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Informalization of Work and its Impact on Economy

Organised by Centre for Labour and Social Studies Nepal (CLASS-Nepal)

25 September 2012, Kathmandu

Ritu Raj Subedi
Associate Editor
The Rising Nepal

Informal economy has been playing an important role to grow income, nationally and globally. In Nepal, its share to GDP stands between 15 to 40 per cent. According to data, of the country's total workers that stands about 11.779 millions, the formal sector has 1.991 millions and informal 9.788 millions. The informal workers outnumber the formal ones in a large quantity but, there is tepid response of the state to the concerns of informal workers, whose contributions keep the national economy going. Unlike in the formal sector that is organized and wields legal weapons to fight 'greedy' employers, informal workforce is deprived of basic facilities they are entitled to get as per the ILO declaration. The worrisome part is that there has been growing trend of informalising the formal sector. This has added additional challenge to deal with the problems of the informal sector.

Against this backdrop, the Centre for Labour and Social Studies Nepal (CLASS-Nepal) in the support of Friedrich-Ebert Stiftung organized a national seminar 'Growing informalisation of work and its impact on national economy' to draw the attention of policy makers and stakeholders to the problems of the informal sector. One-day seminar saw the participation of the representatives from different organization, NOGs, INGOs and government. Divided into two parts - opening and discussion sessions, it had three working papers on the subject.

Opening Session

National Planning Commission vice-chairman Dependra Bahadur Chhetri inaugurated the seminar amidst a function. Addressing the programme, Chhetri said that there had been tendency to run formal sector on the informal basis.

Citing the example of banking sector, Chhetri said that these days banks did not directly appoint their employees. Some companies that provide training to the prospective employee supply them to the banks, which, in turn, give some portion of their salary to the former, he said, adding that this had exploited the bank employees.

The banks do not want to recruit employees on the permanent basis because this would oblige them to give facilities such as pensions and payment to the revolving fund.

Touching the negative sides of employees, Chhetri said that they showed a tendency of not working honestly once they became permanent.

The companies refuse to register more unions because the former have to pay hefty amount to them once they are recognized by the offices, he said.

Chhetri said that there was the need of clarity at the policy level to address the problems of informal sector. "Employers and employees must abide by the law to avoid labour unrest and strikes facing the industrial sector." The ongoing transition, strike and instability have overshadowed the problems faced by the informal sector, he said.

FES Nepal head Dev Raj Dahal said that informal sector in Nepal is huge and this space is mostly preoccupied by those at the bottom of development statistics - poor women, workers and also those who stand between labor and capital.

The deliberate exclusion of informal workers exposed them to multidimensional vulnerabilities - the abuse of their right, absence of entitlement, remuneration, paid leisure, maternity leave, health and safety, pension and adequate living wage for sustainable livelihood. "The labour-capital ties in informal sector, except in cases of those run by family members, are beleaguered by one-way dependency of workers and decision-making by owner of capital and enterprise."

In the context of growing youth population, declining public budget and rural push of poverty and foreign pull of opportunity, the state often lags in providing a supportive policy framework for their productive employment, he said and added that the informal sector continued to grow in direct proportion to the decline of the forma l economy owing to the negative effects of globalization, crisis of global capitalism and political instability. "But, one can clearly see the urban bias in development policies and resource allocation of the state, employers and even labour unions."

He stated that the corporate global world is at conflict with the workers o welfare measures, science over climate change and environmental issues and art over commercialization of spiritual and human life. Dahal called for cohesiveness of unions to exert pressure for policy reform, organization, solidarity, communication and collective action on behalf of its members and society at large.

All Nepal Trade Union Federation president Salikram Jamkattel said that the trade unions were unable to demarcate a line between the formal and informal workers. He said that all except agriculture belonged to formal sector. The government and employers wanted not to recognize workers engaged in construction and transport sectors as formal, which was simply wrong. "The existing Labour Act has failed to address the problems of the informal sector's workers. We need to formulate common opinion on the informal workers."

