Informality and Development

A core prediction of the Development Theory was that the informal sector in developing economies would rapidly decline with growth. In reality, the informal sector declined very slowly even in fast-growing, developing economies and still remains huge. This is because the governments invested in the informal sector (which incorporated agriculture) to pre-empt the possibility of a stagnant agriculture choking the growth of the formal sector and increasing impoverishment. The sector’s growth implied substantial improvement in employment conditions for the bulk of the workforce that it employed. In fast-growing developing economies, the slow decline of informality, therefore, did not mean the deterioration of employment conditions. India’s experience provides good illustrations in this context.