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Empowering Workers in the Informal Economy Julio Faundez* University of Warwick The Hague Journal on the Rule of Law, Volume 1, Issue 1, pp. 156-172 (2009).

Abstract The Commission on Legal Empowerment of the Poor (CLEP) states that workers in the informal economy can be legally empowered by bringing them within the framework of effective legal regulation, in particular, international labour standards. This paper acknowledges the value of extending rights to workers in the informal economy, but argues that CLEP‘s recommendations are impractical and unrealistic. It shows that neither international standards nor recent national legislation designed to promote the legalization of informal enterprises offers unqualified positive answers to resolve the plight of workers in the informal economy. Given the poverty of prevailing regulatory structures and the pervasive impact of inadequate structures of governance, workers in the informal economy justifiably distrust legal institutions and, as a consequence, do not, in the first instance, resort to legal institutions in their quest for empowerment. This paper offers examples of strategies that have successfully enhanced the social, political and economic power of workers in the informal economy. It concludes, however, that although the legal system has a role to play in consolidating the gains achieved by these strategies, law and legal institutions do not necessarily offer the best point of departure towards effectively empowering workers in the informal economy.

Key Words: legal empowerment; International Labour Standards; law and development; informal economy

Making law work for everyone is probably one of the most universally shared aspirations in the world today. Unfortunately, it remains merely an aspiration, as most of us know that law does not in fact work for everyone. ―Making Law Work for Everyone‖ (hereafter Report) is also the title of a two-volume Report by the Commission on Legal Empowerment of the Poor (CLEP), a group of prominent politicians, publicists, international civil servants and bankers who, funded by public and private sources, prepared and published it with the assistance of the United Nations Development Programme. 1 To make law work for everyone and, in particular, the poor, CLEP argues that all people should be legally empowered. CLEP‘s recommendation is based upon its observation that the nearly four billion people who are excluded from the rule of law are also the most poor and vulnerable in the world. The conclusion that CLEP draws from this observation is that, in order to overcome poverty, it is necessary legally to empower the poor. Legal empowerment 'involves states delivering on their duty to respect, protect, and fulfil human rights, and the poor realising more and more of their rights, and reaping the opportunities that flow from them, through their own efforts as well as through those of their supporters, wider networks and governments.' 2 * I am grateful to Octavio Ferraz, Steve Golub and Randy Peerenboom for helpful comments and suggestions. 1 Commission on Legal Empowerment for the Poor (hereafter CLEP), United Nations Development Programme, Making the Law Work for Everyone 2008 (2 volumes). 2 CLEP, Making the Law Work for Everyone, Vol. I at p. 4

2 CLEP members are far too experienced to assume that the road towards achieving legal empowerment is purely legal. In their view, it is also political and an inseparable component of the process of democratization. CLEP does not, however, elaborate on this point. Likewise, although CLEP notes that the path towards legal empowerment is not based on a single model, the Report does not elaborate on the models available. Indeed, the Report is disappointingly vague on how to achieve legal empowerment. Thus, for example, the Report notes that it is necessary to persuade the rich and the powerful and to establish broad coalitions for change. 3 These recommendations, though sensible, are far too vague to be helpful. What if the rich and the powerful are not persuaded? How should coalition for change be structured? The Report notes that legal empowerment cannot be instantly achieved, but makes no effort to examine the obstacles that a legal empowerment strategy is likely to face. The Report makes several references to poor regulation and unrealistic expectations, but does not offer detailed analysis on these points. As a consequence, readers are left with the impression that the Report provides a long list of worthy, but largely impractical objectives. To some extent, the vagueness of the Report‘s recommendations is due to the generality of CLEP‘s analysis. There is, also, a more fundamental problem that explains the elusive nature of the Report‘s recommendations. This problem stems from CLEP‘s assumption that the law and legal systems are not directly responsible for the suffering and exclusion experienced by the poor. On this point CLEP seems to confuse two conceptually different issues: the exclusion of the poor from the benefits of the rule of law ideal (security, predictability, equality); and the extent to which the law and legal systems are part and parcel of the process that prevents the poor from enjoying the benefits derived from the ideals associated with the rule of law. Under CLEP‘s conception, the poor are represented as a group that looks at the legal system from outside, from the wilderness of social and political informality. Hence, not surprisingly, the Report‘s recommendation is that legal exclusion could be easily resolved if the poor are brought within the framework of the law through legal empowerment mechanisms. This recommendation, however, is unpersuasive because it is based upon a fundamental confusion between the ideals of the rule of law and the real impact that law and legal systems have on the life of the poor. A realistic and persuasive statement about the ideal of legal empowerment requires a careful analysis of whether, how and why legal and social systems favour some groups while consistently excluding, undermining and discriminating against the interests of other groups. The Report‘s recommendations regarding workers and entrepreneurs in the informal economy illustrate the problems that arise when the ideals of the rule of law are invoked without taking into account the way law operates in practice. According to the Report, legal empowerment of workers in the informal economy can be achieved through the effective application of longstanding international labour standards, improvements in the quality and enforcement of labour regulation, increased access to employment opportunities, expansion of social security, promotion of measures that guarantee access to medical care and greater gender equality. Thus, the Report implicitly suggests that the legal empowerment of workers and entrepreneurs in the informal economy is a simple process that involves bringing them within the framework of effective legal regulation. This suggestion oversimplifies the problem and is impractical and unrealistic. 3

CLEP, Making the Law Work for Everyone, 2008, Vol. I at p. 45.