Namrata Bali, executive Director of Sewa, Indian, said that informal sector contributed 60 per cent to India's economy but informal workers were deprived of social security benefits, minimum wage and collective bargaining power.

CLASS Nepal chairman Shankar Lamichhane called on National Planning Commission to take initiatives to solve the problem of informal sector. He was of the view that the Central Bureau of Statistics could play an important role to address the woes of informal workers by providing exact data about their number and contribution to the national economy. He said that regulating bodies failed to pay attention to the concerns of working people. "Since every citizen is formal, his work is also formal. The concept of informal sector came into existence to exploit the workers."

CLASS-Nepal general secretary Tilak Jung Thapa noted that the CLASS is partnering with all those working in the field of labour. He said that informal sector consisted of big portion of labour workforce and played an important role in the national economy. Labour itself could not be segregated into formal and informal one. It is practice that makes work informal, he said and added, "Despite the huge contribution of informal workforce, the state failed to recognize their contribution and resolve their problems."

Sailendra Kumar Jha, national coordinator for informal sector programme ILO-Nepal, said that the ILO was soon going to launch a programme to carry out study about the status of the workers involved in the informal sector.

Stating that the size of the informal sector was increasing, he pointed out the need of policy to address the workers of informal sector. He said that informal workers are deprived of the social security. There was tendency to import workers from India, he said.
Rajendra Kumar Acharya, director at the UNI-APRO, said the demarcation line between the white collar and blue workers had been blurred, and both they were mixed up.

Discussion Session- 1

The discussion session saw three separate working papers related to the condition of informal workers and their contribution to the national economy. GEFONT general secretary Umesh Upadhyaya presented 'Trade Union movement in Informal Economy: Challenges and Opportunities' in the first discussion session. Sailendra Kumar Jha of ILO moderated the first session. Shankar Lamichhane of CLASS Nepal and Baburam Gautam of ANTUF commented Upadhaya's paper.

'Informal workers deserve trade union rights'

In his paper, Updhyaya offers a conceptual framework to the informal economy and suggests ideas to bring the vast informal workers into the framework of the formal economy. He noted that owing to the transitional phase, the problems of the informal workers are piling up. Making a class analysis of the Nepali society, he said that there are mainly three active opposing forces - feudal, business and working class. "While the feudal class still holds its sway in the power equation, the business class, which grew out from the feudal class, has still feudal mindset when it comes making investment and operating their business. This is a reason why the business class still treats workers as servants, not as human being."

In the paper, he demarcates a line between informal sector & informal economy in Nepal. According to him, informal sector is a narrower term, encompassing family enterprises & micro enterprises with less than 10 workers at work but informal economy is a broader term, covering every economic activity outside the formal sector and constitutes a segment of informal economy. It includes registered establishments with less than 10 workers, unregistered informal establishments or micro enterprises and informal activities concerning production and services

Workers in the informal economy consist of wage-employed and self employed, paid workers and unpaid family workers and attached worker with no separate payment for her/his work. Informal sector covers only paid workers whereas informal economy also covers all paid, unpaid and attached workers including self employed workers. There are various forms of informal works. Those working in diverse fields such as farm & farm related areas, construction, trading - street vendors, hawkers, small traders, sales workers, transport, micro enterprise & cooperatives, craft workers, garbage cleaners and sweepers and home-based workers, among others, can be categorized as the informal workers. Upadhyaya said that of the country's total workforce 11.779 millions, males are 5.520 million and females 6.259 million. Of them, the formal sector has 1.991 millions and informal economy 9.788 millions.

