Formalizing the Informal – the only economic reform that matters

Two incidents last week: a friend’s enthusiastically launched ‘start-up’ is downsizing in less than a  year and will probably become ‘stop-down’ soon; and another friend’s 16 year old but spacious flat has been attracting great interest from the local small businessmen, even before she has put it on the market. In other words, the money in India is inexorably moving from the formal to the informal sector. With the advent of a hefty Goods and Services Tax, the situation will only get worse. And there is little the Government can do, or is willing to do, to stop this leaching away of its legitimate tax revenue.

Given that its traditional support base has always been the urban business class, the ruling party is unlikely to take stringent action against this class which is the biggest beneficiary of that twilight zone of the informal sector that now covers over 68% of the economy of India’s commercial capital – Mumbai.

By promising greater ease of business to attract domestic and foreign investors, the business-friendly and business-financed central government has weakened the regulatory framework to such an extent that it has opened the floodgates for environmentally irresponsible infrastructure projects, and the exploitation of child labour – now legitimized by allowing children to work in family businesses or ‘learn’ traditional crafts. (Though there is hardly any skill or craft to be learnt, at the cost of regular schooling, to serve tea in your uncle’s roadside cafe, is there?)

Not quite familiar with consumer preferences in the West and the growing importance of ethical supply chains (especially among EU importers), both the Indian Government and the Indian business community are at a loss to understand why foreign direct investment in the country continues to remain sluggish.

But domestic consumption continues to grow and this demand is increasingly being met by informal and semi-informal enterprise, both in services and light manufacturing. As a result, quality and safety standards are readily sacrificed to cut costs. Ever wondered why a plumber or carpenter brings along a drill with bare leads which he pushes into the nearest electric socket? Because there is no standardization in the electric fittings produced cheaply in some back alley, and no two plugs/sockets in India will ever be compatible… This haphazard style of ‘making do’ with whatever is available then gets eulogized in management books as the inherent Indian genius of ‘jugaad’ while its corollary of ‘Chalta hai’ or ‘anything goes’ is blamed for every social evil from corruption to traffic snarls… God save us from management gurus.

But what of the workers in the informal sector? Most of them are likely to be poor male migrants from the North, with little education and only the skill of their specialization – which means they are exclusively employed in the construction, interior design or garment sectors. They also tend to belong to the lower castes and religious and ethnic minorities who have few opportunities for education and development on their home soil. They are ready to live and work in abysmal conditions so long as they make good money, to look after their families back home. In essence, as the informal sectors of the economy expand, so do the slums and informal settlements in a city – with all the concomitant consequences of anomie, alienation, violence and crime.

And as the formal sector keeps shrinking under the onslaught of the informal, the job market shrinks, and those lucky enough to be born into a higher caste/class and able to afford the qualifications to work in the formal sector, are so grateful to find a job – any job – that Indian workers report the greatest sense of well-being in their jobs, while paradoxically also being the hardest working, as these two Statista infographics indicate:

Percentage expressing well-being at work:

STATISTA WELL-BEING AT WORK

Working hours of Millennials (20-34 age group):

STATISTA WHERE MILLENNIALS WORK LONGEST HOURS

 

The point is that no amount of policy tweaking can swing a country’s economy this way or that because the way the economy works is inexorably tied to the way that society is organised. And all economic reform must necessarily be underpinned by social reform – greater equality of opportunity, inclusion, universal education, equitable regulation … and so on…

 

 

Development and the informal urban economy

The term informal economy was coined by social anthropologist Keith Hart in 1971, while working in West Africa. It is:

  • The survival economy of the poor, whose individual economic transactions do not ever rise to the taxable limit;
  • The grey zone of commercial exchange, where the worker offering his labour allows the mainstream economy to subsidise itself.

It should be remembered that the informal economy thrives and grows, only because the formal economy finds it the most cost-effective means of earning profit. In reality, being undocumented and unregulated, the informal economy weakens the national economy in the long run:

  • By pushing more and more of its practitioners deeper into poverty
  • By dissipating India’s age advantage, as deprivation leaches away at the human potential of generation after generation, denied access to education and skill building
  • By operating below the tax radar and denying taxes to the local, State and Central Governments
  • By untold damage to the urban environment, as a consequence of little or no monitoring or regulation

The informal economy in large cities manifests itself in 3 ways:

  • Informal INDUSTRY
  • Informal ENTERPRISE
  • Informal HOUSING

Informal INDUSTRY is usually based upon an investment of a few thousand rupees, seldom exceeding one lakh. Thus the assets created are too meagre to warrant capital financing by banks in the formal sector. Moreover, as the eminent Peruvian economist Hernando de Soto pointed out, the reason that poor countries (like India) remained poor is:

“… the absence of a representational system that converts every asset, every liability, every land, every building, every inventory and every business into a property document, thus making it visible to the larger formal economy.”

In the absence of such a representational system, the assets of the poor in the informal sector cannot become fungible assets and remain as dead capital, unable to benefit their owners. With conservative estimates putting 60% of India’s economy in the informal sector, these assets if formalized, can become an immense national resource, besides bringing millions into the formal economy, easing poverty and augmenting India’s tax collection by a huge quantum.

Informal ENTERPRISE can benefit greatly through changes at the local government level. The current policy on street vendors is nebulous to say the least, and only results in endless harassment for this segment, whose contribution to the retail trade is grossly underestimated. Well-meaning efforts to provide hawkers’ zones have failed, primarily because they overlook the Unique Selling Point (USP) of street hawking in India – the mobility of the hawker, as he passes through one neighbourhood after another providing his services and wares on demand, when needed and where needed.

