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Integrating the Informal Sector in the Modernization Process

Tokman, Victor E.

SAIS Review, Volume 21, Number 1, Winter-Spring 2001, pp. 45-60 (Article)

Published by The Johns Hopkins University Press

DOI: 10.1353/sais.2001.0027

For additional information about this article

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http://muse.jhu.edu/journals/sais/summary/v021/21.1tokman.html





45

Support Strategies for the Informal Sector

T here is a general agreement on the need to pay attention to theinformal sector, on account of its importance with respect to

employment and poverty issues alike. There are also an increasingnumber of programs aimed at supporting similar informal activitiesin highly diverse national contexts. This consensus is backedthrough the adoption, at the highest level, of policy measures that are

meeting with growing acceptance and, sometimes, the active supportof social actors, in particular among entrepreneurial and trade unionorganizations. Such a stand is also based on evidence that policies topromote the informal sector are viable and profitable even duringeconomic downswings, and have international financial support.

Yet, to the extent that it fails to embrace a shared strategic vision, this is a limited consensus that hinders the effectiveness of policies implemented in this area. While often adequate on an

individual basis, they are insufficient and produce limited effects by failing to respond to a more comprehensive approach. This paper willfeature some contributions made through recent research conductedby the International Labor Organization (ILO) in the framework of a project financed by the United Nations Development Program(UNDP).

The lack of a shared approach is related to the absence of a common definition of the informal sector, which has grown

increasingly complex since it was first described in a pioneering ILOreport on Kenya in 1972. Along with the heterogeneous nature of informal economic activities, different readings lead to different

Víctor E. Tokman is the Regional Director of the International LaborOrganization for the Americas.

Integrating the Informal Sector

into the Modernization ProcessVíctor E. Tokman

SAIS Review vol. XXI no. 1 (Winter-Spring 2001)



46 SAIS Review W INTER -SPRING 2001

strategies. These are reviewed in the first section. Too great anemphasis on the regulatory perspective has identified informality with illegality and labor precariousness. Yet, in spite of their ties toinformality, these two categories are conceptually different. Thesecond section is devoted to this subject. Lastly, the third sectionexplores strategic options to regulate the informal sector, tracing thefeatures of a different approach to formalizing informal activities inorder to facilitate their full integration into the modernizationprocess. For the purposes of this paper, the latter concept is definedas the most dynamic part of the economy operating under a commonregulatory framework.

Interpretations and Trends

Evolution, Diagnosis and Interpretations

The notion of the informal sector was brought forward in a 1972ILO report on Kenya,1 inspired by a previous contribution.2 They highlighted that the problem of employment in less-developedcountries is not one of unemployment but rather of employed

workers who do not earn enough money to make a living. They are“working poor.” Their conceptual interpretation was defined inopposition to formality and on the basis of their lack of access to themarket and productive resources.

This was followed by several contributions.3 One perspective isguided by the logic of survival. Informal sector activities are theresult of pressure exerted by a labor surplus for jobs when good jobs,usually in the modern sectors, are scarce. The result is that the people

seek low-productivity income solutions by producing or sellinganything that may provide for their survival. Another rationale associated with globalization and changes to

the international division of labor points to productivedecentralization.4 To deal with an increasingly unstable demand,modern enterprises adapt to the new environment by introducingmore flexible productive systems and decentralizing productive andlabor processes, which allow them to cut production costs andexternalize demand fluctuation.

Recent research efforts allocate a growing importance to theinformal sector’s operation beyond the prevailing legal andinstitutional frameworks.5 However, the issue of whether this featureis the cause or the consequence of informal activities has not yet beensettled.



INTEGRATING THE INFORMAL SECTOR 47

Efforts to explain the informal sector have shifted focus overthe years. The logic of survival has been and continues to be a majorfactor in the development of informal activities. There is a growingpresence of activities generated by the logic of decentralization,particularly in the context of rapid economic opening, and this extra-regulatory behavior has become an important aspect for analysis andpolicy.

Independent of the interpretation adopted, the characteristicsof the informal sector are similar: small, unsophisticatedtechnologies, low capital requirements per worker, and a distinctionbetween micro and large-sized enterprises in terms of capitalrequirements. Additional features include limited sharing of the

ownership of the means of production and a majority of wageworkers laboring without contracts and protection.