Highlighting the activities carried out by the GEFONT in the informal economy, he noted that it has given emphasis to specific trade union roles in informal economy basically focused on the areas of organizing, ensuring minimum wages and justice in the market to self employed workers, developing & extending the social protection system and building awareness and right-based education work, among others. He admitted that they faced challenges when it comes to building awareness for recognition as workers deserve trade union rights. Summing up the experiences of campaign aimed at consolidating the rights of the informal workers, he lists some important points useful for the future drive in the favour of informal workers:

  • Organizing easier with some benefit/welfare package not with the empty hands/empty mind
  • Issues of children and women should to be given emphasis
  • Wages to be considered as the basic area for actions
  • Local level social and political activists as well as teachers can play very important role
  • Strong lobbying with the government for workers registration system and providing ID cards in local level

He suggests for forming trade unions and expanding committee network, launching for a campaign for the implementation of the minimum wage, social security, mobile health camps and separate especial programme for development of women leadership. The slogan of 'not mere representation but real participation' to organize more and more women workers should be applied. In order to ensure collective bargaining strategy for informal economy, he recommends following ideas:

  • Demand for right to local bodies to settle the cases of workers through tripartite structure
  • Direct national level bargaining of national federations with employers' commodity associations and negotiations (Industrial Bargaining System in national level)
  • Bargaining with Municipalities and negotiations
  • Interactions and pressure to concerned Departments of government
  • Informal economy workers to be managed within labour legislation through Labour market reform process


As a key commentator, Shankar Lamichhane said that the informal sector, in which a large number of women are involved, is not completely organized. "If we can organize women through women-friendly programmes, it will become strong sector." Stating that the workers are mentally and politically fragmented, he said that they assume different roles at different times. Sometime they are citizens and other time they are workers. What the state needs to do is to recognize their role and identity." He said that whole society is worker's society. The trade unions are borrowing knowledge from outsides and the time has come for the local trade unions to produce their own knowledge to ensure their rights, he added.

Second commentator Baburam Gautam noted that the main problem lay with the traditional economy that fails to infuse modern technology and management. He also said that the Nepalese workers are also divided in the name of gender, religion and ethnicity, weakening the trade union movement. "The trade unions should forge a common working strategy for the cause of the workers:" He also asked the paper presenter to define the self-employed workers by fixing the ceiling of their income. He also expressed concerns over the growing informalisation of the formal sector and urged for the measures to check such a trend.

From the chair, Shailendra Jha said that the government has not included informal workers in its laws and policies and subsequently their earnings have not been included in the national income. He said that annually around 400,000 workforce enter the job market and most of them become under-employed, not unemployed. It is a matter of satisfaction that all trade unions are up in arms to secure the rights of informal workers.

Comments from the floor

There has been mixed responses on Upadhyay's paper. About six participants commented on their papers. Some of participants appreciated it for encompassing many things about informal economy while some others advised him to add some areas wherein the informal workers are engaged but go unnoticed by the concerned bodies. Their comments can be summarized in the following points:

  • The paper fails to include the condition of informal workers working in the media houses that are running their institution on the informal basis as many of them are deprived of trade union rights and do not get their salary in time.
  • It would have been better if one-person-one-job policy is implemented to increase employment.
  • The presenter needs to clarify the self-employment policy.
  • The government needs to revamp the sick industries to promote job and growth.
  • The efforts need to be concentrated to attract foreign investment.
  • There should be women friendly programmes to organize women workforce in the informal sector.
  • There is the need to modernize the traditional entrepreneurship and industries.
  • All trade unions must come together to formalize the informal sectors.
  • The government should invest in agriculture sectors for where the nation makes income of billion of rupees.
  • While organizing workers from both sector formal and informal, the trade unions should pay due attention to the health of the women workers through health-friendly programmes and activities.
  • A health insurance policy needs to be introduced.

Discussion Session- 2

Resham Thapa, lecturer of economics at the Central Department of Economics, Tribhuvan University, presented his dissertation entitled 'Size of unobserved economy, determinants of informality and human capital formation in Nepal: A Glimpse'. Jaya Kumar Sharma from Department of Statistics moderated the session while Subarna Karmcharya of National Human Rights Commission and Dr. Abdur Rihim Mikarani, a member of National Planning Commission commented Thapa's paper.

