Hidden Potential

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.