The importance of the informal sector as a source of new jobsis unmistakable. By 1997, this sector was providing about 57 percentof total urban employment in Latin America.6 Moreover, its share inthe labor market continued to grow steadily. Out of every 100 new jobs created since 1980, eighty have been informal. Thus, thepercentage of informal workers with respect to non-agricultural

employment grew from 40 percent in 1980 to its 1997 peak of 57percent.

The current growth of informality is undergoing a transformation in that microenterprises (five or ten workers,depending on the country) are showing the highest rate of growth.Out of every eight new workers informally employed, four work inmicroenterprises. An increasing number of these enterprises arebecoming a valid job-creation option with respect to income,

although they are still far from offering acceptable conditions interms of job stability and labor and social protection.The growing importance of informality in the 1980s is clear

and marks a break with the three preceding decades. Between 1950and 1980, approximately four out of every ten new jobs were createdby the informal sector, i.e., the equivalent of 50 percent of itscontribution during the adjustment. This behavior was determinedby two factors: the withdrawal of the public sector as a net employer,and downsizing measures implemented by large-sized enterprises.The public sector conducted its own adjustment process, as part of policies aimed at reducing the fiscal deficit and promotingprivatization. Meanwhile, large-sized enterprises dealt with the




economic opening by increasing productivity, basically at theexpense of employment. Public employment decreased in relativeand, in some countries, even in absolute terms. During the 1990sthere was some recovery, but only fifteen out of each 100 new jobswere generated by large-sized enterprises, that is, one third of theircontribution before the adjustment process. In fact, the fastexpanding segment of micro-enterprises came in to provide the jobs that large-sized enterprises failed to create (Figure 1).

Divergent Approaches

The interpretations discussed above suggest different strategiccourses of action. The main approach of this paper is to seek ways toincorporate the informal sector into the process of modernizationthat to varying degrees is currently underway in Latin America; thisis an alternative to designing a survival support strategy conceived asa policy to fight poverty with a welfare bias. While the informal sector




embraces survival activities that have no chance of converging withthe mainstream of a country ’s economy, it also includes a largenumber of activities whose growth is dependent on the ability toincorporate them fully into the overall economic system.

This important objective would help to turn support for theinformal sector into a source of self-sustained growth behavior nolonger tied to permanent governmental support. On the other hand,an equally important objective such as poverty alleviation, throughthe support of survival strategies, tends to perpetuate inequality andsegmentation. Therefore, emphasis should be placed on movingtowards integration. By doing so, we could also clarify theorientation of a variety of institutions created to support informal

activities. Presently, these agencies are torn between welfareinterventions and productive initiatives that often lead to conflictingactions and, worse yet, inter-agency strife.

Integration of the informal sector into the process of modernization may be achieved through different butcomplementary means. Prevailing policies to this effect generally favor a three-pronged approach. The first consists of providingsupport to foster the productive development of microenterprises by

facilitating their access to the market and productive resources. Thetools frequently used for those purposes are credit programs, as wellas training and promotional programs to seek access to moredynamic markets by strengthening organizational skills andmarketing practices.

The second approach involves the social welfare of informalworkers. At this level, policy options tend to get mixed with poverty-alleviation policies. It should be kept in mind, however, that the family

unit and the small-scale productive unit always become entangled.Labor and family relations merge in a workshop or small business.Capital goods such as means of transport are investment capital, tothe extent that they are used for business purposes. However, they arealso consumer goods used for private purposes, which renders themfamily assets as well. Resource fungibility makes the absence of socialprotection an obstacle to good economic performance. In otherwords, when the uninsured owner-worker gets sick, themicroenterprise collapses. Thus, mutually complementing policiesimplemented from a social welfare perspective have externalitiescapable of generating a positive interaction with the productivedevelopment of the poor.

Lastly, a third course of action focuses on the regulatory




framework. Informal activities are not caused by regulatory inadequacies, but rather by the failure of the economic system tocreate enough productive employment. Yet, we must not neglectthe fact that regulatory improvements favor the integration of informal activities into the modernization process. This debate hasevolved in the last few years, providing for a substantial narrowingof the previous gap between those who argued in favor of thesimplistic notion that legislative or procedural changes are enoughto overcome the existing problems, and those who denied the roleof regulatory arrangements with respect to the economic system.

While recognizing the relevance of the first two courses of action discussed above, this essay addresses the latter. It attempts to

deepen a strategy aimed at altering the regulatory framework in a manner conducive to the integration of the informal sector.

