Linkages between the formal and the informal sectors in developing countries: a review of literature

During the 1970s and early 1980s the ILO carried out a number of studies on the informal sector in large urban centres of developing countries, including Accra, Lome, Yaounde, Dakar and Kaolack. These studies failed to elaborate on the nature and extent of the relationship between the informal and formal sectors. This review is a first attempt to examine the question of informal-formal linkages. The author finds little solid argument in support of the hypothesis that the informal sector is subject to exploitation by the formal sector in the sense that a substantial part of the surplus generated in the micro production units is appropriated by the formal sector. The survey shows that there are significant backward linkages between the two sectors. If these are detrimental to the interests of the informal sector it is largely because of the imperfections in the factor markets. The review also underlines the need to look at the two sectors in an integrated framework of national economies.