3 The objective of this paper is to show that the process of empowerment of workers in the informal economy is far more complicated than the Report suggests. It argues that legal empowerment is not the sole or main vehicle through which vulnerable workers in the informal economy can improve their social and economic prospects. Indeed, as this paper shows, law plays a complex and contradictory role in the regulation of the informal economy. Neither international standards nor national legislation designed to promote the legalization of informal enterprises offers positive answers to the issues of legal empowerment. Contrary to the Report‘s assumption, workers in the informal economy are very much part of the legal system and the social and economic factors that sustain it, except that they find themselves on the wrong side of the law. As a consequence, although the Report correctly notes that legal empowerment is not purely a legal issue, the solution it proposes does not take into account either the obstacles or opportunities that the poor encounter in their struggle to achieve empowerment. This paper is divided into three sections. The first section offers background information on the informal economy and on the type of enterprises found in this sector. The second section examines the way international and national legislation addresses the regulation of workers and enterprises in the informal economy. It includes an overview of the approach taken by international labour standards and national labour regimes; a précis of the arguments and evidence concerning the extent to which excessive labour regulation pushes workers and enterprises into informality and stifles economic growth; and, an overview of recent legislative attempts to encourage informal entrepreneurs to embrace legality. The third section explains why workers in the informal economy often distrust legal institutions and provides examples of how informal workers have successfully achieved improvements in their social, political and economic status. I Background The informal economy, according to CLEP, includes all economic activities by workers and enterprises not covered or insufficiently covered by formal arrangements. 4 Workers and entrepreneurs in the informal economy are usually selfemployed or work in small units that generally employ fewer than 20 workers. Hereafter I refer to these units as small businesses. In developing countries, most small businesses are part of the informal economy. The line that divides formal from informal businesses is difficult to draw. Indeed, Victor Tokman has argued that the divide between the formal and informal sector is a grey area between legality and illegality. 5 In some countries, enterprises that are formal and legal in the eyes of the law do not necessarily comply with all the formalities required by labour law and hence their workers are ‗informal workers‘. Conversely, many informal enterprises comply with some legal requirements. For example, street vendors may obtain permission to occupy public spaces under certain conditions, yet they may not comply with fiscal, labour or health regulations. Thus, formality and informality is better seen as a continuum, the one merging with the other.6

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CLEP, Making the Law Work for Everyone, 2008, Vol. II at p. 137 V. E. Tokman, Beyond Regulation: The Informal Economy in Latin America, 1992 6 See International Labour Organisation (hereafter ILO), Decent Work and the Informal Economy, 2002 at p. 125; also C. Maldano, ‗The Informal Sector: Legalization or Laissez-Faire?‘, 134 International 5

4 Working conditions in the informal economy are generally lower than those in large formal enterprises and often fall below minimum standards of human rights. Wages of workers in the informal economy are very low, usually determined unilaterally by the owner-manager and are rarely paid on time. Informal economy workers usually lack structures of representation, their hours of work are longer than those prescribed by local laws, they have no remedy against discriminatory or abusive treatment, they lack social protection and their working environment is often unhealthy and dangerous. In brief, workers in the informal economy rarely enjoy any of the core labour rights, as defined by the ILO, which include freedom of association, the right to collective bargaining, the elimination of all forms of forced or compulsory labour; the abolition of child labour; and the elimination of discrimination. The importance of the informal economy in most developing countries contrasts sharply with the poor working conditions its workers have to endure. In Latin America the informal economy contributes to 40 per cent of the region‘s gross domestic product, and over the last fifteen years, the informal economy has contributed to more that 70 percent of new jobs. 7 In Sub-Saharan Africa, the informal economy employs 90 per cent of the labour force. 8 In India informal employment accounts for 93 per cent of total employment, while in Mexico the corresponding figure is 62 per cent. 9 Given these figures and the appalling conditions prevailing in the informal economy, it is not surprising that CLEP—as well as several international organizations, including the World Bank and the International Labour Office—has sought to find mechanisms to enhance the rights of workers in the informal economy. Yet, as the materials in the following section show, neither international nor national legislation provides clear mechanisms for achieving this objective. II The Role of Law: National and International International Labour Standards CLEP argues that the plight of workers in the informal economy could be improved if countries complied with international human rights conventions and, in particular, with international labour standards. The difficulty with this argument is that, until very recently, international labour Conventions and Recommendations have neglected the plight of informal workers. Indeed, the ILO consistently claims that the international labour regime applies across the board to all workers, whether they work for large or small companies or whether they work in the formal or informal economy. 10 This claim is, however, unfounded. Indeed, several ILO Conventions, both old and new, only apply to employees (those with formal contracts of employment), thus excluding workers in the informal economy, who generally do not have employment contracts. Moreover, several of the most important Conventions either do not apply to small enterprises or allow considerable flexibility to Governments to exclude small enterprises from the scope of the Conventions. The number of workers employed by a given undertaking is a factor taken into account by some important ILO Conventions. The Termination of Employment Labour Review (1995) pp. 705-728 at p. 727; also L. Sepulveda and S. Syrett, ‗Out of the Shadows? Formalisation Approaches to Informal Economic Activity‘ 35 Policy and Politics (2007) pp 87-104. 7 ILO, The Informal Economy, 2007 at p. 5. 8 ILO, The Informal Economy, 2007 at p. 2 9 CLEP, Making the Law Work for Everyone, 2008, Vol. II at p. 139. 10 ILO, Decent Work and the Informal Economy,2002 at p. 49