Urgency to study underground economy: Thapa

There has been tendency to work informally as there is the paucity of formal job and 80 per cent of economically active population is engaged in informal activities in Nepal, who are economically and socially insecure like Middle East and North American workers, said Thapa. The size of unobserved (informal economy or underground economy) is rising irrespective of the state of development of any economy in the world. Quoting Schneider and Enste, he said that the size of shadow economy in developing countries ranges from 35 to 44 per cent of GDP whereas the same for transition and OECD countries ranges from 2 to 30 per cent and 14 and 16 per cent respectively during the last quarter of the 20th century.

According to him, Nepal has been considered by many as a safe haven for the underground economic activities attributing mostly to the absence of related acts, proper rules and regulations, institutional arrangements etc to monitor and control them. "Although there are no recent studies conducted to estimate the size of unobserved economy in Nepal, indications of its rampant prevalence and its sizeable effects on economic and non-economic fronts such as higher budgetary and fiscal deficit, increased cost of production etc are apparently noticeable."

Shedding light on the negative externalities of the unobserved economy, Thapa noted that it has serious macro and micro level consequence in the overall economy. "In Nepal, considering the present political and social dynamics, it is urgent to understand the current situation of underground economy that not only downsizes the pace of growth but also encourages the anomalies in the form o widening inequalities, enmity and immorality."

"Unobserved economy," said Thapa "stands at least 15 to 40 per cent of GDP in Nepal, which is more than world average." The volume might have legal and illegal facets. Out of legal informal and observed segment, informal employment plays significant role that by nature our economy is informal, he said.

There are various socio-economic determinants whether people opt for informal employment. Thapa points out following socio-economic determinants:

  • Ethnicity matters whether to participate or not in informal job
  • People living in urban area are more engaged in informal job
  • Wage level definitely matters whether a person remains in the informal job or not
  • Females, married couple and divorced are more engaged in informal job than males and the unmarried
  • Contrary to other similar type of economies, people in Nepal work in informal sector despite their older age.
  • People with secondary education participate in the informal job followed by higher education and college.
  • There are wage discriminations in formal and informal sectors.

Thapa's recommendations:

  • A national level mechanism must be in place to check uncertainties caused by unobserved economy,
  • While formulating policies related to informal sector, gender, geography, educational status, marital status, geography, educational status, age and ethnicity status need to be taken into account.
  • The wage differential and returns to education in Nepal different for formal and informal sector. Therefore, suitable compensation packages can be introduced so that the working poverty might not increase further.


The comments of Dr. Abdur Rihim Mikarani and Subarna Karmcharya on Thapa's paper are as follows:


  • It is comprehensive and though-provoking paper on the size on the unobserved economy and provides national and global aspects on the matter.
  • In Nepal, the informal sector is rising rapidly, especially in education, health, agriculture, small trade, hotel business and some other services sector. There is lacking the needed policy to regulate them.
  • The people working in the informal sector are deprived of decent working condition, and are unreported or underreported in the national data system, and also undercounted in the GDP.
  • On the one hand, they are more vulnerable to job layoff, on the other the investors want more informal labour so that they could pay less tax and can avoid labour laws and social security.
  • There is the need to formalize the informal sector to ensure the social security of the workers, increase government revenue and improve the estimate of GDP.
  • The concerted efforts are necessary to implement the above mentioned ideas. Trade unions, civil society, the private sector, political parties and the government should join hand and come up with a new strategy to solve this alarming situation of the informalisation of the economy.


  • It is good and informative paper on the informal economy.
  • Education and health sectors are also being run on the informal basis.
  • We must change our mindset that working in the government offices are good and working at home or in informal sector is bad.

Comments from the floor

Around three participants expressed their views on Thapa's papers. Yuva Raj Neupane said that the paper is full of data that boggles the mind of the audiences. "The main challenge ahead of us is how to formalize the job and organize the workers to ensure their social security. Baldev Tamang said that there had been arrogant feeling that the trade union leaders developed after they engage into their respective organizations. Bhawanath Acharya warned that if the current trend of informalisation of formal sector continues, the formal sector ceases to exist within a few years. The concerned sector must pay attention to this matter, he said.

