Chapter 5: The informal economy: dilemmas and policy responses
Since it escapes the state’s regulatory framework, the informal economy challenges the wider notion of social contract, which is the cornerstone for the legitimacy of the state. At the same time, the informal economy is the sole source of livelihood for the vast majority of households in the global South. Is this paradox good news for the welfare state? Or does it indicate that the welfare state is a straightjacket when the European model is emulated in the global South? Answering these questions, the chapter argues that, while dealing with the complex issue of the informal economy, nation states in the global South are creating welfare institutions very different in substance and form from those of industrialized countries. The chapter has two parts. The first part deals with the conceptual issues about the nature of the informal economy. It summarizes how four decades of academic research have shaped the discipline of the informal economy. Further, it attempts to uncover the structure and map of the informal economy, which is defined by a variety of systemic embeddedness between social and economic motivations, and variations across occupational categories. This part ends by providing evidence of how the globalization process intensifies the informal economy. The second part deals with policy responses by nation states in dealing with the challenge of informality. The early attempts at formalization, attempts to organize informal labourers, the model of the welfare fund and the task of broadening social protection are also discussed in this part.
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