5 Convention (C158) of 1982 contains perhaps the most important exception based on size of the enterprise. The Convention allows its Members to exclude from all or from certain provisions of the Convention certain categories of employed persons ‗in respect of which special problems of a substantial nature arise in the light of the particular conditions of employment of the workers concerned or the size or nature of the undertaking that employs them‘ 11. The Hours of Work (Commerce and Offices) Convention (C 30) of 1930 allows Members to make permanent exceptions for shops where the nature of the work, the size of the population or the number of persons employed render inapplicable the working hours stipulated by the Convention. 12 Likewise, the Labour Inspection Convention (C81) of1947 provides that in the process of appointing inspectors Members should pay due regard to the number, nature, size and situation of the workplace liable for inspection and to the number and classes of workers employed in such workplaces. The Social Security (Minimum Standards) Convention (C102) of 1952 and the Employment Promotion and Protection Against Unemployment Convention (C168) of 1988 contain similar references to the size of enterprise. Both Conventions allow countries to reduce the number of workers entitled to benefits and to exclude workers employed in enterprises employing fewer than 20 workers. One of the most common exclusions allowed by ILO Conventions concerns small undertakings comprised of family members only. Thus, for example, the Hours of Work (Industry) Convention (C1) of 1919 excludes undertakings in which only members of the family are employed. The Hours of Work (Commerce and Offices) Convention (C30) of 1930, for its part, allows Members to exclude from the application of the Convention establishments in which only family members are employed. The Night Work of Young Persons (Industry) Convention (C6) of 1919, the Night Work of Young Persons (Non-Industrial Occupations) Convention (C79) of 1946 and the Night Work of Young Persons (Industry) Convention (Revised) (C90) of 1948 contain similar exceptions: undertakings in which only family members are employed are authorized to employ young workers, provided the work is not harmful, prejudicial or dangerous. The exemption of ‗family enterprises‘ from the reach of international labour standards is regrettable since today most illegal child labour takes place in small-scale informal family undertakings in the agricultural sector. Indeed, it has been estimated that some 70% of working children are found in the agricultural sector. Another sector where small-scale family enterprises employ children is mining, where children as young as 6 or 7 years old carry out support functions under dangerous and exploitative conditions. 13 The foregoing shows that legal empowerment of workers in small informal enterprises would entail a major review of international labour standards. In recent years the ILO has begun to focus on the informal economy, but has yet to adopt a Convention addressing the multiple problems faced by workers in this sector. Instead, the ILO has focused largely, by means of non-binding Recommendations, on gently encouraging its Members to promote micro and small

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Art. 2, The Termination of Employment Convention (C158) of 1982, http://www.ilo.org/ilox/english/convdisp.htm (accessed 28 November 2008) 12 Art. 7, Hours of Work (Commerce and Offices) Convention (C30) of 1930, http://www.ilo.org/ilox/english/convdisp.htm (accessed 28 November 2008) 13 ILO, The International Labour Standards: A Global Approach, 2002 at p22 and p30.

