Trade and the Informal Economy

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