chapter  5
The Informal Sector
Pages 15

The move from country to town, urbanisation, is a universal phenomenon happening in both developed and developing countries, but differs considerably across countries in how it happens and its outcomes. Some nations have experienced urbanisation that was accompanied by skills upgrading, industrialisation and the expansion of the urban formal (modern) sector, but others urbanised without such modernisation and in these countries the urban informal (traditional) sector grew. This latter is largely a characteristic of developing countries where there is a lack of education and social and economic infrastructure. The speed of urbanisation differs, but appears to be highest among middle-income countries and lowest in developed nations where this urbanisation happened in the past (Yuki 2007). Researchers in development studies and economics have tried to define the non-farming informal sector across a range of nations, finding as many differences as there are similarities. They have also examined the relationship of the urban informal sector to issues of poverty, slum dwellings and access to education. These differing ways of approaching the topic will be discussed in this chapter together with the role that the informal sector plays in most developing countries. Migration decisions of rural residents are mainly driven by economic factors, in both developed and developing countries. However, the evidence suggests that rural migrants do not necessarily enjoy higher welfare in urban areas. This can be seen to be due to the dualistic nature of the urban economy in a typical developing country and the lack of capacity rural migrants have to adapt to a very different environment. The divide between rich and poor in urban areas

can be great, and often reflects the differences in opportunities between longterm urban dwellers and newcomers from more rural areas. In most developing countries the size of the informal sector is substantial, often making up the largest portion of the economy. Large welfare gains by rural immigrants occur only if an economy has achieved industrialisation, or is in the process of industrialising. Otherwise, the limited urban formal sector employs only skilled workers and physical capital, not unskilled rural workers with little human or financial capital (Yuki 2007).