6 enterprises so as to increase productive employment. 14 An exception to the practice of using non-binding Recommendations is the recent Promotional Framework for Occupational Safety and Health Convention (C187) of 2006. This Convention stipulates, however, that Members should establish a national system that includes support mechanisms for the progressive, not immediate, improvement of occupational safety and health ‗in micro-enterprises, in small and medium-sized enterprises and in the informal economy‘. 15 This Convention, however, does not define the terms micro, small or medium enterprises or the phrase ‗informal economy‘. Informal Economy Workers in National Labour Laws Given that ILO Conventions all but ignore the plight of workers in the informal economy, it should not be surprising that labour laws in developing countries also neglect them. In formal terms, this neglect is embodied in provisions that exclude from the scope of labour legislation enterprises (formal and informal) that employ fewer than a minimum number of workers. For example, in Korea the Labour Standards Act only applies to enterprises that employ more than 5 workers. In Iran, enterprises with fewer than 10 workers may be temporarily excluded from the reach of labour regulation. The Factories Acts of India and Pakistan apply only to enterprises that employ 10 or more workers, 16 while in Zimbabwe the threshold is set at 5 workers. 17 Kuwait excludes from the scope of the Labour Code (section 2) workers at enterprises that operate without recourse to power and employ fewer than 5 people.18 Workers in the informal economy are also denied the right to form unions. Although the ILO Convention on Freedom of Association provides that workers and employees ‗without distinction whatsoever‘ shall have the right to establish and join organisations of their own choosing without previous authorisation, 19 in practice, most countries require a minimum number of employees to form a union. Paraguay, for example, requires a minimum of 300 workers to establish branch trade unions. 20 In Venezuela, the minimum number of workers required to form a union is 40. 21 Nigeria‘s Trade Unions Act requires 50 workers to form a union.22 In India, the National Commission for Enterprises in the Unorganised Sector (hereafter National Commission) has floated the ideal of establishing a mechanism to extend social security cover to informal workers and workers generally outside the social security system. 23 In 2005 the National Commission submitted a draft bill (The Unorganised Sector Workers Social Security Bill) for consideration to the 14

See ILO Employment Policy Recommendation (R122) of 1964; and ILO Job Creation in Small and Medium-Sized Enterprises Recommendation (R189) of 1998 both available at http://www.ilo.org/ilolex/english/recdisp1.htm (accessed 1 December 2008) 15 Art 4, Promotional Framework for Occupational Safety and Health Convention (C187) of 2006, http://www.ilo.org/ilox/english/convdisp.htm (accessed 1 December 2008) 16 ILO, General Survey-Night Work Conventions, 2001 at p. 91 17 ILO, General Survey- Labour Inspection, 2006 at p. 9 18 ILO, Report of the Committee of Experts on the Application of Conventions and Recommendations, 2003 at p. 455. 19 Article 2, Freedom of Association and Protection of the Right to Organise (C87) of 1948, http://www.ilo.org/ilolex/english/subjlst.htm (accessed 1 December 2008) 20 ILO, Report of the Committee of Experts on the Application of Conventions and Recommendations, 2007 at p. 139 21 ILO, Report on the Committee of Experts, 2007 at p.178 22 ILO, CEACR: Individual Observation concerning Freedom of Association and Protection of the Right to Organise Convention, 1948 Nigeria, 2007. 23 ILO, Report on the Committee of Experts, 2007 at p. 4

7 Government. The scheme proposed by the Bill includes old-age pension, personal accident insurance and medical insurance. The National Commission does not, however, make any suggestions on how this proposal might be financed. Enforcing Labour Legislation Even if national labour laws did not exclude workers in the informal economy and workers in small businesses from the reach of labour legislation, it is unlikely that their rights would be respected because most developing countries lack adequate systems of labour inspection. Labour inspection is one of the weakest links in the labour law system of most developing countries. The problems it faces are common and widespread: lack of human and material resources, poor training and prevailing levels of corruption. The recent retrenchment of state institutions has probably diminished even further the resources that countries allocate to their labour inspection systems. The figures are impressive. While in developed countries there is roughly one inspector for every 20,000 workers, in Sub-Saharan Africa and in the Asia Pacific region there is one inspector for every 80,000 workers. 24 In some countries the number of inspectors is so low that it is even difficult to regard the country as having a national system of labour inspection. In Ethiopia, for example, the total number of inspectors is 44. Not surprisingly, inspectors only focus their attention on enterprises with more than 1,000 workers, which they can inspect only once every five years. 25 Applying a ratio of one inspector per 40,000 workers to various developing countries, Maria Sabrina De Gobbi found that Nigeria, which in 2001 had 500 inspectors, should have had 4,000 and Nepal, which in 2001 had 15 inspectors, should have had 125.26 In most regions there is a dramatic variation between countries. Thus, for example, in Latin America, while Chile has close to 20 inspectors per 100,000 workers, México has 1.72 and Ecuador only 0.57. 27 The Informal Economy and Excessive Labour Regulation Against the background of the materials examined in the preceding section, it is paradoxical that in recent years the prevailing view among experts and international development agencies is that excessive labour regulation is one of the main factors that account for the reluctance of informal enterprises to become formal. The policy recommendation that follows from this observation is that deregulation of labour markets would persuade informal enterprises to embrace legality and thus enhance the prospects of workers in the informal economy. There are many examples of what some observers regard as excessive labour regulation. One such example is the case of probationary periods for new recruits. The argument is that very short probationary periods discourage employers from hiring new employees. Indeed, the European Union‘s Good Practice Catalogue on small enterprises singles out, as an example of good practice, a French law that allows businesses with fewer than 20 employees to recruit new employees on an extensive 24

ILO, Strategies and Practice for Effective Labour Inspection, 2006. M. De Gobbi, Labour Market Flexibility and Employment and Income Security in Ethiopia: Alternative Considerations, 2006 at p. 27 26 M. De Gobbi, Labour Market Flexibility and Employment and Income Security in Developing Countries, 2006 at p. 37 27 A. Schrank and M. Piore, Norms, Regulations, and Labour Standards in Central America, 2007 at p. 22 25