Formalization as a Means of Inclusion

A generally accepted interpretation of the genesis of informalactivities is rooted in their operation beyond the prevailing regulatory systems. In other words, these activities do not comply with legal or

administrative requirements. A more positive view suggests thatexclusion has to do with the lack of access to development policies, inparticular to credit programs, training and the marketplace. Thisapproach to the informal sector emphasizes lawlessness as a featureand tends to deal with it as an area devoted to underground activities.

Actual conditions in the marketplace are not as unequivocal asthey initially appear. The informal sector is not a “black market”operation and the “formal” sector is not as law abiding as could be

expected. Gray areas prevail. Previously,7

we described informalmarkets as the result of limited compliance with legal and proceduralrequirements, going from complete illegality to full compliance.However, what prevails is a middle ground where certain registrationprerequisites are met while tax obligations are neglected andhaphazard compliance with labor law is commonplace. Thissituation is also found also in modern activities, particularly incountries where fiscal discipline is poor and inspection capabilitiesare limited. Obviously, total illegality is non-existent, but limitedlegality is significant.

New empirical evidence gathered by ILO researchers providessupport to previous findings involving the existence of gray areas inthe formal and informal sectors alike. Unregistered labor contracts




by private enterprises in the Mercosur area represent 32 percentof the total number of wage labor in Argentina, 38 percent inBrazil, 68 percent in Paraguay, and 24 percent in Uruguay.8 Arecent paper9 shows that the percentage of wage labor withoutcontract in 1996 was over 40 percent in Peru, some 32 percent in Argentina and Colombia, and 18 percent in Chile. Moreover, a far-from-marginal percentage of those workers is to be found in largeenterprises; over half of them in Argentina and Colombia, onequarter in Peru and one third in Chile. On the other hand, almostall new jobs created in Argentina during the 1990s were withoutcontracts, and many of them involved large-sized enterprises. Half of the total number of jobs created in Peru had the same

characteristics.Recently, changes to labor laws made it easier for entrepreneurs

to hire workers under atypical, generally fixed-term contractscharacterized by higher degrees of precariousness, either because of built-in occupational instability, or due to a legal or de facto reductionof the levels of social and labor protection. More than 55 percent of labor contracts in Peru exhibit those features, as do over 20 percentin Chile and 10 percent in Colombia. In Argentina, 85 percent of new

contract jobs created in 1997 involved atypical contractualarrangements.

Thus undeclared and precarious work, usually associated withinformality, builds up in the labor market. Informality, illegality, andprecariousness become used interchangeably. As previously discussed, the absence of contractual relationships and the use of precarious contractual arrangements are regular practices. Yet thistrend does not necessarily denote informality, but rather tax evasion

or, sometimes, the use of an instrument that has been cleared by laborlaw. The informal nature of small-scale economic activities results inthe inability to absorb the costs involved in regularizing thecontractual situation of the workers and to comply with socialprotection requirements, but this is not the case for larger enterprises.Only in microenterprises do these concepts tend to represent a singlephenomenon of informality. The following figure shows that, onaverage, some 65 percent of wage labor manufacturing in Argentina,Chile, Colombia, and Peru had no contract or found themselves in a precarious situation. The above mentioned percentages vary fromover 80 percent in Peru to about 50 percent in Chile.

These statistics do not include registered contracts that under-declare wages in order to cut down the contributions due to health




and pension plans by workers and employers alike. On the otherhand, data on the informal sector show that microenterprisesmaking limited contributions to finance labor benefits reach 65percent in Peru (only 6.4 percent are in full compliance, while 28.6percent fail to make any payments), 70 percent in Brazil, and 57percent in Chile.10

The proportion of microenterprises that pay some taxes issignificantly higher: 94 percent in Peru in 1996; in Chile, where some70 percent of the microenterprises employing five or fewer workersand 96 percent of those employing five or more workers paid incometax and Value Added Tax (VAT) in 1990; and in Ecuador, where 78percent of small microenterprises and 94 percent of larger

microenterprises paid income tax, while 54 percent and 81 percentpaid VAT, respectively. Moreover, close to 80 percent of Ecuadorianmicro-enterprises paid some municipal taxes. However, a significantproportion of the micro-enterprises operating in all these countries,and a majority in some of them, fail to comply fully with labor andtax laws.