Informal sector and experience from SEWA Modality

Namrata Bali of SEWA, India shared the success story of Self-employed Women Associations (SEWA) in India. Her presentation covers informal works, their contribution to the global, regional and Indian economy and lessons learnt from organizing the rural, poor and illiterate women, who run SEWA. Bali first moves to define informal economy and then offers picture of variety of informal works and condition of women involved in the informal activities. According to her, informal economy involves self-employment small enterprises, which are unregistered and unincorporated. They include employers/owner operator, own account workers and unpaid contributing family workers in family businesses. While wage-based informal employment lacks contracts, workers' benefits and social protection.

Informal jobs includes:

Wage work for informal enterprises.
Domestic work without a regular contract.
Casual day labour without a fixed employer.
Industrial outwork for formal or informal firms (or their intermediaries).
Unregistered or undeclared work for formal or informal firms.
Temporary and part-time work for formal firms without worker benefits or social protection.

Shedding light the status of informal economy at global level, she said that the informal economy had not only grown, but also emerged in new appearance and in unexpected places. "It represents a significant, but largely over-looked share of the global economy and workforce, a fact that has become more apparent in the recent global downturn. That renewed interest in the informal economy that also stems from the recognition of the links between informality, growth, poverty and inequality."

Highlighting its role in Indian economy, Bali quoted the National Council of Applied Economics Research's findings that show the 62 per cent contribution of informal economy in the GDP, 50 per cent in Gross National Saving and 40 per cent in national export.

"About 94% of all workers in India are informal while 96% of all women workers are informal," she said.

She admitted that it was uphill task to organize the informal workers as they harboured a suspicion whether they should need organizations for their cause.

"It has been a Herculean work to sustain organizations for workers at times the financial implications. Many workers in the informal sector have no experiences of managing vast amounts of money or talking boldly to many people at different levels or in any way managing an organization," she said.

Bali noted that it is essential to bargain for one's rights. This can be achieved only through struggle. "In order to be able to deal with street vendor's issues for example, we need to be recognized by the authorities so that negotiations are possible."

How did they open bank?

A group woman approached the concerned authority seeking the permission for the opening of their own bank to save money and lend it to the needy in the fair interest rate. The officials were taken aback by their initiative: "How you, illiterate and poor women, could set up and run the bank? It is quite impossible." They convinced the officials that they collect small savings from hundred of thousands of women to create the bulk of funds. They stumbled with another big problem: They did not know to sign the documents. What could the poor women do? They finally hit upon a bold idea. The leader of the women locks up all of them in a room. "Until they don't learn to write their names, no one could go out of the room," they promised. After hours of efforts, they finally succeeded to put their signature on the documents.

Dwelling upon the condition of women in informal sector & need for organizing, she noted that from the economic aspect, women's work is not counted as 'work' in the 'mainstream'.

"Socially, being women, and mostly of the lower caste or community, they are not included in social decisions making. Neither in community decisions (because they are women) nor in the village level decisions (because they are poor and low caste). They have little or no interaction with government at any level. Individually and personally, they feel they are nobody, their self esteem being systematically crushed by the social system."

According to her, in the unorganized sector, the gap between the male and the female workers' status widens further. "Women are an essential production force in the economy of developing countries, but the 'statistical purdah' created by existing concepts and methods of defining and measuring the labour force renders much of women's work invisible."

Bali put emphasis that organising is the most effective and first step towards bringing a change in the condition of women workers or workers in general. "Today the formal or organised sector workers enjoy relatively better working conditions and terms of employment largely due to the fact that they are organised. Organising is the only means to ensure that their grievances and demands are heard."

Participants were thrilled when she shared the story of SEWA wherein around 1.3 million poor women have been organized. At one point, she described how the poor and rustic self-employed women finally succeeded to open their own bank.

Asked whether the SEWA is a trade union or which trade union it is associated with, Bali said that it not a trade union, neither did it is affiliated with any national trade union. "It is an organization of self-employed women from lower class."

She was of the view that the trade unions had to think about new strategy to include the informal sector's women into their wings.

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