# **1 Introduction**

## **1.1 Background**

1. In the last decade, development policy has emphasized strategies aimed at attaining the twin objectives of increasing economic growth and reducing poverty. As an alternative to agriculture, the non-farm informal economy has become an important vehicle for economic participation by the poor, thereby contributing to both growth and poverty reduction agendas of many countries.<sup>3</sup> Thus, a better understanding of the dynamics, constraints, and potentials of informal enterprises is essential for designing policies and interventions that can turn them into an engine of employment and income growth, rather than simply a mechanism for coping with vulnerability and sharing poverty.

2. However, an analysis of the informal sector is less straightforward. The informal sector is an extensive, often misunderstood concept that refers to conditions of employment or of firm behavior. Informal employment is likewise subject to multiple interpretations as many „informal‟ jobs exist even within companies in the formal sector, some of which pay regular wages. In general, informal workers are those who do not have a contract that is in accordance with labor regulations. Meanwhile, the firm side of the informal sector can include a variety of different types of enterprises, but informal firms are typically small-scale and may or may not be registered with government agencies of any kind. Viewed from an enterprise perspective, the definition of the informal sector omits the informal workers, in contrast with a labor market definition that captures them. There are also other important dimensions of size, such as capital outlays or turnover, which show important variations within each category of informal enterprises. These are often ignored when the size of an informal enterprise is defined mainly on the basis of the number of its employees (see Table 1.1). All these imply that a “one size fits all” approach is less useful in analyzing the informal sector.

3. This study focuses on the smallest informal firms, the household enterprises (HEs), as these entities are uniquely placed within the informal sector. HEs represent both conditions of informal employment and informal enterprise. For the most part, they are started by a single entrepreneur so they create employment for the owner and establish small businesses within the household and the economy.

4. Household enterprises, as defined in household and labor surveys, consist of own-account operators and unpaid family workers. From the standpoint of enterprise surveys, they are tiny firms consisting of a single entrepreneur, perhaps working with unpaid workers who are likely to be family members.<sup>4</sup> In practice, many people may participate in HEs as a secondary activity, including farmers, civil servants, and schoolchildren. Although this complicates the statistical picture, it means that HEs may be even more important for coping with and exiting poverty than would be suggested by data based only on primary occupations (Steel and Snodgrass, 2008).

> 3 See ILO (2002), Fox and Gaal (2008), and Heintz (2004).

> 4 The term “ _nano_ enterprises” may also be applied to indicate that these are the lowest rung on the ladder of enterprise sizes, with no wage workers.

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