Recent ILO research also confirmed the high cost of formality.To bring a microenterprise in line with regulations, micro-

entrepreneurs in Brazil must go through at least eleven differentadministrative procedures, while those in Peru must go throughnine, those in Colombia six, and in Chile four. Obviously, each of these procedures, such as applying for a license to start a business orrequesting sanitary clearance, entails a large amount of paperworkand bureaucracy. Besides, microentrepreneurs must pay at least tendifferent taxes and social insurance contributions in Brazil, seven inColombia, and eight in Peru. The number of procedures involved and

weekdays devoted to them vary from country to country, dependingon the number of regulations, the competence of the bureaucraticsystem, and the nature of the country ’s administrative andinstitutional organization.

Given this heterogeneity of relations to the regulation system,informality cannot be defined solely by this variable. Structuralfeatures related to the existence of surplus labor, production andwork organization and market structures are more importantdeterminants of the existence of informal activities than the costs of gaining access to legality. However, they result in a certain degree of illegality.

But even considering this conceptual difference, it is alsoimportant to deepen strategic options to integrate the informal sectorinto the regulatory system as a means of achieving a fuller




participation in the modernization process. The starting point is theinability of informal entrepreneurs to comply with the requirementsand to shoulder the cost involved in becoming formal. A study conducted in Peru11 estimated that only 35 percent of microenterprises employing five or fewer workers and 60 percent of those employing between six and ten workers could comply with thewhole package of social insurance contributions. It was alsoestimated that full compliance would represent over a 50 percent cutinto the profits of 75 percent of these enterprises. But the proportionof compliant microenterprises would significantly drop below 35percent if the burden of complying with income and other taxes wereto be added. Regardless of the various factors involved, this situation

shows an unbalanced relationship between requirements andpossibilities, and calls for a more reasonable balance if the goal is toadvance the formalization process as a tool for achieving integrationinto the modern sector.

Given the existence of gray areas and segmentation within theinformal sector, we should ask ourselves whether a differentiated setof regulations responding to the specific characteristics andcapabilities of this economic sector and its different segments should

apply. Before addressing this question and undertaking the design of strategic options to regulate informality, we should assess thechances of each informal segments’ accomplishing a successfulprocess of modernization. Available empirical evidence aboutproductivity and income in the segment of productive units thatrespond to survival strategies shows that they would accomplish very little through productive modernization. Most of them are family units in which regular labor relations have no place and which

operate at such low levels of productivity and income that compliancewith administrative regulations and tax laws is hardly feasible.Without neglecting issues such as access to credit and training andoccupational safety and hygiene, the situation of these informalunits would be more adequately addressed through anti-poverty interventions. Therefore, strategic options seeking to formalizeinformality should concentrate their efforts on productive units thatshow some potential in terms of achieving productivemodernization.

Strategic Options to Regulate Informality

A first possible option would be to design an ad hoc regulatory system, different from existing regulatory frameworks that apply to




activities and individuals occupied in more organized sectors. Thiswould involve adopting dual or preferential regimes. This approachis opposed on fiscal, commercial, and above all labor grounds.Distinctions sanctioned by law hamper fiscal oversight both withrespect to microenterprises and large enterprises, by causing “sliding”for tax evasion purposes.12 Furthermore, limitations embedded inspecial regimes often become obstacles to the growth of themicroenterprises involved. In the labor field, the implementation of preferential schemes would entail that, depending on the sizes of theenterprises, workers would no longer be treated equally before thelaw. Therefore, for reasons that mainly take into account the labordimension of this issue, a single system would be preferable, even

acknowledging that full compliance with existing legal requirementsis impossible, at least during a transition period of time.13

It should be emphasized that the preference of single systemshas to do with special comprehensive regimes, but it does not excludethe implementation of de facto differential tax procedures such as a non-taxable basic income, simplified tax declarations, or taxestimations based on presumptive income, nor does it involve theimplementation of credit programs at preferential interest rates. Even

the objections raised with respect to labor issues depend on the natureof the affected rights. For instance,it is generally acceptable tointroduce a distinction on collectivebargaining to best address thepeculiarities of small productiveunits.

