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Insightful but Incomplete

The Outsiders: Economic Reform and Informal Labour in a Developing Economy by Sugata Marjit and Saibal Kar (New Delhi: Oxford University Press), 2011; pp 218, Rs 695.


Insightful but Incomplete

Arup Mitra

he study of the informal sector has been a key focus area in development economics literature. Particularly since the 1970s, it has drawn extensive attention of researchers and policymakers. The considerable overlaps between informal sector employment and poverty are testimony to the phenomenon of the “working poor”. Now in the present context of globalisation there has been a revived interest in issues relating to the informal sector. Thus the volume under review is timely and useful.

The volume treats the informal economy “as one of the most dynamic, active and hotly debated domains in the developing world”. Perhaps it is necessary right at the outset to suggest that this very mechanism of conceptualising the informal economy can be misleading in many a situation because in the context of the developing countries it is hardly a dynamic sector, though some thin segments tend to be so. Thus, it is then a theoretical luxury to assume as if the firms have a choice to produce in the formal or in the informal sector. Nevertheless the theoretical underpinnings are brought out distinctly and a vast spectrum of issues, which are relevant in the present context of globalisation and liberalisation, have been discussed with great lucidity. The chapter on political economy of the informal sector deals with many interesting aspects such as governance, informality and corruption. Similarly, the focus on the link between agriculture and the informal sector and the chapter on the phenomenon of outsourcing and the informal wages are indeed insightful. International trade,

The Outsiders: Economic Reform and Informal Labour in a Developing Economy by Sugata Marjit and Saibal Kar (New Delhi: Oxford University Press), 2011; pp 218, Rs 695.

informal sector and welfare gains have also been discussed extensively.

The empirical section, however, is very weak. Even the theoretical exposition that it offers to justify some of the propositions (p 163) has not been developed appropriately. For example, it claims that the more affluent informal sector forces the formal sector to look for “productivity augmenting strategies”. It would be rather interesting to identify situations under which the conditions in the formal sector can lead to better work conditions and wage rates in the informal sector. Questions worth pondering could include specific types of development in the formal sector that can make the informal sector complementary in nature and help it reap the benefits of growth. Several studies in the Indian context have tried to analyse these aspects quite systematically. Unfortunately the authors do not find them worth citing.

Too Obvious

The authors spend a lot of effort in bringing out certain obvious facts. For example, productivity growth in the informal sector naturally will be higher as the level of productivity is much lower than its formal sector counterpart. Similarly the productivity response to capital in the formal sector is higher than that in the informal sector – it is an obvious fact because the informal sector is endemically a capital scarce sector.

The fact that labour productivity is positively related to capital-labour ratio does not come as a surprise.

The study could have analysed several other relevant issues pertaining to the informal sector. For example, the size, composition, variations in the incidence of the informal sector across activities, nature of linkages between the formal and informal components and their variations across activities, issues relating to earnings, the productivity-wage relationship, and nature of employment in the informal sector are some of the crucial issues.

It is of great analytical interest to check if the informal sector varies in response to industrialisation and growth. The concept of growth with productive employment generation has important implications in terms of industrialisation and the technology adopted in the (formal) industrial sector. The large spread of the (formal) industrial sector and adoption of labourintensive technology can create labour demand. Even when high productivity industry cannot absorb labour directly, ancillarisation, subcontracting and outsourcing can also thrive outside the formal industrial sector due to the complementary relationship between the formal and the informal manufacturing units. Although the relative size of the informal sector can be almost equally high in both the situations of sluggish and rapid industrialisation, the latter situation may envisage the growth of productive activities even within the informal sector. The other connection between the formal and the informal sector can be perceived in terms of the inter-sectoral wage linkages. The formal industrial sector wage may be high for being linked to higher levels of technology and productivity. And this may have a positive impact on the wages in the informal manufacturing units depending upon the factor market conditions.

november 5, 2011 vol xlvi nos 44 & 45

Economic & Political Weekly


But what about the informal services sector? In fact it constitutes a very large percentage of the total informal sector employment. These activities are not directly connected to the high productivity segment and the possibilities of spillover are limited in comparison to those observed between the formal industrial sector and the informal manufacturing enterprises.

