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Podcast May 24, 2021

As COVID-19 wreaks havoc on service workers, is the informal sector increasing global inequality? | The Development Podcast

The World Bank Group’s flagship international development podcast takes a deep dive into a new analysis of informal work around the globe – and its relationship to economic inequality during the COVID-19 pandemic. 

– and no, we’re not talking about drug smuggling or other illegal commerce.

In this edition of The Development Podcast, the team takes .  

From Cidade Estrutural – one of the poorest neighborhoods in Brasília, Brazil – we hear from Abadia Teixeira de Jesus, who has spent her life climbing out of the economic shadows and into formal employment – only to be knocked back into informality by COVID-19.  

Back in Washington, Raka and Paul speak with Franziska Ohnsorge, the manager of the World Bank’s Prospects Group, about her new book, The Long Shadow of Informality, and what these stunning datapoints mean for the long-term development goals of emerging market and developing economies.
 

Transcript

Raka Banerjee: Hello, and welcome to the Development Podcast coming to you from the World Bank Group in the United States and around the world. I'm Raka Banerjee alongside Paul Blake.

Paul Blake: Today, the informal sector, jobs and companies outside the line of sight of governments in emerging markets and developing economies.

Franziska Ohnsorge: There is ample evidence that .

Raka Banerjee: We're diving into a new, comprehensive analysis of informality, what it means for the COVID-19 recovery and economic development over the long term.

Paul Blake: From Brazil, we hear from those working in the economic shadows.

Abadia Teixeira: It was a tough job. Working conditions were terrible. Because this was such an unsanitary environment, people would often get sick.

Raka Banerjee: All that and more over the next few minutes, but first, let's take a look at the data.

Paul Blake: Before we jump into the data, can you sort of start us off by first just saying what exactly is informality exactly? How is it defined?

Raka Banerjee: When we talk about informality in terms of the informal sector, we're basically talking about things that are hidden from public authorities. All right? That can be goods. It can be services, anything related to the market or to production, right? One way to think about it is anything that would be part of GDP normally if it were not hidden.

Paul Blake: I'm picking up on that word hidden. Explain to me why these goods and services are hidden from public authorities?

Raka Banerjee: Well, actually there are a bunch of reasons. It could just be to save money, just to avoid paying taxes, or making contributions to social security. That's one reason. It could be to avoid heavy regulations if the country just has a lot of government bureaucracy and people just want to sidestep red tape. It could be if a country has a lot of corruption or weak rule of law. If the formal institutions and the government are not trusted, people might turn to informality.

Raka Banerjee: It could also just be because of a lack of skills. If workers don't have skills, don't have resources, it makes it harder for them to find work in the formal sector. They might end up just selling vegetables from their garden at the market. That would be informal, too, but one thing I should say is that informal doesn't mean illegal. It's work that would be legal, but it's not accounted for. It would normally be part of GDP, but it isn't.

Paul Blake: What about something like childcare. If a teenager is looking to make a little extra cash and is babysitting the neighbor's kids while the parents are away, would something like that count?

Raka Banerjee: It depends basically. If it's a paid service that normally would be part of GDP, like a nanny where you normally would be reporting that income to IRS, but it's not being reported, that's informal sector. If it's part of routine, unpaid household labor, like a teenager caring for their kid siblings while the mother's away, that's not part of GDP. That would be excluded.

Paul Blake: Okay. I think I understand kind of what is and isn't informal. Explain to me how big of a deal this is globally. I'm thinking it probably plays a pretty big role in lower income countries based on what you were saying about the definition of informality.

Raka Banerjee: Yeah. It's actually kind of a shocking difference. In the recent World Bank Report, The Long Shadow of Informality, great name, the authors find that while in advanced economies, informal sector is about 20% of GDP and 16% of all employment. In contrast, they're looking at emerging markets and developing economies, called EMDEs. There, the informal sector accounts for a third of GDP and an astonishing 70% of all employment.

Paul Blake: Just to underline that, 20% of GDP, 16% of employment is informal in advanced economies, but in sort of EMDEs, emerging markets, developing economies, the informal sector is a third of all GDP and it's 70% of all employment in those countries. I mean, that's huge. It makes me think that there are probably some pretty big consequences when it comes to governments collecting revenue, tax revenue, or other forms of revenue when so much of this informality is taking place in their economies. I guess at the same time, too, there's also a chicken and egg thing. That informality is there because of the government, how it is or because of policies it has, and the government can actually contribute to higher levels of informality in a country. Am I kind of onto something there?

