How the sustainable growth of emerging markets hinges on the informal economy

The informal economy is a lifeline for millions worldwide. It’s a vibrant mix of jobs, small businesses, and economic activities that thrive beyond formal regulations, fuelled by a dynamic and entrepreneurial spirit. Yet, this vital force is often overlooked in the global discourse on economic growth.

This must change. To unlock the full potential of emerging markets, we must integrate the informal economy and make it a key part of the global agenda to drive sustainable, long-term growth.

In many emerging markets, formal economies struggle to scale fast enough to meet their populations’ needs.

According to the World Bank, Africa’s working-age population is expected to grow by 450 million between 2017 and 2035. However, based on the current economic trajectory and without significant policy reform, there will be only 100 million new jobs.

Similarly, India – home to over 600 million people aged between 18 and 35, with 65% under 35 – continues to experience a demographic boom. S&P Global estimates that India’s share of the working-age population will hit 59% by around 2041 but the creation of jobs within the formal economy is unlikely to keep pace with this growth.

In contrast, the informal economy is expanding and providing essential employment opportunities in emerging markets.

In Kenya, for example, more than 15 million people are maintaining livelihoods and building opportunities across the entrepreneurial, informal economy. They work as motorcycle delivery drivers, run small kiosks or hair salons, open cyber dens and engage in e-commerce and gig work.

According to Kenya’s 2023 Economic Survey, this “invisible” 83% of the population accounts for 24% of Kenya’s gross domestic product, meaning the informal economy employs five times more workers than the formal economy and creates jobs at a rate that is ten times as fast.

Collectively, we have a lot to gain from supporting the informal economy. It has a critical role in our efforts to achieve the SDGs, unlocking the full potential of emerging markets and enabling inclusive economic growth that benefits underserved groups, including women and young people.

Almost half of workers (44%) in the informal economy are aged 15-34 and nearly 60% of informal enterprises in Kenya are owned by women, according to The Future of Work in the Informal Economy research developed by Brink and commissioned by TRANSFORM, an impact accelerator led by Unilever, the UK’s Foreign, Commonwealth and Development Office and EY.

The flexibility and income offered by the informal economy not only elevate women’s social standing but also provide young people with opportunities to develop their skills.

The informal economy is also a vital driver of innovation, creating solutions to address pressing social and environmental challenges. An example of this can be found in Nigeria. Wecyclers – a social enterprise providing convenience and accessible recycling services – enables informal waste workers to earn a better income and develop their businesses.

With no formal job, Wecyclers subscriber Iya Daniel turned to plastic collection and earned NGN 319,000 ($194) in three months. This income has allowed her to pay rent and fees and increase her business capital. Iya has also encouraged others in her community to embrace recycling, showing the ripple effect informal initiatives can have.

Beyond social and environmental benefits, the private sector also stands to gain from closer collaboration with the informal sector. Through engagement with informal entrepreneurs and enterprises, private sector companies can tap into new routes to market, expand access to their products and services, and extend their reach.

MESH launched in 2021 as the first online community for entrepreneurs in the informal economy. It empowers young people to take control of their futures through access to essential training and financial services. It enables forward-thinking businesses to connect with informal entrepreneurs, such as kiosk owners and street vendors, to co-create new distribution models.

By partnering with informal players, the private sector can help drive business growth and social impact.

A collaborative approach is needed to bolster the informal economy to deliver sustainable growth in emerging markets. Local enterprises, governments and the private sector need to work together on the following actions:

Access to finance is vital for entrepreneurs in the informal economy as it allows them to grow their businesses, buffer against risks, improve their competitiveness and, ultimately, improve their livelihoods. Traditional financial institutions often overlook the sector due to a lack of collateral, credit history or formal registration.

MESH is a good example of a platform that is helping to address this challenge. By creating digital profiles for credit scoring tailored for gig workers, MESH is helping them gain better access to micro-business loans and other financial services.

Through comprehensive qualitative research and data collection, we can better understand emerging markets’ informal economies and the needs and aspirations of informal workers.

For support from corporates and developed markets to be effective, we must be led by individuals and their lived experience of the Global South’s informal economy.

Businesses, organizations and governments operating in emerging markets should actively support policies that empower informal workers.

This includes measures such as setting minimum wages and providing digital skills training, which can help protect individuals’ rights and improve their bargaining power.

Public-private collaborations are crucial to driving lasting change. They leverage each sector’s strengths to create more effective solutions.

TRANSFORM is a prime example, supporting enterprises like Wecyclers and MESH by combining funding, business expertise, local knowledge and networks to scale impact. It can integrate impact enterprises into corporate value chains, enhancing business and sustainability outcomes.

For instance, with TRANSFORM’s support, MESH has reached over 80,000 young African workers in the informal sector, while Wecyclers has established 26 new franchises, creating over 300 indirect jobs.

To drive sustainable growth in emerging markets, we must prioritize the rights, needs and voices of people in the informal economy. This requires a concerted, collaborative effort from businesses, policymakers and researchers and must include local organizations and individuals.

Only by supporting and empowering informal workers and entrepreneurs in our vision for sustainable growth can we ensure a truly inclusive global economy – one that drives sustainable growth, sparks innovation and ensures a brighter, more equitable future for all.