A new report from the International Labour Organisation outlines a set of propositions on how countries should go about formalising the informal economy. The report provides the basis for negotiations on the subject at the International Labour Conference in Geneva in June 2025.
Formalising the informal economy is a burning issue, particularly for countries in Africa. In some, such as Nigeria and Ghana, more than 80% of the workforce is informal.
According to the ILO report, the informal economy is a “structural barrier” to social justice and decent work. This is so because informal enterprises do not pay tax, therefore governments do not have the public revenue to meet their sustainable development goals.
Based on my research and policy work on the informal economy I believe that the ILO’s analysis, and its proposed solutions, are flawed. In my view, they follow a long tradition of misplaced thinking about the formalisation of informal work.
The ILO has the view that all “independent workers” should be “brought under” laws that regulate enterprises. And it assumes that providing “independent workers” with access to finance, business and skills training, and access to markets (“business development services”), will lead to more “productive” enterprises that create jobs.
I don’t agree.
Business development services have been tried in many countries since the 1990s – without success.
Clearly, informal enterprises that earn above the tax threshold must be “brought under” enterprise laws and must comply with labour laws if they employ others. But what about own-account workers, such as street vendors and waste pickers, who earn way below the tax threshold?
Labour law only covers employees, but I argue that it should be reformed to include own-account workers. That’s because given structural unemployment, artificial intelligence and a shift from firms investing in production to investing in financial products, industrial reform and business development services are not going to create sufficient jobs.
The flaws
The ILO report argues that the reasons “independent workers” don’t formalise are that: they lack the capital to be productive; it’s too costly to comply with legislation; and they don’t want to pay tax because they don’t trust state institutions.
This logic suggests that states should: support enterprises to become more productive and profitable; reduce the cost of compliance; make institutions trustworthy; and reform industrial policy to improve productivity and create jobs. This is exactly what the report recommends.
But these approaches haven’t worked. If decent work is the aim, most people in the informal sector should fall under labour law, rather than enterprise law.
Old wine in new wineskins
Policy approaches to the informal sector have changed over the decades. For example, in the late 1980s simplifying regulations and creating property rights was seen as the answer for informal micro-enterprises to formalise.
This was first popularised by Peruvian economist Hernando De Soto’s 1989 book The Other Path: The Invisible Revolution in the Third World. He argued that Peruvians operated informally because complying with the regulations was too time-consuming and expensive. His insights were incorporated into the World Bank’s “good governance” development agenda.
Similarly, access to credit and markets, business and skills training – known as “business development services” – was the key strategy in the 1990s, when I first worked in this sector. When the first democratically elected government in South Africa published its small business strategy in 1996, this reflected “best practice” at the time.
South Africa’s policy visualised the formalisation process as a ladder: with the right support, micro-businesses would climb the “entrepreneurial ladder” to become “globally competitive businesses” and create jobs. Government’s role was to simplify regulations and provide funds to service providers.
Back in 2010, I critiqued this approach, in part because there was no evidence that livelihood activities (such as street vending) will grow into job-creating businesses simply by providing the inputs, correcting market failures and simplifying business regulations.
Since then, informality has increased everywhere, as evidenced in the ILO’s report. Kate Philip, the programme lead on the Presidential Employment Stimulus in the Office of the South African Presidency, argues that this approach places the responsibility on the most economically marginalised citizens to “self-employ themselves out of poverty”.
One size does not fit all
The ILO report lumps together employers – people whose businesses are informal and employ others – together with own-account workers into one category: “independent workers”.
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ILO data show that own-account workers make up 47% of informal workers, and fewer than 3% are employers. In Africa, the percentage of own-account workers is even higher. In sub-Saharan Africa, street vendors comprise 43% of informal employment.
The goal is “bringing them under regulation, with both the advantages and obligations it entails” to realise decent work and to grow the tax base. It assumes that own-account workers are not regulated and are not contributing to the fiscus.
Both these assumptions are false. Public space, where many work, falls under nuisance, health and vagrancy regulations. And vendors pay “taxes” to local authorities to trade.
The report recognises that own-account workers suffer violence and harassment in their workplace. Violence, arrests and confiscation of goods – by municipal officials and the police – is ubiquitous. Workers are powerless to engage individually with the state. To realise decent work, they need to do that collectively.
Where labour law fits in
Labour law recognises that workers and employers’ interests are not aligned. It provides a collective bargaining framework for workers to negotiate as a group.
Although labour law only covers employees, I have argued that it can be reformed to include own-account workers. Street vendors and other own-account workers are here to stay. Reforming labour laws to realise their right to collective bargaining – to co-determine their working conditions – should be a critical part of formalisation.
