Issues Informal Economy

Social Development: In the context of informal economy and social protection

The overall state of social development in the South Asian region as a whole is not comforting. The region, despite posting development of significance, currently: i) hosts hundreds of millions of illiterates, ii) has a higher child mortality rate, iii) access to safe drinking water is not available to all, and iv) about a quarter living in poverty and those number raising when compared with those earning $1.25/day.

Although, some increase in the manufacturing and services sector employment and overall rising exports notwithstanding, still agricultural sector and informal mode of employment account for a majority of employment in the region. The formal sector employment having some form of rules and regulations governing employment is pitiably small. Thus, lesser remunerative and low productive work currently affects a significant proportion of the employed. Poor working conditions in significant workplaces are also not uncommon.

Unemployment and under employment is quite pervasive; the underutilized labor of South Asia accounts for over a fifth of the workforce. Informal sector (economy) dominates employment in the urban areas, while rural workforce is content with the low productive agricultural sector.

The move from permanent to flexible employment, from stationary to distance work, fast emerging as the labour market reality. Even jobs in the formal economy are becoming informalized; non-core tasks are increasingly outsourced thus furthering the process of casualization and informalization of work opportunities. For instance, in Nepal, the percentage of individuals employed in the (non-agricultural) informal sector actually increased from 17.5 percent during 1998/99 to 18.2 percent in 2008 (note: this figure does not include individuals working in the agricultural informal sector and individuals in informal employment outside the informal sector). Furthermore, as seen in the table below, overall (non-agricultural) informal employment remains a major challenge across South Asia.

Informal Employment in South Asia (ILO, 2013)



Informal Employment (% of non-agricultural employment)













Sri Lanka



Furthermore, of the unemployed  estimated to be well over 60 million, a large proportion is found to be: i) educated and trained and youth, and ii) active in the job/work search for a longer period. The South Asian region as a whole does not boast of a formal social security system of some significance. This then places enormous pressure on the concerned households and individuals. It is also a drain on the already meager resources of the South Asian countries.

Labor market monitoring is weak, thus existing system in vogue largely does not capture the changes taking place in the labor market. Even accurate account of nature and extent of unemployment by education, gender, areas and length of unemployment is largely not available. The education and training system also continues with qualitative and quantitative bottlenecks.

Looking from another angle the employment the access of working women and men to many labour protection mechanisms including exercise of their fundamental right to organize and bargain collectively is rather limited in the South Asian Countries. The Export Processing and Special Zones (EPSZs) cropping up in South Asia are found succumbing to the dictates of the foreign investors and providing numerous concessions including relaxation in labour laws.

Whereas, many countries in the region are not only members of the ILO, have ratified a number of Conventions including CLSs and also have labor laws including industrial relations, coverage and enforcement continue to raise serious concern. Furthermore, the labor laws have exclusion clauses even with regard to the fundamental right to organize and bargaining collectively. Almost all the countries have restrictive clauses denying  trade union right to any or all belonging to: i) civil service, ii) informal economy, iii) agriculture, iv) sub-contract/outsourced, and v) home-based. In some countries, one union-one enterprise is mandatory for state enterprises. Even strikes can also be banned or cancelled.  Many countries boast of ESMA or similar laws restricting union work, putting a ban on union for a specified number of months, banning strike, et cetera.

Given that a vast majority of workers in South Asia find themselves working in the informal economy without sufficient provision of social security/protection from their employers, it is imperative that the government step in to fill the void. Social protection or social security is not by any means a nascent concept for most countries in South Asia. Countries like India and Sri Lanka instituted social security measures soon after they gained independence in the late 1940s. However, in others, like Nepal, such measures have emerged in the more recent decades. Regardless, there is an innovative array of social protection measures across countries in South Asia. This being said, the depth (amount in benefits), breadth (coverage) and efficacy of such measures still leave room for much deliberation and debate.

In fact, the Social Protection Index (SPI) of the eight South Asian countries (as a whole) is only 0.061, lowest among the regions in Asia. Most countries spend 2% or less of their GDP on social protection, the exceptions being Sri Lanka (3.2 %) and the Maldives (3.0%). This is worrisome in light of the fact that the poverty headcount ratio (at $2 per day) surpasses the percentage of population benefiting from the existing social protection programs in all of the concerned countries (with the exception of Sri Lanka) meaning that the existing social protection programs have not been successful in covering the entirety of the respective country poor population. 

Although social protection measures of all kinds have been instituted in South Asian countries, there are still some major gaps and deficits that need to be addressed. The way forward should consist of a combination of steps that focus on increasing the coverage of existing programs, and measures that ensure accurate beneficiary identification as well as introduction of additional programs. There is enough evidence that indicate that the following measures would help improve social protection in South Asian countries:

  • As unemployment, especially among the youth is rampant, it is crucial to increase the coverage of the existing labour market programs, particularly in countries like the Maldives, Nepal (where the underemployment is high) and Afghanistan, where unemployment is particularly high. Sustaining the current GDP per capita growth will definitely help in alleviating this issue but the government needs to simultaneously also ensure that the consequent job growth is not contained to the informal sector.
  • Moreover, given the sheer size of the informal sectors in South Asian countries, the governments should prioritize the expansion of social insurance to the informal sectors. Perhaps, instituting measures similar to that in Sri Lanka would be good way forward. The predominance of informal sectors is indicative of bottlenecks in access to employment in the formal sectors; as such the governments would benefit from conducting further research to identify these barriers and taking measures to abolish them.
  • Further, there is a dire need to expand the reach of social assistance and institute systems for more acute beneficiary identification. This is absolutely crucial as South Asia continues to hold the largest number of poor people in the world (particularly India and Bangladesh). The governments should invest in the expansion of existing provisions catering to the financial, health, and educational needs of the poor. Old age pension programs should also be given considerably more attention in light of the impeding increase in the dependency ratio in the forthcoming decades. Countries like Sri Lanka with its free education system, Maldives with its universal healthcare and Nepal with its universal old age pension serve as good examples.
  • Disaster relief should be a crucial component of any social assistant program. The governments should, in the least, make financial provisions for disaster relief, particularly in countries like Nepal, Bangladesh and India which are extremely prone to natural hazards. Research on chronic poverty indicates that living in areas frequented by natural disasters is a key poverty trap.
  • Finally, there is also a need to make provisions for the marginally non poor population who are unable to benefit from either social insurance or assistance. These groups of people are still extremely vulnerable and have so far remained out of the reach of social protection.

(Summary of concept paper prepared by Centre for the Study of Labour and Mobility (CESLAM), Nepal)