Informal Economies: Same Challenges, Different Solutions

Informal economies are a global reality, but their size, structure, and drivers vary significantly across regions. Asia, Latin America, and Africa all face the challenges of large informal sectors, yet each of them is confronted with different obstacles. Of all world regions, Africa (particularly Sub-Saharan Africa) has the highest level of informality, with more than 85% of employment taking place outside the formal sector.

Formalization Efforts in Asia and the Pacific

In Asia and the Pacific, informal employment remains pervasive: the International Labour Organization (ILO) estimates that more than 60% of total employment is informal. Despite rapid economic growth across much of the region, governments continue to grapple with the challenge of transitioning large segments of their workforce into the formal economy: a critical move aimed not only to broaden their tax base, but also to to channel new investment and economic dynamism into formal economic structures. Here, efforts to address informality typically involve a mix of strategies, including:

• Incentives like simplified registration processes and reduced tax burdens;
• Regulatory reform aimed at reducing red tape and administrative barriers;
• Strengthened legal frameworks to protect informal workers and encourage compliance.

A leading example in the region is Indonesia, which has seen a quite sharp decline in its percentage of informal workers, from 66.93% in 2010 to 59.45% in 2021. This progress is the result of a coordinated set of policies:

• Regulatory simplification: The government has streamlined business registration and licensing procedures. For instance, obtaining a taxpayer identification number (a key step in formalizing a business) can now be done online, increasing accessibility for micro and small businesses.
• Lowering formalization costs: Financial and administrative burdens for small enterprises have been reduced through tax exemptions, simplified compliance obligations, and tailored support for micro-enterprises.
• Improved access to information and services: Through one-stop shop platforms and digital portals, informal businesses can now more easily access services and guidance related to registration, taxes, and permits.
• Social protection and legal inclusion: The government has extended social insurance schemes to informal workers, including health and accident coverage. Legal recognition has also expanded to previously excluded occupations, such as street vendors, gig workers, and self-employed individuals.
• Structural transformation and rural formalization: Recognizing that much informality stems from rural areas and agriculture-linked activities, Indonesia has promoted agro-processing, light manufacturing, and rural industrialization as a pathway to formal employment.

Indonesia’s experience offers two vital takeaways for other countries tackling informality:

1. Education, training, and outreach are essential. Without targeted outreach (especially in local languages and through trusted community networks), formalization programs risk benefiting only the better-educated and more connected segments of society.
2. Digital solutions must be inclusive. While digitalization has streamlined many formalization processes, it also risks excluding those with limited internet access or digital literacy. Successful strategies must combine digital tools with manual and in-person support to avoid deepening existing inequalities.

Targeted education, training, and outreach remains the most critical factor. This is supported by numerous studies that have shown that low levels of education are a key factor contributing to individuals remaining in the informal sector. For instance, a 2018 study from ILO revealed that a significant portion of the global informal workforce (approximately 50%) has either no formal education or has only completed primary school. In stark contrast, a mere 7% of informal workers have attended post-secondary schooling, such as colleges, technical institutes, vocational schools that provide specialized training or professional schools and universities.

To address these challenges, Indonesia has launched several supporting initiatives that target informal workers. These initiatives include:

• Kartu Prakerja: A national upskilling and training program aimed to address labor market mismatches by developing workers' competencies, enhancing productivity and competitiveness, and promoting entrepreneurship. The program focuses on skilling, reskilling, and upskilling unemployed individuals and informal workers to better align their capabilities with market demands.
• She Can Program: A program offering financial literacy, entrepreneurship training, and mentorship for women operating in informal settings.
• Self-Employed Workers Programme: Designed to support informal entrepreneurs and self-employed individuals through training, coaching, and microfinance access.

In addition, the Omnibus Law on Job Creation (Law No. 11/2020) was recently enacted to further reduce bureaucratic complexity, particularly for micro, small, and medium-sized enterprises (MSMEs). The law simplifies business permits, eases compliance burdens, and makes it easier for informal businesses to transition into the formal sector.