The single-regime proposition

also generates a variety of optionsopen to the implementation of different policies. The first one argues that to accept a de facto dualsituation without enforcing penalties entails a certain degree of tolerance, as well as the adoption of a different promotional rationalewith respect to the informal sector while other economic sectors arepenalized. This is one of the courses of action usually followed in thefield of labor rights, where legal requirements become goals andprogress towards greater compliance is an area subject to monitoringand oversight. All this should be qualified by the respect due tocertain basic labor rights, whose enforcement is required regardlessof the nature of the activity or labor relationship involved, to theextent that these are labor-related human rights, notably, freedom of

In Peru, 90 percentof labor contracts ininformal activitiesare not written.




association and bargaining, forced labor, non-discrimination anderadication of child labor. We may describe this option as a “singleregime with qualified tolerance and minimum floors.”

A second, non-exclusionary strategic option consists inadapting formalization requirements to bring them closer to thecapabilities of informal entrepreneurs, insofar as the costs of formality and formalization procedures and machinery areconcerned.

The cost of legalizing informal activities may be cut down,without affecting the “single regime” perspective, provided that thereduction is universal. This is the current stand in the labor field,where the flexibility and reduction of non-salary labor costs sought

by the modern sectors to improve competitiveness should also leadto the abatement of obstacles to the integration of informal activities.The same thing may take place in the fiscal area due to reducedtaxation or increased emphasis on informal activities. Unlike currenttrends in the labor area, present tendencies in the fiscal area go in theopposite direction, as expanding tax collection becomes a majorpriority and taxation increasingly relies on the Value Added Tax(VAT).

Simplifying bureaucratic procedures is another way of bringingdown access barriers. Numerous measures have been adopted toimplement simplified registration regimes, both in terms of unifyingregistries and administrative steps toward compliance. Currenttrends point to the implementation of a single-registry window regime. This approach would minimize the cost of formalization, butits feasibility has not yet been tried. Creating a single authority wouldfacilitate the dissemination of information and avoid overlapping

and contradictory regulations, administrative procedures andoversight efforts. However, this field is littered with obstacles, frombureaucratic vested interests to technical demands raised by oversightand enforcement actions. This situation may suggest theopportunity in some fields for combining interventions by institutions with different objectives to follow a unified procedure.This will reduce the cost for the micro-entrepreneurs less than thepresent multiple-agency inspections.

Lastly, there is room for action regarding the mechanisms forformalization. An increasingly popular device first suggested by DeSoto14 is the recognition of property titles as a mechanism to haveaccess to credit. The proposed innovation seeks to simplify the releaseof a legal property title and to adapt it to prevalent conditions of de




facto ownership. This course entails disregarding contractualprerequisites and providing proof of property using alternativemeans of recognition such as long-term usufruct, calling onwitnesses (preferably neighbors when housing or land are involved)and having boundaries recognized by third parties that might haveconflicting interests. Thus, entitlement responds to a major obstacleto having access to credit, since collateral requirements, which usually involve assets, represent a further hurdle to a sector where “property ”is not formalized.

An additional formalization tool, which could be modified forthe same purpose, is the recognition of labor relationships. In Peru,for instance, 90 percent of labor contracts in informal activities are

not written, although this is an indispensable prerequisite for accessto the benefits of employment promotion laws. Yet, a verbal contractentered by mutual agreement could be accepted as an alternative,without having to stretch the existing regulation. A note in theemployer’s monthly book may provide proof of the laborrelationship, by calling witnesses to attest to that effect or to theperformance of a regular work schedule, or by showing proof thatsalaries have been paid. All of this would help to “formalize” the

relationship, as a first step to entering into regulated relations.Street vendors deserve special treatment through the

implementation of a strategy capable of reconciling the public’s rightto enjoy public spaces and the right of vendors to have a stable,income-generating occupation. While these activities must beregulated within a single legal, fiscal, and labor framework, therelevant formalization and modernization strategy must also takeinto account the peculiarities of this sector. First, access to land

through ownership or leasing, for the purpose of setting upcommercial activities in compliance with municipal regulations;secondly, rendering the supply of available urban land compatiblewith the public transportation system, in order to provide the publicwith adequate access to shopping areas; thirdly, encouraging street vendors to organize both at the market level and also at a higher level,to improve the rate of return of their investment by developingeconomies of scale.