Raka Banerjee: It's hard to draw any causal directionality.

Paul Blake: That's quite the phrase, “causal directionality”.

Raka Banerjee: Yeah. I mean, causality, right, basically is what we're talking about.

Paul Blake: All right.

Raka Banerjee: Which way it's going, chicken or egg. We can say that when countries have better governance and higher levels of human capital, financial resources, informality tends to be lower, but which way it goes, it's hard to say. The authors compared government revenues in countries that have above average informality with countries that have lower than average informality, right, just to try to see the difference in revenues between the two. Revenues were five to 12 percentage points lower for countries that have higher levels of informality.

Paul Blake: Wow. When a country has higher levels of informality, the government is bringing in less revenue, which means it's more limited in its ability to, I don't know, intervene in a crisis, whether it's a natural disaster or, I don't know, a pandemic like the one we're in right now.

Raka Banerjee: Yeah, exactly. Not only does the government have less access to resources that it can mobilize against our current pandemic or, in more normal times, to help build human capital, but the higher levels of informality also affect the workers. Right? In a time of pandemic like now, they're not able to tap into formal systems of support, like social safety nets, unemployment, pension funds, all of this stuff.

Paul Blake: What regions, what parts of the world, where do we see this most being an issue? How does informality vary across countries and regions?

Raka Banerjee: Looking regionally at the informal sector when it comes to percentage of total employment, Sub-Saharan Africa has the highest level of informality at about 62%. Then after that, we have South Asia where informality is about 59% and then it goes down from there. On the low end, the Middle East and North Africa is the region with the least level of informality with less than a quarter of employment being informal.

Paul Blake: Okay. Hold on, hold on. I'm confused. Geek out with me on this. You mentioned that Sub-Saharan Africa has the highest level of employment informality at 62%, but earlier we were saying that informality around the world accounted for more than 70% of unemployment. How do those numbers add up? What's going on there?

Raka Banerjee: Yeah. Glad you caught that. This is really where we get into data land. Both the numbers are right, but they're using different definitions of informality. The data that the authors are relying on for the 70% statistic from the beginning, they don't have good coverage. That data doesn't have good coverage when it comes to all countries over long periods of time. Instead, for the regional breakdowns, they're looking at self-employment as a share of total employment, which is a common proxy for informality. Basically these things always come down to the data that we have and the way that things are measured. That's why I'll put in a plug for why we need to invest in better data.

Paul Blake: Just as we sort of wrap up here, how about other demographic characteristics? Do informal workers tend to be mostly men? Are they mostly women? Is it pretty even? What's the data show there?

Raka Banerjee: Women are actually more likely to be employed informally than men. 42% of all women workers are employed in the informal sector, and that's compared to 32% of men, but in fact, in low-income countries, up to 92% of all employed women are working in the informal sector. That's a huge number. That's, again, different data. That's from the international labor organizations, the ILO. What's really interesting is that, in my opinion, emerging markets that have higher levels of informality also tend to have higher levels of gender inequality. Again, chicken and egg, but they do seem to go hand in hand.

Paul Blake: Wow. Well, thank you so much.

Raka Banerjee: My pleasure! 

Paul Blake: Well, in a few minutes, we'll be talking to the World Bank's Franziska Ohnsorge about a new comprehensive analysis of informality.

But first, we want to take you to Cidade Estrutural on the outskirts of Brasilia. The community was founded in the shadow of what was one of the largest trash dumps in Latin America. Members of the community long supported themselves by picking through the landfill, looking for items of value that could be resold or recycled. Today, it remains one of the poorest neighborhoods in Brazil's capital. The World Bank Group's Mariana Kaipper Ceratti found out that COVID-19 has pushed many in the community out of formal employment and into informality.

Mariana Kaipper Ceratti: Just 20 kilometers from the towering beauties and monuments of Brazil's capital city, [inaudible] or structural city in English. For decades, economic life in Cidade Estrutural has revolved around one piece of infrastructure, a trash dump. It's in this land fill that Abadia Teixeira worked for several years, picking over waste for anything of value.

