Avoiding Informality Traps

Despite historically high rates of economic growth in South Asia over the last two decades, the extent of informality remains large and widespread. This paper asks why that is, why informality needs to be addressed, and how it can be addressed. The central thrust of this paper is to emphasize the heterogeneity of the informality discourse. While informality has a core commonality of concern in analysis and policy, there are diverse conceptualizations, diverse empirical measurements, diverse causal channels and theories of informality, and diverse policy concerns. For policy, the single most important conclusion is that there is no single overarching policy intervention to address the concerns that arise with informality, and that a range of interventions need to be examined and implemented. These include: policies that induce fast growth whose sectoral patterns make it highly labor absorbing; extending coverage of state protections to informal workers while reviewing existing regulations to enhance their flexibility and implementation; direct measures to increase the productivity and incomes of enterprises in the informal sector, which includes targeted measures of training and enterprise support as well as general measures of bringing legal and other state infrastructure support to these enterprises; better enforcement of regulations that do exist, and assessing enforcement possibilities before regulations are passed.