8 probationary period of up to two years. During this two-year period the employer can terminate the contract without having to give reasons. 28 A key assumption underlying this so-called ‗good practice‘ is that excessive labour regulation is a disincentive for entrepreneurs, especially for those who run small companies and do not have the capacity, resources or knowledge to comply with labour law. 29 This assumption is also endorsed by the World Bank. According to Doing Business, the Bank‘s flagship publication, labour law in most developing countries is seriously flawed. Instead of benefiting the most vulnerable workers, it damages them, as their excessive regulatory zeal suffocates labour markets, erodes international competitiveness, and, above all, causes the informal economy to flourish. 30 A recent World Bank Report on South Africa reaffirms the Bank‘s view that bad labour laws lead to bad employment outcomes. According to this Report, South Africa ranks higher than all comparator countries (except for Brazil) in terms of difficulty in hiring and firing. Thus, the Report concludes that labour regulation is one of the most important reasons that the informal economy is flourishing and the growth of formal employment is stagnant. 31 The view that excessive and inflexible labour regulation is one of the main factors that account for the existence of the informal economy is not, however, universally shared. 32 Indeed, an OECD-sponsored survey, which focused on seven developing countries, contradicts this view. 33 This survey was carried out in seven countries (Algeria, Ecuador, Jamaica, Niger, Swaziland, Thailand and Tunisia) and involved 300 undertakings in each country, divided into three categories: selfemployed, enterprises employing between 2 and 5 workers and enterprises employing between 6 and 20. This study focused on four areas of legal policy—minimum wages, working hours, hygiene and safety and affiliation with social security institutions. In each of these four areas, the survey found that legal requirements were largely not observed and hence were not obstacles to the establishment or development of the enterprises. Although all seven countries had minimum wage legislation, only half of the employees surveyed complied with it. The survey also found that most enterprises with fewer than 6 workers did not comply with hygiene and safety requirements, yet compliance in this area improved as enterprises grow in size. A similar pattern was observed with regard to the obligation of employers to insure wage earners against work-related accidents and illness. 34 An earlier survey of small businesses in Niger, also sponsored by the OECD, confirms that they do not see labour law as an obstacle. Indeed, according to this survey, less than 10 per cent of enterprises in Niger employing at least one paid worker complied with minimum wage or working hours regulations and only 15% complied with social security regulations. 35 28

European Union, Good Practice Catalogue, 2007. J. Heckman and C. Pagés, ‗Introduction‘, in J. Heckman, et al., eds., Law and Employment Lessons from Latin America and the Caribbean, 2004. 30 J. Berg and S. Cazes, The Doing Business Indicators: Measurement Issues and Political Implications, 2007. 31 International Bank for Reconstruction and Development (hereafter World Bank), South Africa Enhancing Effectiveness of Government Promoting Micro, Small and Medium Enterprises, 2007. 32 See G. Bensusán, La Effectividad de la Legislación Laboral en América Latina, 2007; A. Marshall, Labour Market Policies and Regulations in Argentina, Brazil and Mexico: Programmes and Impacts, 2007 at p 43; OECD, Employment Outlook, 2006 at p 212; OECD, Employment Outlook, 2004 at p 63; I. Joumard et al., The Impact of laws and Regulations on Micro and Small Enterprises in Niger and Switzerland, 1992; CLEP, Making the Law Work for Everyone, 2008 Vol. II at pp. 157-165. 33 C. Morrison, What Institutional Framework for the Informal Sector? 1995 at p 15 34 C. Morrison, What Institutional Framework for the Informal Sector? 1995 at p 16 35 I. Joumard et al., The Impact of laws and Regulations on Micro and Small Enterprises, 1992 at p 57 29

9 A study carried out in Tanzania involving 150 small businesses found that the main reason why entrepreneurs did not comply with the law was simply that they could not afford to. Indeed, since all the enterprises included in the survey were just about breaking even, had they fully complied with the law they would have gone bankrupt. 36 In the context of Latin America, Victor Tokman has noted that small businesses with fewer than 10 workers cannot generally afford to pay the non-wage labour costs. 37 If small businesses are unable to comply with labour regulations because they do not have the resources, is the solution to relax labour law requirements? Adriana Marshall, who conducted a cross-country analysis of labour legislation in Latin America, also found that non-compliance is disproportionately found among very small enterprises (especially those with no more than 5 employees). Yet, she emphatically rejects the idea that a relaxation of labour legislation would improve levels of compliance. In her view, non-compliance in Latin America is prompted largely by lax enforcement and by the prevailing views about acceptable levels of evasion; in other words, by the general climate of corruption. 38 She notes, in particular, that firing costs do not influence compliance among micro enterprises, while perceptions of corruption have a clear effect in shifting their levels of compliance. 39 It should be noted that CLEP is cautious and largely sceptical about the virtues of deregulation. Indeed, it rightly notes that policy recommendations should not be drawn without carefully considering the heterogeneity of the various regulatory environments. CLEP also notes that before hastily prescribing policies of deregulation, issues relating to governance and the quality of the legal system should be taken into account. 40 Flexible Labour Regulation It is unlikely that the argument as to whether labour law hampers or facilitates the development of small businesses will be settled, since not enough is known about their characteristics and behavior in developing countries. Yet, despite this uncertainty, some Latin American countries have attempted to resolve some of the problems arising from the informal economy through amendments to their labour laws. The aim of these amendments is twofold: to make it easier for the owners of small enterprises to comply with labour regulation; and, to persuade entrepreneurs in the informal economy of the benefits of becoming legal. The available evidence suggests that, in general, these objectives have not been achieved. Most of the measures introduced by these legislative amendments have tended to weaken, rather than strengthen, the already meagre labour rights of workers in small enterprises. Thus, for example, in 1995 Argentina enacted measures allowing small firms to introduce shorter advance-notice periods. It also exempted firms with fewer than 40 workers and sales below a given level from the requirement that temporary contracts should be validated by collective agreements. In some cases, small firms were also exempted from paying compensation in the event of