The separation of assets between the individual and theentrepreneur (also a very important step for microentrepreneurs), isusually conducted by creating firms of a diverse legal nature anddiverse degrees of complexity. Requirements associated with thissimple but crucial change to the patrimonial responsibility of micro-




entrepreneurs entail a monetary cost, as well as compliance witha series of regulations that render this enfranchising step towardformality a difficult one. This process could be simplified by conferring legal status to the entrepreneur along with the businesslicense.15

From Informality to Economic Citizenship

Previously discussed options lead to a different vision of formalization as a tool to ease the integration of informal activitiesin the modernization process. The extension of formalization is notwarranted from the point of view of the organized sectors, but ratherby the benefits that access to formality may bring in fostering the

development of informal activities and the people occupied in thiseconomic sector.

Oversight campaigns targeting informal activities are often justified by the need to widen the tax base, cut down on evasion andpunish illegality. While these are important objectives per se, it is alsowell known that these campaigns usually do not yield the expectedresults. (According to SUNAT, the Peruvian national tax agency,every additional sol collected in Peru entails an administrative cost of

0.75.) Actually, the importance of the integration of an informalactivity as a tax-paying entity is that its first consequence consists inmeeting a basic business requirement, such as producing accountinginformation. If the entrepreneurfails to do so, he is deprived of a key tool of modern management, a requirement to achieve fulleconomic citizenship.

The same thing happens withthe recognition of labor contracts, anarea where the goal should not be somuch to punish illegality, as to createcitizens who are ready, as workers, togain access to labor protection orembrace the logic of business, as would be the case of the micro-entrepreneurs who have to adapt to formal labor relationships.Having to respect certain labor rules is conducive to more modernmanagement standards.

A similar argument may be advanced with respect to therecognition of ownership titles for the purpose of gaining access to

Despite its flexi-bility, the informalsector is culturally

unprepared toproduce for de-manding markets.




credit or to a patrimonial division between the individual and thebusiness, brought about by receiving the legal right to subscribecontracts. As far as street vendors are concerned, stopping policeharassment and the recognition of a stable and lawful place of business, reduce the cost of informality and may also provide accessto new markets and productive resources.

Microenterprises present a paradox. Large enterprises areshifting strategies to improve competitiveness and increaseproductivity by adopting more flexible productive systems to smoothsupply-side fluctuations, by producing goods upon request, and by getting closer to customers before and after delivering the goods. Thisis the kind of approach traditionally followed by small business.

Yet, to take advantage of it, microentrepreneurs must radically alter their behavior by going through a process of cultural change.They must move from individualistic ways of doing business, drivenby the imperative of succeeding by any means in a wild competitiveenvironment, to a culture that seeks the benefits of poolingproductive resources as well as associating with other producers intheir efforts to gain access to the marketplace. Previous ways of relating to customers should change too, and new forms of

communicating with different actors should be explored. Fromworking on an individual basis and being barred from credit in anenvironment in which he or she usually entertains a personalrelationship with customers, the entrepreneur must start producingfor a market in which customers are faceless, request good quality,expect timely service, and expect professionalism. The informal sectoroperates in flexible ways but it is culturally unprepared to produce fordemanding markets.

In order to have access to credit, informal micro-entrepreneursmust undergo a cultural change that involves establishing andnurturing relationships with the banking system. Likewise, dealingwith state institutions requires learning to take advantage of existingprograms designed to assist entrepreneurs, as well as not lettingthemselves be intimidated by ministerial and other public authorities.They must also get acquainted with the ways and means of collectiverepresentation, when securing benefits and concessions is the resultof social efforts. Usually, microentrepreneurs or their workers do not join business or trade union organizations. After all, it was not solong ago that these organizations stopped seeing them both asdisloyal competitors, and started to make efforts to integrate themand accommodate their concerns, mainly as a result of a quest for




greater representation.The present proposal is indeed addressed to the ongoing

cultural change. It seeks to foster new attitudes and behavior tofavor the development of microenterprises and of those who laborin them in an environment more conducive to success.Formalization may be the gateway to full economic citizenship asa prerequisite to competition in the marketplace. It entails rightsas well as duties. The proposed views alter previous priorities.Rights should be emphasized over duties, because the former aretools for development and progress. Enfranchisement may inspire“ virtuous circles” leading to the expansion of the regulatory framework and to the creation of new conditions to allow citizens

to comply with their social duties, while also benefiting from them.Such a context would provide incentives to turn informalbusinesses into the main force behind formalization efforts.