Imagine how difficult domestic life would be without the periodic visits of the raddiwala or the knife grinder! Local Government can act as facilitator by marking parking spots for street vendors, with a built-in time limit; providing basic facilities like toilets and electricity to weekly street markets; and providing licenced premises for those entrepreneurs with wares to sell from a fixed outlet.

Or like China, we could remove the vendors of trinkets from the streets by building mini-malls on public land like the suburban railway station in Shenzhen, where Indian tourists flock to buy Gucci rip-offs.Examples of such markets/malls abound in India in the ubiquitous Gol Markets found in all our defence establishments. Shops in these malls can be leased out at a reasonable rent for, say, 10 years, which is a reasonable time of security to educate the next generation and enable an entire household to move upwards on the social scale. It is this secure breathing space which will move millions of urban poor from the struggling classes to the aspiring classes – so eagerly wooed by all our politicians, come election time.

That this great social change is achievable, is borne out by the experience of our blue collar workers who went and sweated their life’s blood on the desert sands of the Gulf in the 80s and 90s, so that their daughters and sons could become neurosurgeons and IT engineers. Within the span of a decade, the community changed from blue to white collar.

Informal HOUSING (or ‘slum’ as it is derisively called) has become the hallmark of all metros in the developing world, from Rio to Lagos to Nairobi to Mumbai. The evolution of slums in post-Independence India is the stuff of legend, on which many a career in New Wave Cinema of the 1970s was built….

Several studies during this period revealed that the typical migrant to urban areas was a semi-skilled or skilled male, 18-35 years old, who sent a major share of his earnings back home to support his family.  Housing was a low priority for such a person and he was ready to squat or settle at any location which cost him the least of his hard earned money. The social vacuum created by a separation from rural roots was compensated by congregating along ethnic, caste, linguistic and regional lines, and such arrangements provided a strong social support system to compensate for the break-up of the rural extended family.

The downside of this has been ghettoisation, which not only enhances strife and bigotry, but provides easy mobilisation in violent crises – be they communal riots, industrial unrest, or underworld gang wars.

In planning terms, the assumption that slums and urban poverty were co-extensive and coterminous led to numerous ad hoc ‘slum improvement’ schemes at this time, where it was naively assumed that upgrading living conditions in slums in a piecemeal fashion, would eliminate the scourge of poverty from our towns and cities.

But as the research and information base has grown, it has become clear that the relationship between urban poverty and slums is both tenuous and complex – especially as a second generation of slum dwellers, with few choices and little upward mobility, begin to emerge on the urban scene. They can look forward to a life only in the informal economy of the city, and given our antediluvian civic laws, even a new-born child in such a household, breaks a dozen laws as he draws his first breath… (Hope to share some interesting insights on slums in Census 2011,in a future Post)

During the 1980s, urban slums could no longer be seen as extensions of rural poverty and became more or less autonomous. As thriving, self-sustaining social systems in their own right (Dharavi being an example), urban slums were no more synonymous merely with urban poverty. Thus while urban poverty incidence has declined between the early 1970s and the late 1980s, there is no evidence of any decline of the slum population.  As a result, fewer people have access to safe drinking water and nearly 70% are reported to be without basic sanitation.  Poor housing, infrastructure and urban services are the problem, not poor people.

It is the failure to perceive this key point that has undermined most poverty alleviation programmes. As a UBSP Benchmark Survey (NIUA:1997) rightly points out …

“Since it is assumed that those living in slums are poor, there is very little effort to affect cost-recovery for improvement work or collect user charges for services when provided, even though the capacity to pay may exist among a substantial proportion of the slum dwellers. This reduces the resource potency and the scope for expanding the coverage to include those who are at the lower side of the poverty ladder.”

The consequences of regarding urban poverty and slums as co-extensive and coterminous have been largely negative:

  • Once a slum is recognized as such, subtle political forces prevent it from ever becoming de-notified and this has stigmatised entire communities of urban poor, doomed to be labeled ‘slum-dwellers’ for generation after generation
  • As a result, slums become powerful vote banks and can be mobilised for various anti-social activities like crime, extortion, land grabbing, strike breaking and communal violence
  • The various slum upgradation schemes set up an unsustainable regime of subsidies, inculcating the same dependency syndrome among beneficiaries, which was earlier seen only in Indian villages
  • Providing basic services in slums was made synonymous with poverty alleviation, and the neglect of health and education in urban slums continues to eat away at the human potential of slum populations, pushing them further and deeper into unemployment, under-employment and the informal sector
  • On the side of local government, there is a tendency to underestimate the ability of the urban poor to pay for services and they have to learn to ‘do without’ these services
  • Slum schemes with their emphasis on shelter and basic services, neglect informal enterprise, and compound the problem by making no effort to integrate the informal slum economy within the larger city economy
  • Almost all housing schemes continue to neglect the key issues of  access, security of tenure, and affordability and it is this – the most visible housing dimension of urban poverty ­­- which continues to scar Indian cities
  • Finally, with the entry of private commercial interests into slum rehabilitation projects as under Maharashtra’s SRA, there is a danger of encroached government and municipal lands passing forever into private hands.

Perhaps Indian cities can take a leaf out of Singapore and China’s public housing and long-term lease policies to ensure development with equity. Summarising, one sees endless opportunities for doing something to formalise India’s growing urban informal sector, but these measures will take a long time to produce results, and a polity in its eternal 5-year rat-race is highly unlikely to take the trouble.

Especially one so notably in favour of the rich that it is willing to cast even the formal sector workers’ rights on the dust heap; change land acquisition laws without a thought for the rehabilitation of those affected; and dilute environmental strictures – all in the name of ‘development’!

This is what I meant about the direction of growth we are now stuck with, at the start of these series of posts…. Hope to look at Governance next time round…