Rethinking the effect of informality on inclusive growth: lessons from Colombia and South Africa for their regions

The informal sector is not a homogeneous mass of individuals. The same instruments cannot be used to approach the informality of a senior executive avoiding taxes and that of a street vendor. The analysis of labour markets in Colombia and South Africa provides an opportunity to create a framework broad enough to understand the complex phenomenon of informality. Both South Africa and Colombia are upper-middle income countries struggling to break out of the middle-income trap. While both countries are very similar in a number of aspects, such as levels of per capita income and inequality, South Africa stands out for having relatively high levels of unemployment and low levels of informal employment. Colombia, on the other hand, has a lower rate of unemployment but persistently high levels of informality. As a result, current debates surrounding informality in the two countries are very different. In South Africa, the informal sector tends to be viewed as a way of reducing unemployment and consequently national policy aims to promote self-employment through entrepreneurship. In Colombia, on the other hand, informality tends to be viewed as a constraint on the growth of the formal sector and consequently the national policy aims to control it. We therefore have two similar countries where the impact of informality on inclusive growth is viewed very differently. These apparent differences led us to ask the following three questions: 1) Is labour informality positive or negative for inclusive growth, understood as growth accompanied by lower inequality? 2) Is the answer to question 1 the same for all types of workers in a country? and 3) Are the policy recommendations to improve inclusive growth through informality the same for all types of workers? This comparative evidence paper attempts to answer these three questions simultaneously. For this purpose, we developed a taxonomy of informality and a methodology to estimate the configuration of informality in each country. We theorised the relationship between each type of informality and inclusive growth, as well as the policies required to increase the inclusivity of growth for each type of informality. We applied this exercise in a detailed way to Colombia and South Africa, and more broadly to other countries in Latin America and Africa, in order to draw out conclusions and policy recommendations relevant for countries across these regions.