Abadia Teixeira: It was a tough job. Working conditions were terrible. Because this was such an unsanitary environment, people would often get sick.

Mariana Kaipper Ceratti: Abadia's one of the community's more fortunate residents, finding and seizing the opportunity to train as a seamstress.

Abadia Teixeira: I've been working since I was very young. In addition to working with recycling, I've been a domestic worker. Later in life, I was able to train as a seamstress. I've sewn custom garments for 30 years. In 2008, I started teaching sewing lessons to women in another neighborhood.

Mariana Kaipper Ceratti: The chance to teach her craft and the consistent income that it provided represented a boost in fortunes for Abadia. Then COVID struck.

Abadia Teixeira: Then the pandemic struck and these courses, which provided me with a fixed income, were shut down. I now do piecemeal work from home. I make pillow covers and curtains among other items for people who already knew my work. I no longer get a salary. When you're an informal worker, if you don't do anything and you don't get paid anything.

Mariana Kaipper Ceratti: She's not alone. The pandemic has pushed many others in Cidade Estrutural back into informality. Abadia, who is also community leader, estimates that 80% of her neighbors are informal workers.

Abadia Teixeira: People are now selling candy and drinks at the bus stops. They are selling masks, doing everything possible to earn a little money. They are recycling and selling aluminum cans, selling food. At every bus stop, you will see someone selling coffee or homemade bread, for example, but considering the infrastructure here is so poor, you can imagine how hard it is to keep good cooking hygiene.

Mariana Kaipper Ceratti: While specific data on how COVID-19 has impacted informal workers is too forthcoming, research from the World Bank Group and others suggest that the pandemic has been particularly severe on the informal sector with informal workers more likely to lose their jobs or surfer severe income losses during lockdowns. These can prove devastating for informal workers who are largely excluded from formal social safety nets, have low incomes, and limited buffers, such as savings or access to government support programs.

Abadia Teixeira: I always say that Cidade Estrutural is a microcosm of Brazil. Unemployment rates and hunger are very high today. Many people are dying of several diseases. Women are the most impacted because they have to do domestic work on top of everything else, but men are also struggling to find jobs.

Mariana Kaipper Ceratti: Abadia and the residents of Cidade Estrutural aren't giving up. She and her neighbors have organized to get funding from a public scientific institution called Fiocruz. They now put their sewing and craft skills to work, designing and producing masks, soap, and other goods to help protect their community from the virus.

Abadia Teixeira: This project has benefited the community for at least three months. We made 2,500 masks, 500 kilos of bar soap, and 500 liters of liquid soap, and we distributed them to the community. It was a great experience.

Mariana Kaipper Ceratti: The initiative, known as Healthy and Sustainable Estrutural Committee, has proven successful and is now moving to a second phase, one preparing the community for life after the pandemic, teaching residents how to grow their own edible gardens among other skills, skills that could prove useful as cash transfer schemes fall short of supporting the informal workers like those in Cidade Estrutural. Mariana Kaipper Ceratti for the World Bank Group in Brasília, Brazil.

Paul Blake: Thanks to Abadia for sharing her story and to Mariana for sending it to us.

Raka Banerjee: This is the Development Podcast from the World Bank Group. We'll be right back.

Paul Blake: Well, we've gotten the view from informal workers in Brazil whose economic security has been further threatened by the pandemic.

What are some of the broader implications of informality? Just how widespread is informal employment and what does it mean for economic development around the globe?

To get answers to these questions and more, we recently spoke with Franziska Ohnsorge. She's the manager of the World Bank's Prospects Group, which recently completed a new report analyzing informality around the world. We started by asking her to paint a picture of informal workers, who they are and the type of jobs they perform.

Franziska Ohnsorge:
Okay. What we consider an informal worker is someone who is active in legal activity. It's someone who is conducting a market-based activity, but who just happens to be out of the sight of the government. It has to be legal, so the drug dealer is not informally employed. It's illegal.

Raka Banerjee: Yeah.

Paul Blake: Right.

Franziska Ohnsorge: That's not informal employment. It has to be market-based. You going to a neighbor and mowing the lawn, that is not informal employment. 

