
it is in the best interest of the state to formalise informal firms
to ensure workers are protected with basic labour protection laws.
As a result encouraging informal firms to formalise, overall
economic development will be impacted in a positive way.
States should encourage informal firms to formalise by simplifying
regulations to make it easier for firms to operate (Desoto).
It is important to note that countries with the highest levels of
informality also score lowest in the World bank doing business
reports each year.

Informal firms should be incentivised to formalise with training,

access to credit, protection of rights that formal firms have access
to (Chen,2005)

Finally, formalised firms should be supported more since there are

spillover effects from subcontracting activities between formal
firms and informal firms (Rodrik).
To conclude, this essay has discussed why the informal sector should
be encouraged.
This essay discussed the characteristics of the informal sector.
The reasons why the informal sector should be encouraged.
Finally discussed some of the reform options available to formalise
the informal sector.