36

ILO, Decent Work and the Informal Economy, 2002 at p 49 V. Tokman, De la Informalidad a La Modernidad, 2001 at p 76 38 A. Marshall, Explaining Non-Compliance with Labour Legislation in Latin America: A CrossCountry Analysis, 2007 at p 3 and at p 16. 39 A. Marshall, Explaining Non-Compliance with Labour Legislation in Latin America, 2007 at p 13. 40 CLEP, Making the Law Work for Everyone, 2008, Vol. II at p. 165. 37

10 termination. 41 In 1998 Brazil extended measures to increase labour flexibility to small undertakings. It allowed small firms (fewer than 50 employees) to hire up to half its employees under fixed-term contracts and with reduced social rights. 42 In South Africa providing small firms with flexibility to enable them to comply with labour law obligations is achieved through a process of exemptions. The Labour Relations Act and the Basic Conditions of Employment Act give firms the possibility of applying for exemptions, which are specifically tailored to small and medium-sized enterprises. Firms that apply for exemption have to demonstrate that the standard required by the legislation is harmful to their business. The exemptions are temporary and usually involve release from the obligation to pay minimum wage or from the strict application of rules relating to working hours, the length of overtime or the provision of certain benefits to workers. 43 Perú’s Law for the Formalization of Informal Enterprises The most ambitious attempt to bring the informal economy within the realm of the law is Perú‘s Act for the Promotion and Formalization of Micro and Small Enterprises (Law No. 28015 of 3 July 2003). This Act has attracted international attention because Perú‘s informal economy is one of the largest in Latin America. 44 It is also important in the context of this paper because it is likely that the work the CLEP‘s cochair, Hernando de Soto, who has written extensively on the informal sector, 45 provided the inspiration for this law. Perú‘s special labour regime applies to small enterprises, but only for a period of 5 years from the enactment of the Act—not from the time that the enterprise is registered under the Act. Thus, the Act was due to expire in 2008, but was recently renewed for a further five years, until 2013. It defines micro enterprises as those that employ up to 10 workers and have an annual volume of sales below a specified amount. Small enterprises are firms that employ between one and 50 employees and have a volume of sales about five times larger than the amount specified for micro enterprises. Enterprises that qualify under the Act and are registered with the Ministry of Labour may apply a special labour regime, which consists of the following components: 1. Night Work Premium: micro and small enterprises that regularly operate at night are not required to pay the standard 35% salary premium. 2. Holiday Period: micro and small enterprises are allowed to reduce the annual holiday entitlement from 15 to 7 days a year. 3. Compensation in the event of unfair dismissal: the standard rate of one and a half month‘s salary per year of service up to a maximum equivalent to 12 months‘ salary, is reduced to half a month‘s salary up to a maximum of six months. 4. Labour inspection: the law sets the Ministry of Labour an annual target of inspection for micro enterprises of 20%.

41

J. Berg et al., Meeting the Employment Challenge- Argentina, Brazil and Mexico in the Global Economy, 2006 at p 135 42 J. Berg et al., Meeting the Employment Challenge, 2006 at p 135; R. Vega and M. Luz, La Reforma Laboral en América Latina 15 Anõs Después: Un Análisis Comparado, 2005 at pp. 11-12. 43 H. Bhorat et al., The South African Labour Market in a Globalizing World: Economic and Legislative Considerations, 2002 at pp. 50-51. 44 G. E. Perry et al., Informality: Exit and Exclusion, 2007 at p 4. 45 H. De Soto, El Otro Sendero- La Revolución Informal, 1986.

