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

Trade and Employment: From Myths to Facts
generally not covered by social protection mechanisms and have a high incidence
of poverty.
The informal economy, though, has provided employment opportunities for
both the newly unemployed and certain informal workers who have little opportunity
to enter the formal workforce without planned interventions. The high proportion
of employment in the informal economy in developing countries was, by the late
1990s, recognized as being of enormous importance (Meagher and Yunusa, 1996;
Ranis and Stewart, 1997; Sinha, 1999). Given the considerable influence exerted by
the informal economy, it is important to study how it interacts with other economic
variables. In fact, for more than two decades, scholars and policy-makers have paid
increasing attention to the informal economy as they grapple with the challenges
faced by many developing countries. Moreover, new understanding of the informal
economy has surfaced. In earlier discussions, the informal economy was often viewed
as an underground economy or illegal sector that was detrimental to healthy growth,
and squeezed out resources from formal and legal activities. However, this perception
began to change because of a series of studies, led by de Soto (1989). De Soto argued
that policies and certain circumstances prevented people in the informal economy
from improving their own lives through entrepreneurial endeavours. They could, if
not constrained, make an important contribution to economic and social progress.
De Soto’s book on Peru’s informal economy opened up discussions about informal
economies around the world.
With global trade reaching 60 per cent of the world’s gross domestic product
(GDP), and trade liberalization continuing across the globe, it is important to review
the impact of trade and trade liberalization on employment, wages and welfare in
the informal economy. Studies conducted since the late 1990s have indicated that,
contrary to classical trade theories, trade liberalization does not necessarily lead to
rising welfare of unskilled labour. In fact, opening economies up to trade may instead
lead to informalization of work, increased wage differentials across formal and informal
manufacturing and market segmentation, rather than a greater degree of economic
integration. Stallings and Peres (2000), Sinha and Adam (2000), Carr and Chen (2002),
Harriss-White (2003), Sinha et al. (2003, 2007), and others have described the rapid
expansion of informal economies, which contradicts assumptions of neoclassical economic
theories of international trade.
This chapter surveys various theoretical and empirical studies to examine the
link between trade and informality, and attempts to identify the specific contexts
where they are positively or inversely related. In addition, the study provides guidance
on how to develop a model to assess the impact of trade on informality. Examples
of data sources from four countries are provided (Bangladesh, Benin, Guatemala and
Indonesia). Such a model can help policy-makers and social partners develop a sound
understanding of the impact of trade and labour market policies on the informal
economy. When combined with background information on their linkages, such a
model could constitute a global knowledge tool on trade and informality.
The rest of this chapter is organized as follows. Section 4.2 discusses the definition
of the informal economy that has evolved over time. Section 4.3 briefly provides
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