Hidden Potential: Rethinking Informality in South Asia

Informality remains widespread in South Asia despite decades of economic growth. The

low earnings and high vulnerability in the informal sector make this a major development

issue for the region. Yet, there is no consensus on its causes and consequences, with the

debate polarized between a view that informality is a problem of regulatory evasion and

should be eradicated, and another that equates informality with economic exclusion.

Recent advances in analyzing informality as the outcome of firm dynamics in distorted

economic environments can help reconcile them. Building on these advances, the

approach adopted in this volume clarifies that there are different types of informality,

with different drivers and consequences.

The report has four main messages that underscore the need for a multipronged strategy.

First, informality in South Asia is dominated by firms that happen to be outside the

purview of regulations because they are small, as opposed to those that remain small

to escape regulations. Second, reforms of business regulations tend to have small direct

effects on the informal sector, although they could have sizable indirect impacts on it if

they succeed in removing major inefficiencies in the broader economy. Third, e-commerce

platforms offer new opportunities to informal firms and workers, but many of them lack

complementary skills or credit to benefit from such technologies. Fourth, a combination

of contributory and non-contributory programs recognizing the heterogenous saving capacities of informal workers may be

necessary to achieve more universal coverage of social insurance.