11 The Ministry of Labour‘s website provides information on the Act and on the number of enterprises registered. 46 It reports that some 33,289 enterprises registered under the Act between 2003 and 2007. Unfortunately, this figure is not disaggregated, so it is not possible to know how many of these enterprises were legal before the Act came into force, how many have been recently established and how many are enterprises that previously operated informally. In any event, in order to assess the significance of this figure it is necessary to consider the size of the informal economy in Perú. Given that the number of informal enterprises is around two million, the number of registrations under the Act, though not negligible, is quite modest. 47 One of the factors that might explain the relatively poor impact of the Act is the fixed five-year period set for the duration of the special labour regime. Since one of the main objectives of the Act was to persuade informal enterprises to become formal, the five-year period is extremely short. Indeed, given the well-known difficulties in disseminating information about any new legislative initiative among such a diverse and often detached segment of society, it is not surprising that only 236 enterprises registered during the first year of the Act. In the following two years there was a marked increase of new registrations: 2,643 in 2004 and 4,400 in 2005. In 2006 and 2007, however, there was an enormous increase: 11,902 in 2006 and 14,108 in 2007. The evidence suggests that Peru‘s attempt to reduce the size of the informal sector through weakening the rights of workers does not provide a strong enough incentive to persuade informal entrepreneurs to embrace legality. The Peruvian case also confirms the conclusions of a recent study on social exclusion that the choice that informal entrepreneurs make between embracing legality or remaining informal is not determined purely by legal factors. 48 If this is so, then the path towards legal empowerment of informal workers requires a comprehensive strategy of social, political and economic change. III The Legal System, Self-Help and Collective Action Whether or not excessive labour regulation is the reason why the informal economy flourishes in developing countries, the poor quality of governance and, in particular, the discrediting of the legal system, are important obstacles in the path of legal empowerment. Lack of confidence in legal institutions is undoubtedly one of the reasons why the vast majority of informal workers and entrepreneurs in Perú choose to remain outside the framework of the law, rather than under the jurisdiction of labour inspectors or tax officials. This is also the reason why even well-intentioned government policies are often regarded with suspicion. Distrust of public authority and the legal system is also prevalent elsewhere in Latin America. In Ecuador, for example, when the cities of Quito and Guayaquil launched urban regeneration programmes, the main victims of the regeneration efforts were informal workers, beggars and street children. Thus, as Kate Swanson argues, while the authorities were creating a sanitized space for tourists, they turned their attention away from the social factors that force poor people—mainly indigenous, in

46

Peru, Ministry of Labour, http://www.mypeperu.gob.pe J. Chacaltana, Economic Implications of Labour and Labour-Related Laws on MSEs: A Quick Review of the Latin American Experience, 2006 at p 35. 48 G. E. Perry et al., Informality, 2007 at pp. 9-13. 47

12 the case of Ecuador—to the streets in search of a living. 49 Ironically, as Swanson points out, while the slogan that inspired the urban regeneration programmes was Más Ciudad (More City), its outcome was Menos Ciudad (Less City) for the majority. A study in India found that more than half of small businesses that required a license to operate had difficulties obtaining it. The difficulties stemmed largely from interference by government officials, which were largely resolved by bribery. 50 These findings are confirmed by another study that focused on the city of Ahmedabad. According to this study, 62% of the fees paid by small enterprises were collected illegally.51 Thus, not surprisingly, small entrepreneurs and their workers have little respect for the formal legal system. Indeed, in India, most owners of small businesses do not have legal advisors, because they know all their business partners and can deal with them directly. Thus, the conclusion drawn by the authors of the study of small enterprises is that in India ‗the formal legal system takes a back seat while reputation, trust and informal personal relationships are the driving factors in screening counterparties to do business with‘. 52 Distrust of the law and of public authorities has led many operators of small businesses to develop their own structures of regulation. As Sergio Peña‘s study on the regulation of informal commerce in México shows, when the state lacks capacity or legitimacy, markets are regulated by social norms that create competing models of regulation.53 The absence of effective state institutions often prompts community organisations to take responsibility for regulating their affairs. Indeed, in the absence of effective state authority, communities often apply regulatory provisions similar, if not stricter, than those of the state. Self-help has been one of the most effective ways of securing durable and effective improvements. The case of SEWA (Self-Employed Women‘s Association) in India is perhaps the best example of self-help. Indeed, SEWA, established in 1972 and now representing some 300,000 workers, is as much a union as a mutual aid society. It provides its members with a variety of services including banking, childcare, legal aid, vocational training and insurance. It empowers its members by enabling them to change their behaviour as economic agents. 54 SEWA‘s strategy is not confrontational. Instead of exclusively struggling for higher wages or better conditions, it seeks to reduce women‘s vulnerabilities by enhancing their employment opportunities. 55 In South Africa, SEWU (Self-Employed Women‘s Union), established in 1993—and inspired by SEWA—is another example of a self-help organization that endeavours to improve working facilities for its members, as well as their literacy, negotiating and lobbying. 56 Self-help is also the main pillar of a wide 49