The informal economy has lots of faces, and in part that's because there's so many different reasons to join the informal sector. For some, working in the informal sector is a choice, but for others, it's a last resort. Some are self-employed. That's about half of those working the informal sector. Others are subsistence farmers or they're actually informal employees, even. Generally, women are more likely to be informally employed, much more likely to be informally employed. Also, informal workers tend to be younger. They tend to be lower skilled and they tend to be less experienced. They are generally also lower paid. In fact, on average, informal workers are paid 19% less than formal workers. This gap really largely reflects their lack of experience and their lower skills.

Paul Blake: I understand that the informal sector had actually been shrinking before the pandemic. How did the pandemic, how did COVID-19, impact the informal sector around the globe?

Franziska Ohnsorge: Yeah, that's right. Over the past three decades, the share of informal output in GDP has fallen by about seven percentage points. It is now about one third of GDP in the average EMDE. Informal employment, another aspect of informality, has also fallen by 10 percentage points over these three decades. That has all been embedded in this broader development process where per capita incomes have been rising and extreme poverty has been falling rapidly.

Franziska Ohnsorge: Now, your second question, has COVID disrupted this declining trend? Well, the 2020 data will not be available for a while, not for at least another year, if not more, but we do know that the informal sector was hit hard by the pandemic. That's in part because so much of it is concentrated in services, where consumer foot traffic simply plummeted. Just bear in mind that almost three quarters of firms in the services sector are informally average EMDE, three quarters. That compares with about one third in manufacturing.

Paul Blake: Talk to us about the more on the ground impacts. How were informal workers impacted by the pandemic? Can you give us kind of any anecdotal evidence, even if the data kind of isn't available for another year or so?

Franziska Ohnsorge: Yeah, yeah. Yes. This has hit the informal workers and informal firms just as much. They face a particularly severe shock because they were all employed, so many of them are employed in the services sector, but they also had very few buffers to fall back on to absorb the shock. Many couldn't switch from in-person to online operation. In fact, you may remember these Word Bank Group phone service to households and firms, and about a hundred emerging markets in developing economies showed that it was large and formal firms that managed to switch to operations online, much more to a much greater extent than the smaller informal ones. Many of them couldn't access government support systems.

Franziska Ohnsorge: Almost by definition, the informal workers are typically not covered by social security and the social security programs are very threadbare in countries with high informality. Take, for example, the average emerging market and developing economy with above median, so in the upper half, by informality. Only 4% of the population in these countries is covered by social security, by unemployment benefits. There's very little government support that they could access.

Franziska Ohnsorge: In these countries, also there was much less fiscal and monetary stimulus to just buffer the economic shock, so generally their economies were more exposed. Fiscal support packages were smaller. Then if you look at monetary policy stimulus, it was blunted because monetary policy stimulus operates through the formal financial system, but informal firms workers typically don't access the form of financial system. For example, again, in these emerging markets and developing economies with above median informality, just about 19%, less than a fifth of firms, can access formal bank financing for their investment needs. It's much less, 10 percentage points less than in other EMDEs. Whatever monetary stimulus was put in place in these countries just didn't reach the informal sector.

Paul Blake: You're talking about the wealthier section of EMDEs have these sort of dire statistics. I imagine it's even worse for the less wealthy, the lower income countries in that group.

Franziska Ohnsorge: Well, informality is particularly high in low income countries. It's really very strongly associated with development. The largest informality is where per capita incomes are the lowest. This is a very simple proxy, but another thing you have to bear in mind is, so what we spoke about were the government support systems, the help that came from outside. There's also very little help inside the households where informal workers work because they themselves have very few savings to fall back on in times of distress. For example, if you take, again, these countries with the worst informality, one third of the population says that they would be driven to poverty if they have to cover out of pocket direct payments for some healthcare emergency. That's exactly what COVID-19 does. It drives people into healthcare emergencies.

Raka Banerjee: I'm wondering, is it fair to say that this pandemic has widened the inequality within countries between workers in the formal and informal sector?