Formalization Efforts in Latin America

Latin America also grapples with a large informal sector, with roughly half of all employed people in the region working informally.  ILO has identified four common pathways to formalization in the region: improving and simplifying regulations, generating incentives, enhancing productivity, and improving enforcement. Countries like Brazil, Mexico, and Argentina have implemented various e-formalization initiatives, such as digital tax filing and online business registration, to ease the transition. The ILO's "FORLAC 2.0" strategy for the region aims to consolidate these policies and support the transition to formality by promoting an integrated approach. Despite these efforts, informality remains a trap in many parts of the region, affecting a significant portion of the workforce, particularly the less educated and those in low-value agricultural activities.

The Informal Sector in Africa

In Africa, informality is even more prevalent. According to ILO, in Sub-Saharan Africa, it accounts for over 85% of employment, making it the most informal continent in the world. In this region many entrepreneurs remain informal by choice, since the perceived cost of formalization (high fees, heavy compliance burdens, taxes, etc.) often outweighs the benefits. Digital solutions often falter due to the low internet penetration rates and the typically low digital literacy levels of informal workers. The implementation of the African Continental Free Trade Area (AfCFTA) has renewed interest in better integrating this sector into the formal economy, but achieving that integration means going beyond the simple reduction of regulatory and bureaucratic hurdles. It means offering real incentives: easier access to microfinance and targeted capacity‑building and coaching programs to teach this sector how to operate in the formal economy.

The ILO Recommendation No. 204/2015

The ILO Recommendation No. 204/2015 is a landmark international policy framework adopted by ILO during its 104^th International Labour Conference in 2015. The Recommendation provides guidance to countries on how to help workers and economic actors to transition from the informal to the formal economy, while ensuring rights, protections, and decent work throughout the process. This recommendation is the first international labor standard specifically focused on informality, recognizing that informal work often lacks legal and social protections, job security, and decent working conditions. The Recommendation encourages countries to develop comprehensive, integrated strategies across several areas, including:

• Simplifying administrative and registration procedures
• Access to social protection and public services
• Tax incentives and financial inclusion
• Skills development and vocational training
• Labour law reforms and enforcement
• Targeted support to vulnerable groups (e.g., women, youth, migrants)
• Promotion of entrepreneurship and sustainable enterprises

Conclusion

Asia and Latin America have made notable progress in reducing informality through coordinated policy frameworks, digital innovation, and targeted reforms. In contrast, Africa continues to face the most entrenched structural and institutional barriers, remaining the region with the highest proportion of informal employment globally. This is not due to a lack of ambition or effort: it is a reflection of systemic conditions that make formalization inaccessible or unattractive for the majority of workers and traders.

Informality persists not because people are unwilling to formalize, but because, under current systems, staying informal is often the most rational (and sometimes the only) option. Complex regulations, high registration fees, regressive tax systems, limited access to finance, and weak institutional support combine to make formality more burdensome than beneficial for many.

The central lesson is clear: formalization strategies must be grounded in local realities and shaped by the lived experiences of those working informally. This means identifying the actual barriers people face and designing pragmatic, demand-driven solutions that offer clear advantages for making the shift. These could include simplified processes, tailored tax regimes, access to microcredit, social protections, skills training, and a tailored support in coping with tax and administrative formalities that operating in formal avenues implies.

As outlined in ILO Recommendation No. 204/2015, and reinforced by a more recent report released this year, addressing informality requires integrated, yet context-specific, holistic strategies focused on the removal of systemic obstacles and the empowerment of vulnerable groups (especially women and youth). Additionally, this strategy must ensure that governments have both the institutional frameworks and the financial resources needed to design, implement, and sustain effective reforms targeting the formalization of informal economy.

Ultimately, unlocking the potential of Africa’s informal economy will require more than policy tweaks. It demands a fundamental shift in how informality is understood: not as a problem to eliminate, but as a dynamic part of the economy that if supported and integrated can become a powerful driver of inclusive growth, resilience, and opportunity.