Un-tackled Questions

What are the endemic problems of the informal sector? Can they be related to the very mechanisms through which employment takes place in this sector? How do the informal mechanisms continue to facilitate the process of job search and recruitment? What role is civil society able to play in delivering better outcomes and what are the consequences of rapid contractualisation that the economy has witnessed? Has it opened up new channels of labour exploitation while bringing in more consignments? These are some of the issues that need to be addressed both analytically and empirically. While the informal contacts might have help in survival strategies they do not actually result in upward mobility in the long run. Even the theoretical models in which the volume is relatively strong do not bother to cover these points adequately.

What helps workers from low-income households to access urban job market information and whether migrants are able to experience upward mobility at the place of destination are the two pertinent issues in urban development. While highlighting the importance of various informal channels through which urban jobs are accessed it has been noted by others that these networks reduce the probability of upward mobility, as network extension leads to excess supply of labour relative to demand. The issue of upward mobility has also been examined by others by considering a large number of social, economic, demographic, education and health-specific variables. Although the findings are indicative of improvements in the well-being of migrant workers over time, several of the long-duration migrants and natives in the cities still lead a low quality life, the findings of which are indeed important for policy at the national level.

There are certain major omissions in the volume. For example, the survival of low income households in an anonymous urban set-up with an inadequate rural-urban continuum has been a major concern of social scientists. One class of literature that has grown in this respect emphasises the role of social capital in enabling the poor to cope with uncertainties and risks. However, while social capital can enhance accessibility to jobs and earnings at the individual level, issues relating to the needs of a group of households need to be addressed in terms of a wider framework. For example, squatting on public land with no provision of drinking water and sanitation is a difficult situation involving insurmountable risks and struggles. In India, political contacts often play the role of reducing risks and uncertainties relating to land encroachment, and also help with access to basic amenities. The operation of social networks that occurs simultaneously with the struggle to access political support is a complex phenomenon. Thus there is a need to make an effort in understanding some of these processes that make survival even at the bare minimum level possible, although they actually involve a heavy cost to slum residents, perpetuating their misery and restricting their upward mobility. These issues are very much connected to the informal sector issues.

Gender Differences

The other important issue relates to gender differences in the informal sector. Women are often constrained to work in the neighbourhood of their residence (the location of the residence having been decided upon by male family members), and can access jobs only through informal contacts (which usually means they end up in jobs similar to those of the contact persons), both of which reduce their bargaining power considerably. The tendency for specialised activities to be concentrated in different geographic locations of a city further restricts the possibility of women workers being engaged in diverse jobs and thus aggravates the situation of an excess supply of labour in a particular activity. Constrained choice, limited contacts of women and physical segmentation of the labour market perpetuate forces that entrap women workers in a low-income situation with worse outcomes than those of their male counterparts. Consequently with greater intensity of work they still continue to receive low wages, while residual participation in the labour market restricts the possibilities of skill formation and upward mobility. All of these factors offer a substantive basis for policy recommendations.

Another inevitable issue in the context of the informal sector is child labour. In several low income households it is rather pursued for gaining experience even at meagre incomes. Though the contribution made by the child labour to the overall wellbeing may not be substantial, without this, households would have been much worse off compared to those which can afford not to have child labour. The probability of working is higher for a male child compared to a girl child. But this is because the girl children are often engaged in household activities and even when they are engaged in income earning jobs they are shown as helpers. What motivates households to withdraw children from the labour market is a pertinent question and in the context of globalisation the expected and observed outcomes need to be visited thoroughly.

Arup Mitra ( is at the Institute of Economic Growth, Delhi.


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Economic Political Weekly

november 5, 2011 vol xlvi nos 44 45

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