Franziska Ohnsorge: There is a lot of evidence that some aspect of this is happening or has happened, even if you don't have the informal economy data yet, but this is happening well beyond the informal sector. In particular, there's quite a bit of evidence that now shows that the sectors where workers at the lowest average earnings faced somewhat a more stringent lockdowns in 2020. The shock to their livelihoods was much more to those that are employed in these sectors and they happen to be lower wage. We've showed that in our other flagship report for the June 2020 Global Economic Prospects.

Paul Blake: I don't want to dwell too much on it, but when we talk about the impact of informality on governments and public policy, and we spoke previously about limited access of informal firms and informal workers to social safety nets, the other side of that coin is governments and their ability to collect revenue.

Franziska Ohnsorge: That's right.

Paul Blake: Can you explain the impact on government revenues and expenditure by the presence of informal industry?

Franziska Ohnsorge: That's exactly one of the crucial bottlenecks at the moment. Governments of countries who have hight informality simply have fewer resources to spend. Overall, over the past two decades, their revenues have been five to 12 percentage points of GDP lower than in other emerging markets in developing EMDEs. Of course, these lower revenues are reflected also in lower spending. Which type of lower spending? Well, it's education and health. Actually, over the past two decades it's exactly those emerging markets and developing economies with above median informality that have had about one third number of doctors and nurses per thousand people, of course, than other emerging markets in developing economies. That lack of government resources in these economies has eroded exactly the government services that would now be needed to fight the pandemic, but is also eroding the ability to implement support packages because they just don't have the revenues to finance them.

Raka Banerjee: Zooming out to the big question that we asked at the top of this podcast, is there evidence that the informal sector increases global inequality, that basically the countries that have higher levels of informality do less well around the world?

Franziska Ohnsorge: There is ample evidence that countries with hight informality have a whole host of development challenges. Informality is associated with higher poverty, lower per capita incomes, less progress towards the sustainable development goals, there are many of them, greater inequality, less human capital, weaker productivity investment, and perhaps that's the most important, weaker governance as well. Just to illustrate one of these factors, take, for example, those emerging markets and developing economies, again, that have above median informality. In 2018, which is our latest data point, those countries had 26% of their populations living in extreme poverty. That's a quarter. A quarter of their populations were living in extreme poverty. That's much more than a 7% of the population in other emerging markets in developing economies. Yes, informality, widespread informality is associated with a whole long list of development challenges.

Paul Blake: Take me back to basics here, though. I mean, you've kind of hinted at this throughout, but what are some of the factors? When you're looking at all these different countries and obviously they have kind of different dynamics in each one, but what are some of the common thread between them? What some of the factors that help an informal sector flourish? What are some of the regional trends you've seen? What are some of those kind of common, across the board factors that cause an informal sector to thrive?

Franziska Ohnsorge: What is common across all emerging markets in developing economy regions is that there is a lot of informal activity. In some regions, it's more about output, a lot of output being produced informally. In other regions, it's more about a lot of employment, low productivity employment that is informal. For example, this output informality is highest in Europe and Central Asia, in these countries.

Raka Banerjee: One thing that's so interesting was that I know that the ILO, the International Labor Organization, recently changed its definition of employment to exclude subsistence agriculture. Are they still being counted within the [crosstalk] that you're looking?

Franziska Ohnsorge: We are counting them as informal. We are counting them as informal and we are counting them in total employment as well because they have an activity, maybe not employment in the formal sense of employment contract, but they are employed in the same way as a self-employed professional would be.

Raka Banerjee: Absolutely.

Franziska Ohnsorge: For all purposes, they're defined as employment, but there is another kind. You brought up also this difference in the types of informality across regions. We spoke already about these large agricultural sectors that drive informality in South Asia and Sub-Saharan Africa, but elsewhere, in other reasons, there are other facets of informality that are important, for example, Europe and Central Asia and Latin America and the Caribbean, but also parts of the Middle East and north Africa. Informality in good measure reflects heavy regulatory and tax burns. Yeah. This is just heavy handed regulation in the backdrop of weak institutions.

Paul Blake: If I'm understanding, is that sort of this idea that the regulation is so complicated, or burdensome essentially? Let's say you and I come up with a business idea. We say, "You know what? Let's just do this off the books because it's too complicated, or too expensive, or just too burdensome in some way to go register, and figure out all the tax codes, and figure out all the kind of regulatory environment." Am I understanding that correctly?