K. Swanson, ‗Revanchist Urbanism Heads South: The Regulation of Indigenous Beggars and Street Vendors in Ecuador‘, 39 Antipode (2007) p708 at p 724. 50 F. Allen et al., Financing Firms in India, 2006 at p 33. 51 R. M. Sudarshan, ‗The Costs of Informality: An Illustration from India‘, 127 Labour Education (2002) p 51 at p. 52. 52 F. Allen et al., Financing Firms in India, 2006 at p 34. 53 S. Peña, ‗Regulating Informal Market: Informal Commerce in Mexico City‘, 20 International Journal of Sociology and Social Policy (2000) p 37 at p 59. 54 R. M. Sudarshan, ‗The Costs of Informality‘, 127 Labour Education (2002) p 51 at p. 52 55 R. Datta, ‗From Development to Empowerment: The Self-Employed Women‘s Association in India‘ 16 International Journal of Politics, Culture and Society (2003) p 351 at pp. 355-356. 56 S. Motala, Organizing in the Informal Economy: A Case Study of Street Trading in South Africa, 2002 at p 33.; C. Skinner and I. Valodia, ‗Local Government Support for Women in the Informal Economy in Durban, South Africa‘, 16 International Journal of Politic, Culture and Society, (2003) p 431 at p 440.

13 range of savings and credit cooperatives established by micro enterprise workers in countries such as Tanzania, El Salvador, Singapore, Kenya and the Philippines. 57 Street traders, one of the most visible groups of informal workers, are also resorting to self-help measures, since confrontation with the police and municipal authorities is a constant concern in their life. In Durban, South Africa, for example, after dealing with harassment from the police, street traders established in 1995 the Informal Traders Management Board, an association that represents them and has managed successfully to negotiate with the police and local authorities. 58 In Latin America, municipal authorities have finally begun to regard the regulation of street traders as a developmental issue, rather than an issue of law and order. The city of Bogotá, for example, has created orbital markets, which are public spaces where small traders and their workers are allowed during two days a week. 59 This shift in policy has largely been achieved through the pressure of associations established by streettraders. These associations—which Victor Tokman describes as something between a trade union and a business association 60 —have flourished in several Latin American cities. In Bogotá there are 106 associations of street traders and 66 associations of refuse recycling workers. In Santiago there are 8 street-traders‘ associations. In Perú street-traders‘ associations are decentralised and organized territorially, with a membership of 3,000. In Chile and Colombia these associations have forged strong links with the union movement, but this is not the case in Perú. 61 Conclusion The materials in this paper show that achieving legal empowerment for workers in the informal economy is a complex process that does not necessarily involve, in the first instance, changes to the law. While it is true that effective and sustainable legal empowerment of these workers will not be achieved without ultimately changing the law and its practice, the process of achieving legal empowerment requires a wider strategy: one that fully takes into account prevailing political, social and economic conditions in the locality and addresses the structural causes of the problem. This conclusion does not entirely contradict CLEP‘s views. It does, however, place its views within a more realistic political framework. Indeed, although CLEP acknowledges that securing improvements in governance and on the quality of democracy are important components in the process of securing the legal empowerment of the poor, it does not explain the bearing that these components have on the empowerment process. Instead, CLEP‘s recommendations on the empowerment of workers in the informal sector—applying international human rights standards, enforcing labour regulation and increasing employment opportunities— suggests it believes that the problems faced by informal workers can be resolved by merely extending to these workers the benefits of rights enshrined in international human rights conventions or in model labour laws. This paper has shown that neither human rights conventions nor labour law regimes adequately address the complex problems arising from the informal economy. Moreover, as the materials above have 57

M. Levin, ‗Cooperative and Unions-Joint Action for Informal Workers‘, 127 Labour Education, (2002) p 28 at p 30. 58 S. Motala, Organizing in the Informal Economy, at p 17. 59 R. Calle and A. Orsatti, La Situación de los Trabajadores/as Informales en el Cono Sur y el Area Andina-Argentina, Brasil, Chile, Paraguay, Uruguay, Colombia, Perú, Venezuela, 2003 at p 117. 60 V. Tokman, De la Informalidad a La Modernidad, 2001 at p 224. 61 V. Tokman, De la Informalidad a La Modernidad, 2001 at pp 123, 231-232.

14 shown, even when governments attempt to address the problems of the informal economy, their policies tend to undermine, rather than strengthen the rights of workers. Had CLEP taken seriously its own observation that problems of governance and issues of democracy are factors that cannot be ignored in the design of legal empowerment policies, perhaps its recommendations would not have been so straightforward, but would have been more persuasive. The notion that merely extending rights to workers will resolve the problem of the informal economy suggests that CLEP, despite the participation of ILO officials in its deliberations, has all but ignored the fact that since the ILO ‗discovered‘ the informal economy, in the 1970s, there have been countless unsuccessful efforts to implement policies designed to eliminate the negative features associated with it. That these policies have failed to resolve the problems or even contain the informal economy‘s growth, suggests that this is not an issue that can be resolved by merely extending formal legal rights. I unreservedly share CLEP‘s desire to ensure that the four billion poor who do not enjoy the benefits of the rule of law should be brought within its framework. Yet, the road towards achieving this goal is neither simple nor purely legal.

15

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