The informal sector in a Third World urban economy: A case study of Calcutta, India

Abstract

An unresolved controversy exists in development literature over the nature and function of the informal sector in urban areas of the Third World. The controversy revolves around the presumed relationship between the modern system of industrial production (often termed the “formal sector”) and that part of the urban economy operating outside it (the “informal sector”). The earlier view that the informal sector is a source of employment which can be realized if the linkages between the two sectors are improved through policies designed to regularize the informal sector, has been shown to be non-generalizable and even inaccurate. Increasingly, researchers have come to the conclusion that the modern industrial sector in the Third World is parasitic and detrimental to the development of the remainder of the urban economy. Their research implicitly or explicitly points out that a net transfer of value from the informal sector to the formal sector is occurring. The transfer is in the form of undervalued labor drawn from the informal sector, undervalued goods and services produced in the informal sector which are directly or indirectly consumed in the formal sector, and a transfer of the welfare burden to the informal sector. In the process, that segment of the population in a Third World city that earns a living primarily in the informal sector is moving toward a situation of increasing immiseration.