Franziska Ohnsorge: Yes. That's the spirit. Yeah. The formal activity, it's just very costly. It's just very costly to comply with all these regulations and taxes. It's just very costly and it discourages people from being formally employed. Because there is widespread corruption in some of them, institutions are weak, this is an option. This is the kind of informality that is a choice, whereas in much of South Asia and Sub-Saharan Africa, this large agriculture informal employment is often not a choice. It's just very difficult for these informal employees to switch to formal employment.

Raka Banerjee: In general, you were referring to the other areas outside of Sub-Saharan Africa and Asia, do you see a pretty strong correlation between the regulatory burden and informality? The levels, do the levels hold pretty constant if you're comparing those?

Franziska Ohnsorge: Yes, there is a correlation and we show that in one of the chapters of a book actually in detail, but you have to bear in mind that there are really these two types of informality. There is the type that it's a choice, and that is often about regulation. There is a type where there is really not much choice, where informal employment is the last resort. That is not so much about regulation. This is about education. This is about access to fertilizers and resources. It's about access to finance. It's a very different kind of challenge.

Paul Blake: Less choice, more kind of desperation in some of these instances. You mentioned earlier that there was some success in reducing informality before the pandemic. What was driving that? What are some of the most effective policy responses to help informal workers and help, I guess, governments reduce the level of informality within their economies?

Franziska Ohnsorge:
Yes, that's the million dollar question. If there is a silver bullet for reducing informality it is yet to be found. What countries have often found instead is unintended consequences. Those happened especially when programs were narrowly drawn and when they were very short-term. It's sort of try to short-term fix. Generally the most successful strategies for reducing informality have been those that were very comprehensive, tailor to country circumstances, and embedded in these long-term development strategies. That's important because there's so many reasons for informality that we've already discussed. Many of these reasons are really deeply ingrained in the fabric of economies.

Paul Blake: Very specific to those economies, I imagine is what you're saying.

Franziska Ohnsorge: Exactly.

Paul Blake: Yeah.

Franziska Ohnsorge: For those workers and firms who informality is a choice, you might want to prioritize streamlining, and better enforcing regulations, and then have governance to encourage them to move to the former sector. Reduce the cost of being formally employed, but also give a bit of a push to move to the formal sector.

Paul Blake: Create some incentive.

Franziska Ohnsorge: Of course, that would not help those workers and firms for which informality is that last resort, who just cannot be productive in the formal economy. For them, you are talking about better human capital, easy access to resources, and just generally broader social safety nets that can encourage them to move to the formal sector.

Raka Banerjee: That makes sense. What about supporting the formal sector with regards to the pandemic? Are there ways that policymakers can help businesses flourish?

Franziska Ohnsorge: Yes. In the end, these matters to allow the formal sector to flourish are critical to lowering informality. It means removing all your obstacles that now motivate people to go into the informal sector. Whether it's heavy handed regulation, or corruption, or lack of education, but the good news is that a lot of the reforms that we just discussed, they would, of course not only lower informality, but they would also promote growth in the formal sector.

Paul Blake: Franziska Ohnsorge is the manager of the World Bank's Prospects Group. Well, that's it for this edition of the Development Podcast. I've got to say I was really struck by Abadia's story. I mean, just what an incredible person to have gone from working in landfills to becoming a seamstress. Then just the whole thing underscores how devastating the pandemic has been for the poorest and most vulnerable.

Raka Banerjee: Absolutely, and a huge thanks to Mariana for sending us that story, and illustrating the on-the-ground realities of informality, and what it really feels like to be informally employed.

Paul Blake: For sure. If you'd like to get in touch with us, do drop us a line. We love getting your emails. We're at thedevelopmentpodcast@worldbank.org. Until next time, goodbye.

Raka Banerjee: Bye!
 

About The Development Podcast

This international development podcast brings together the data, research—and solutions—that can pave the way to a sustainable future. Through conversations focused on revealing the latest data, the best research, and cutting-edge solutions, let hosts Paul Blake and Raka Banerjee introduce you to the folks working to make the world a better place. Don't miss an episode! Listen and subscribe for free on your favorite platform – Apple PodcastsSpotifyGoogle PodcastsStitcher, and more!

Last Updated: May 24, 2021

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