Trade and Employment From Myths to Facts - International Labour ...

TRADE AND THE INFORMAL
ECONOMY
4.1 INTRODUCTION
By Anushree Sinha 1
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It was generally understood during the 1960s and 1970s that, with economic growth,
the informal economy would shrink. But despite strong global growth that coincided
with a massive increase in international trade, many jobs in developing countries remain
in the informal economy. The share of employment in the informal economy
has been persistent in many developing countries over recent decades and even increased
in some regions. On average, 60 per cent of employment in developing
countries is in the informal sector. Research findings from the 1990s and 2000s
indicate that globalization and trade reforms have shown a tendency to encourage
precarious forms of work. In contrast to developed countries’ experiences, the formal
sector in developing countries has not been able to absorb informal workers and production
processes as expected. In fact, many studies suggest that globalization and
trade reforms lead to competition in the formal sector, which may result in a reduction
in formal employment, at least in the short run. Today’s global value chains combine
various modes of production, such as traditional, semi-industrial and fully industrial
production mechanisms. The downside of such a system is that processes can be outsourced
into the informal sector and larger firms tend to capture a major part of
capital, leaving little for informal enterprises, which generally continue to remain
small scale and less productive. Moreover, workers in the informal economy are
1 I am grateful for the comments received at the Expert meeting on Assessing and Addressing the
Effects of Trade on Employment held at the ILO, Geneva, in December 2009; especially from Marco
Fugazza and Henrik Huitfeldt. Thanks are also due to the anonymous reviewers who provided valuable
comments on the chapter. I am also thankful to Susmita Dasgupta for her editorial support
and input. Finally, I would like to acknowledge Sadhana Singh for providing technical support in
writing this chapter.
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