Hidden Potential

Informality remains widespread in South Asia despite decades of economic growth. Thelow earnings and high vulnerability in the informal sector make this a major developmentissue for the region. Yet, there is no consensus on its causes and consequences, with thedebate polarized between a view that informality is a problem of regulatory evasion andshould be eradicated, and another that equates informality with economic exclusion.Recent advances in analyzing informality as the outcome of firm dynamics in distortedeconomic environments can help reconcile them. Building on these advances, theapproach 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 thepurview of regulations because they are small, as opposed to those that remain smallto escape regulations. Second, reforms of business regulations tend to have small directeffects on the informal sector, although they could have sizable indirect impacts on it ifthey succeed in removing major inefficiencies in the broader economy. Third, e-commerceplatforms offer new opportunities to informal firms and workers, but many of them lackcomplementary skills or credit to benefit from such technologies. Fourth, a combinationof contributory and non-contributory programs recognizing the heterogenous saving capacities of informal workers may benecessary to achieve more universal coverage of social insurance.