Why Acknowledging the Importance of Informal Economy is Crucial for a Sustainable Future

Acknowledging the Importance of Informal Economy for a Sustainable Future

When talking about the global economy, we often focus on the formal sector and the businesses that contribute to it. However, the informal economy, also known as the shadow economy, plays just as significant a role in global economic growth. Despite its significance, the informal economy is habitually disregarded and is often viewed negatively. Nevertheless, acknowledging the importance of the informal economy is crucial for a sustainable future. In this article, we explore the significance of the informal economy in promoting sustainable development.

Defining the Informal Economy

The informal economy refers to those economic activities that are not regulated by the government, and, therefore, are not taxed. It encompasses economic activities such as street vending, waste picking, small-scale farming, and other informal occupations. The informal economy is known for its flexibility, creativity, and adaptability, allowing it to respond to changing market conditions, which make it an essential driver of economic growth. The International Labor Organization (ILO) estimates that about 40 percent of the world’s workforce, or 1.6 billion workers, work in the informal economy.

Informal Economy and Sustainable Development

For years, policymakers have focused solely on formal sectors when promoting economic development and largely neglected the informal economy. However, adopting an inclusive approach that recognizes the significance of the informal economy can be key to promoting sustainable development.

The informal economy presents significant opportunities for poverty reduction and job creation, particularly in developing countries, where it comprises a large part of the economy. When governments focus only on formal sector employment, they overlook the significant role played by the informal economy in driving economic growth. Integrating the informal sector into the national economy can provide significant opportunities for employment creation, poverty reduction, and the development of small and medium enterprises.

Challenges of the Informal Economy

Despite its advantages, the informal economy remains a significant challenge to policymakers, primarily when it comes to taxation and regulation. Governments have failed to collect revenue from informal businesses, resulting in lost revenue streams. However, rather than focusing on increasing taxes for the informal sector, policymakers should focus on implementing measures that support informal businesses instead of stifling them.

Moreover, the informal economy has been linked to issues such as the exploitation of workers and environmental degradation. Addressing these issues is crucial for ensuring a sustainable informal economy. Governments should introduce measures that ensure fair labor practices, safe working environments, and better working conditions.

Conclusion

Acknowledging the importance of the informal economy is critical for providing a path for sustainable development. Rather than ignoring it, policymakers should recognize and integrate informal businesses into national economic policies to support their growth. Informal businesses have the potential to provide significant opportunities for poverty reduction, job creation, and the development of small businesses. However, achieving an inclusive and sustainable economy requires policymakers to address the challenges posed by the informal economy, ensuring that its benefits are enjoyed by all.