What comes to mind when you hear the phrase ‘informal economy’? Unlicensed street vendors? Unregulated taxi drivers? Sweat-shop textile factories? Poorly paid, exploited domestic workers? Informal employment is often seen in negative stereotypes – yet according to the OECD, “the long-standing negative connotation of informality is not always grounded in evidence and often masks the subtler reality.”
So, prepare to have your stereotypes busted wide open. Researchers from Agence française de développement (AFD) have listed five major myths about the informal economy which are wholly or partially unfounded:
Rather than stigmatise workers in the informal economy, they argue that we “should acknowledge the nature of informal work and break down the range of barriers that prevent workers from obtaining a better livelihood.”
Inclusive insurance could help break down those barriers by enabling informal workers to manage their risks and access some degree of social protection. The International Labour Organisation (ILO) makes this need clear: “informality puts workers at a higher risk of vulnerability and precariousness,” it says. “Indeed, informality has a strong adverse impact on the adequacy of earnings, occupational safety and health, and working conditions in general.” Accessible, affordable insurance offering some degree of protection against health emergencies, loss of earnings, or destruction of stock in the case of a catastrophe would go some way towards mitigating those risks.
As we explored previously, the vulnerabilities of garment workers in Asia’s largely informal textile industry are typical of informal labourers. In particular, they provide a clear example of the way in which a disaster not of their own making can push them even further into poverty. New research from the Clean Clothes Campaign estimates that garment workers are owed an astonishing US$ 11.85 billion in unpaid income and severance payments due to the COVID-19 pandemic. “The pandemic has exacerbated several factors that were already of concern before the pandemic,” notes the report. These include “low wages, non-payment of severance, union repression, and the increasing numbers of workers (often migrants and women) engaged in informal employment.”
Data on the informal economy is, by its very nature, hard to gather. The ILO estimates that more than two billion men and women aged over 15 years – that’s 60 percent of the global workforce – earn their livelihoods informally. Across Africa, the figure rises to a staggering 85 percent. Even taking farming out of the picture – agriculture being the leading informal sector – slightly more than half of the world’s working population are employed in the informal economy. The young and the old are disproportionally represented and women are more likely to be in the most vulnerable segments in the informal economy.
Why is this a problem? After all, not everybody agrees that informal employment is necessarily a bad thing. The lower costs involved – no taxes or burdensome regulation – means informal businesses in emerging economies can often undercut their higher-priced competitors in the Global North, thus potentially providing more local jobs. The ILO itself notes that not all informal workers are poor and that many workers shift between formal and informal and back again multiple times, depending on their circumstances.
Transitioning from the informal to the formal economy should not be seen then as a process of destruction of informality, but rather one of transformation, whereby workers have better access to rights, protection, opportunities, and the ability to contribute to the socio-economic development of societies. Also stemming from Recommendation 204, issued in 2015 by the ILO is the acknowledgment that most informal workers do not find themselves in the informal economy by choice, which underpins the importance of combining both insertion – strengthening the ability of individuals and enterprises to enter the formal economy – and inclusion – increasing the ability of the formal economy to absorb and attract informal workers and businesses – into effective transition strategies, as well as highlighting the paramount nature of “the need for balanced approaches combining incentives with compliance measures”.
Zenebee B Uraguch of the Swiss development NGO Helvetas has written that “Informality is complex, dynamic, and resilient. Simple and one-sided push for the formalisation of the informal economy, claiming informality is bad for growth, doesn’t seem to be a good solution… Before demonising the informal sector for the malaise of economic growth, we need to understand the realities and positive aspects of the informal economy, which unfortunately tend to be ignored or downplayed.”
Others are positively pro-informality: “The informal economy is not a relic of the past or a sign of backwardness. It is also not a consequence of the failure of modernisation strategies. Today’s informal economy is an essential feature of global production networks,” asserts Arup Chatterjee, Principal Financial Sector Specialist at the Asian Development Bank.
Informality may not necessarily be bad for growth, but it can have a significantly negative impact on workers, whether paid or self-employed – and this is where inclusive insurance can really help. “The COVID-19 pandemic is exacerbating economic and social insecurity for more than 2 billion people employed in the informal economy, and adding to global inequality,” says the influential think tank Chatham House. “A radical rethink of the nature of work and social insurance is needed.”
“Merely by being part of the informal economy, workers are likely to be excluded from social services and formal banking,” says Florence Bonnet, Labour Market and Informal Economy Specialist at the ILO. “By definition, informal workers do not enjoy decent working conditions: they are not legally recognised or are insufficiently protected. The informal economy is not homogenous, and workers face various degrees of vulnerability. Some enjoy a certain level of protection, but it is typically at lower levels or at the employers’ discretion. It is even worse for women, who tend to earn less than men and are who are more vulnerable.”
COVID-19 has highlighted the market potential of millions of low-income customers who need cover. “Most of our customers in the microinsurance segment are daily workers, so when they’re not working they can’t pay for anything. Now they’re working again and they have disposable income to pay for insurance,” Gideon Ataraire, CEO of Allianz Life Ghana, highlighted during an Expert Forum on the business case for microinsurance last year.
Most obviously, health insurance can help with hospital bills, medicines, or cash to replace lost income, but unemployment or business interruption (BI) insurance is also essential. Remittance protection can mitigate risks both for migrant workers and their families back home. Most workers in the informal economy cannot afford the luxury of staying at home without paid sick leave: for millions, every day in lockdown or self-isolation is a day without pay.
MiN members across the globe have been stepping up to develop and offer affordable cover during the pandemic. For example, as Maximiliano Selva, Commercial Partner at Varese Brokers in Argentina, told a MiN Expert Forum, three new microinsurance initiatives were launched last year including a policy for 1.8 million domestic workers providing compensation for a number of days each year lost to specific causes, including the pandemic; health, breakdown, and lost earnings cover for around 150,000 home delivery riders and drivers who have no insurance or social benefits; and insurance for 150 street vendors, including health and loss of earnings.
Although the pandemic is the most obvious current example, informal workers – especially those in the farming and construction sectors – are also disproportionately prone to climate-related extreme weather events. The All India Disaster Mitigation Institute (AIDMI) has worked with Stanford University to design flood insurance products which “enhance risk transfer options through insurance to small and informal businesses in urban areas as a way to improve local market recovery, sustain livelihoods, and build resilience.”
Whether the so-called ‘gig economy’ benefits workers as well as bosses is debatable – especially in emerging economies. Informal working is often precarious, poorly paid, and subject to global forces beyond the workers’ control. Despite data from the IMF which suggests the informal economy is shrinking – albeit slowly – it is clear that inclusive insurance has a major role to play in mitigating risks for the billions of people still working informally.