Lastly, the present strategy faces at least two limitations that itis unlikely to overcome on its own. The first one is represented by a segment of survival activities that would gain very little fromformalization. The second is that the effects of formalization will notcome automatically and may become insufficient to integrate

informal activities into the modernization process. Therefore,complementary measures should be taken to secure the benefits of enfranchisement. Entitlement requires financial institutions to makeadjustments in order to acknowledge the value of property. To haveaccess to safe places of business of their own, street vendors needmarketplace support, credit and advice. The recognition of legalstatus as a corporate, labor and fiscal subject must go along witheducational efforts to learn to take advantage of administrative and

productivity accounting books, patrimonial division and moreformal labor relationships. Special machinery and financing may also be necessary to facilitate the transition period.

This proposal is a necessary but insufficient condition foraccess to the modernization process. It incorporates strategies underimplementation in many Latin American countries. Ultimately, theobjective of initiatives for the integration of the informal sector intothe modernization process has to be the advancement of rights andthe attainment of economic citizenship.

Notes:

1 ILO, Employment, Income and Equali ty . A Strategy for Increasing Prod uctive Employment in Kenya (Geneva: ILO, 1972).




2 Hart, “Informal Income Opportunities and Urban Employment in Ghana,” Journal of Modern African Studies 11 (1), 1973.3 Tokman, V.E., “Las relaciones entre los sectores formal e informal. Una exploración sobre su naturaleza,” in V.E. Tokman ,ed., El sector informal en

Améric a La ti na . Dos déca da s de anál is is (Mé xico : Consejo Nacional para la Cultura y las Artes, 1995) Chapter II.4 Portes, A.; Castells, M.; Benton, L., TheInformal Economy: Studies in Advanced and Less-Developed Countries (Baltimore and London: The Johns HopkinsUniversity Press, 1989).5 De Soto, H., El otro sendero. La revolución informal (Lima, Instituto Libertady Democracia, 1986).6 The informal sector is defined as including self-employed with less thanthirteen years of education, unpaid family members, employees andemployers in establishments of less than ten employees (depending on

country data availability) and domestic servants. In 1999 a new series wasestimated, since improvements in national statistics allowed excluding fromthe informal sector establishments with more than five employees. The sizeof the informal sector in Latin America with this new series was 48 percentof non-agricultural employment in 1998, while six out of each ten new jobscreated between 1990 and 1998 were informal. ILO, “NEWS Latin America and the Caribbean.” 1999 Labour Overview, no. 6 (Lima: ILO Regional Office,1999).7 Tokman, V.E., Beyond Regulation. The Informal Sector in Latin America (Bolder:Lynne Rienner Publishers, 1992). And Tokman, V.E.; Klein, E., ed., Regulation

and the Informal Economy: Microenterprises in Chile, Ecuador and Jamaica(Boulder: Lynne Rienner Publishers, 1996).8 Galín, P., Informe sobre el empleo no registrado en el Mercosur (Buenos Aires:Draft for discussion, 1997).9 Martínez, D.; Tokman, V.E., “La agenda laboral en la globalización:eficiencia económica con progreso social,” in Flexibilización en el margen, (Viña del Mar: Chile, 1998).10 ILO, “La legislación laboral y su impacto en la microempresa: Aná lisiscomparativo y propuestas,” and “La legislación tributaria y su impacto en la microempresa: Aná lisis comparativo entre pa íses,” in Proyecto Integración del

sector informal al proc eso de modernización, Draft version (Lima, OIT/PNU,1997).11 ILO, “NEWS Latin America and the Caribbean.” 1997 Labour Overview, no.4 (Lima: ILO Regional Office, 1997).12 Revilla, A., “La modernización del sector informal y las cargas tributariasy administrativas a las empresas en el Perú.” Working paper no. 92 (Lima: ILORegional Office, 1998).13 ILO, “Dilemma of the Informal Sector,” Report of the Director Generalpresented at the 78° International Labour Conference, 1991.14

De Soto, H., “¿Por qué importa la economía informal? ,” in V.E. Tokman,ed., El sector informal en América Latina. Dos décadas de análisis (Mé xico, ConsejoNacional para la Cultura y las Artes, 1995), Chapter VI.15 Fuentes, S., “Sugerencias de políticas para la integración de los sectoresinformales de micro y pequeños empresarios,” in E. Chá vez , Pro yec to

Integración del sector informal al proceso de modernización, Draft version (Lima,OIT/PNUD, 1997).

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