COVID-19: How will political economy of formal-informal sector play out

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Read full article by Indranil De@DownToEarth Photo Credit: Down To Earth

Policies and planning in post-colonial countries have always been biased towards the urban elite — it is evident from the division of urban areas between well-served and unserved areas. While the well-served areas emerged as formal areas of residence, unserved areas came out as informal areas or slums.

Indian policymakers have always maintained a hierarchy between formal and informal sectors, with informal being a subordinate to the formal. This is not only reflected in urban settlements, but also among urban service providers.

Urban informal waste collectors are ignored by policy makers and are not included in the planning process. However, they provide major services in urban waste management system.

Practically, the divide is a negotiated concept. It depends on the convenience of the elite to define an activity as formal or informal. Whenever needed, an informal area of residence may be formalised for crony capital gains.

On the other hand, formal transactions are hid by relegating them as informal for personal gains.

The Indian economy is dominated by the informal sector, with more than 80 per cent of the labour force engaged in it, according to International Labour Organization.

Almost all the employment in agricultural sector is informal. But the formal-informal hierarchy has relegated it to a ‘lesser important’ sector.

For example, the Reserve Bank of India announced Rs 50,000 crore for the benefit of NBFCs and micro-finance institutions recently. The NBFCs would, in turn, support real-estate companies.

It is not clear how this is going to benefit the rural money lenders or organisations registered under the society act. They are an important part of rural credit system, and each organisation registered under the society act has hundreds of members.

They are not considered formal credit institutions, but meet the requirements of rural credit to the unorganised or informal sector.

In this light, let us discuss the government’s strategy to contain the novel coronavirus disease (COVID-19).

Before announcing the first phase of nationwide lockdown on March 24, 2020, the Union government allowed all Indian nationals to return to India. The travellers were the initial carriers of the SARS-CoV-2 virus.

The government did not give any hint of the lockdown before declaring it a few hours before its implementation. As a result, an army of informal workers suddenly found themselves in the lurch — and all of a sudden, thousands of them were out on the streets.

The untold misery of informal workers is well-known. A major cost of the lockdown was borne by the informal sector employees due to loss of livelihood and insufficient public support.

However, benefits of lockdown are distributed to every citizen, more so to formal sector employees who are more tied with those who have been more susceptible to the virus.

In a nutshell, major cost has been distributed to large section of population generally ignored by bureaucracy, while the benefits are incurred by a small influential group of people.

Why is it possible to ignore a large section of the population to the benefit of a smaller section?

The combined effect of two important anomalies of institutional functioning causes it. First, institutions are endogenous. Policies and functioning of political and economic institutions are dominated by the rich and influential. As a result, policies benefit them than more than others, which increase their control over the institutions.

Then does the ignored group overthrow the influential, albeit smaller, group?

The influential group provides selective benefits to a smaller section of ignored group and develops a patron-client relationship. This is called political clientelism, where a group of poor is given some benefit against political support while another group is declined the same benefit.

Thus, a market for public goods is created and public service privatised against votes.

The wait, now, is for a vaccine. The lockdown is only buying us time to prepare one. However, it is not certain whether the poor would be able to reap the benefits of vaccination. We may draw lessons from the shoddy public service delivery to the poor.

There is a lack of basic public service such as sanitation and pollution control in densely populated urban slums, mainly because the rich do not enjoy any great benefit to follow such an initiative.

With the discovery of good medicine and better nutrition, the rich can protect themselves against most public health disasters. According to World Health Organisation, over 1.5 million people died from tuberculosis in 2018.

The international media’s response to such a loss is anyone’s guess, because hardly has a policymaker, statesman or important personality been affected. The post-coronavirus world would be gloomier for the poor, not only for higher economic inequality, but also for higher disparity in access to protection against the virus.


Posted on

April 28, 2020

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