Informal economies: Megacities of the developing world
The informal economy encompasses economic activities that operate outside government regulation, taxation, or formal oversight. In mega cities of the developing world, fast-paced urban growth often outstrips formal job creation. As rural migrants flood cities seeking better opportunities, the formal sector—factories, offices, or corporate businesses—cannot absorb the surplus labour. This mismatch drives many toward informal employment as a practical lifeline. For instance, in Lagos or Mumbai, newcomers might become street vendors hawking goods on crowded sidewalks or day labourers waiting at construction sites for temporary work. These roles require little upfront investment or formal credentials, making them accessible to those with limited resources or education.
Globally, over 2 billion people are engaged in the informal economy, accounting for roughly 60% of the world's workforce. In mega cities like Jakarta, Mexico City, or Dhaka, large informal sectors exist alongside the formal economy, filling gaps in services and employment. Street vending, domestic work, and unregistered transport services—such as motorcycle taxis in Manila or cycle rickshaws in Kolkata—are common examples. While these jobs are often marked by lower productivity, unstable earnings, and no benefits like healthcare or pensions, exceptions exist. Some informal entrepreneurs, like food stall owners in Bangkok or garment workshops in Istanbul, can earn enough to support families or even hire others, blending informality with small-scale entrepreneurship.
The prevalence of informal work reflects both necessity and opportunity. For many, it's a survival strategy: domestic workers in São Paulo clean homes without contracts, while waste pickers in Cairo sort recyclables from trash heaps to sell for cash. Yet informality isn't always a last resort. In cities like Nairobi or Bogotá, flexible informal roles—such as freelance tailoring or unlicensed tutoring—allow workers to adapt to shifting demands without rigid formal structures. Despite its risks, including job insecurity and lack of legal protections, the informal economy remains a critical engine of urban life, providing livelihoods where formal systems fall short and sustaining millions in rapidly growing cities.
Informal Work and Informal Dwellings
Urban poverty and slum expansion are deeply interconnected in developing-world mega cities. As rural migrants arrive in search of informal work, many face a harsh reality: earnings from jobs like street vending or domestic labour are too low to afford formal housing. This forces them into informal settlements—unplanned, densely populated neighborhoods lacking basic infrastructure. These areas, such as Mumbai's Dharavi or Rio de Janeiro's favelas, often have limited access to clean water, sanitation, or electricity. The cycle of poverty tightens here, as unstable informal incomes make it difficult to improve living conditions, while poor living conditions restrict access to better job opportunities.
Informal settlements also face systemic neglect. City authorities frequently overlook these areas, leaving residents exposed to health risks from pollution, flooding due to inadequate drainage, or sudden evictions. Without legal protections or social safety nets, families in slums rely on informal work not just for income but for survival. Day labourers, waste pickers, or unregistered domestic workers exemplify this precarity, where earnings are unpredictable and savings nearly impossible. This dynamic perpetuates a loop of informality, where slums grow as formal economies fail to integrate marginalized populations.
Stories from Slums: Interesting Cases from the Developing World
Despite challenges, some informal settlements host surprisingly large-scale economic activities. These operations often emerge organically, filling gaps left by formal systems. In Manshiyat Nasser, a Cairo slum nicknamed “Garbage City,” residents have built a vast informal recycling industry. Thousands collect, sort, and process waste from across the metropolis, repurposing materials like plastic and paper for resale. This decentralized system handles nearly 40% of Cairo's trash, showcasing how slums can become hubs of specialized informal labour.
Dharavi, Mumbai's sprawling slum, is another example. Beyond its residential density, it houses thriving informal industries: small-scale textile workshops, pottery kilns, and leather tanneries. These enterprises employ thousands, producing goods for local and international markets. Similarly, Neza-Chalco-Itza, a megaslum in Mexico City, sustains robust local commerce. Despite pollution and inadequate infrastructure, its millions of residents run shops, food stalls, and repair services, creating a self-reliant economy.
Orangi Town in Karachi stands out for community-led solutions. Residents constructed their own sewer system over decades, bypassing government inaction. This grassroots effort improved sanitation for hundreds of thousands, proving that slum dwellers can innovate under constraints. These examples reveal a paradox: while informal settlements symbolize urban inequality, they also foster resourcefulness, entrepreneurship, and complex economies that keep mega cities functioning.
Policy Trends: From Punishment to Inclusion
For decades, governments in developing mega cities responded to slum expansion with punitive measures—bulldozing settlements, evicting residents, or banning street vending. These crackdowns often failed. Slums would reappear nearby, and informal workers adapted to survive. In cities like Manila or Nairobi, demolishing informal markets only displaced vendors temporarily, as demand for affordable goods and services persisted. Such approaches ignored the root causes of informality: urban inequality, lack of affordable housing, and insufficient formal jobs.
Today, there's a growing shift toward recognizing informal communities and workers as integral to cities. Instead of demolition, some governments now prioritize slum upgrading: improving water access, sanitation, and electricity in informal settlements. Rio de Janeiro's Favela-Bairro program, for instance, connected hillside slums to formal utilities, while India's Pradhan Mantri Awas Yojana aims to upgrade housing for slum dwellers. Investments in public transit, like Bogotá's bus rapid transit system, or better waste management in Kampala, also aim to integrate marginalized areas into the broader urban fabric.
For informal settlements, progressive policies focus on land tenure—granting residents legal rights to occupy land—and incremental infrastructure improvements. In Thailand's Baan Mankong program, communities co-design upgrades like paved pathways or drainage, reducing eviction risks. Social programs, such as Brazil's Bolsa Família cash transfers or South Africa's public works initiatives, provide safety nets while addressing poverty drivers.
For informal work, policies increasingly aim to integrate, not criminalize. Simplifying business registration helps street vendors or artisans formalize operations without bureaucracy. Reducing taxes for micro-entrepreneurs, as seen in Rwanda, encourages compliance. Skill-building programs, like Ghana's vocational training for waste pickers, or microfinancing for home-based tailors in Bangladesh, boost productivity. These steps acknowledge that informality isn't a flaw but a reality shaped by urban gaps—and that solutions must offer dignity, stability, and pathways to progress.
Questions
1. How do examples like Dharavi or Manshiyat Nasser challenge common perceptions of informal settlements as purely sites of poverty?
2. How do large-scale economic activities within slums challenge conventional perceptions of poverty and informality?
3. What factors enable certain slums to develop specialized industries like textiles or recycling, and how do they sustain these over time?
4. How do policy approaches like slum upgrading or microfinance programs affect the livelihoods of informal workers?
Exercise
Imagine you live in a slum where residents have collectively set up informal garment workshops. Describe how you would gather information on supply chains, distribution networks, and the roles people play to keep these workshops running day to day.
Last updated: Spring 2025