The Hidden Economy: Informal Entrepreneurs Driving Inclusive Growth and Innovation

A working paper developed by the Economic and Social Research Foundation (ESRF) in collaboration with the World Institute for Development Economics Research (UNU-WIDER) offers a compelling and data-driven portrait of how informal entrepreneurship powers much of the developing world’s economic activity. Far from being a sign of failure, the study reframes informality as an adaptive, creative response to systemic barriers, an indispensable force that fuels livelihoods, innovation, and community resilience. Drawing on surveys, case studies, and policy analysis, the paper situates informal entrepreneurs not as marginal actors, but as vital contributors to growth and social stability in countries where formal job opportunities remain scarce.

The Invisible Majority: Rethinking Informality

The report begins by challenging the entrenched notion that informality is synonymous with inefficiency or disorder. Instead, it argues that informal entrepreneurship forms a continuum, spanning necessity-driven street vendors, home-based workers, and small, agile enterprises that deliberately operate outside formal systems. For many, informality is not a last resort but a rational choice. Faced with bureaucratic red tape, corruption, or prohibitive registration fees, entrepreneurs innovate within informal networks to survive and thrive. These actors display remarkable resilience, adapting their business models to volatile markets and uncertain institutions. The authors call this phenomenon “entrepreneurship under constraint,” emphasizing that it reflects both human ingenuity and systemic exclusion.

The Architecture of the Informal Economy

Through detailed case analyses, the study reveals that informal enterprises are far from chaotic. Many mimic formal organizational practices, employing workers, managing supply chains, adopting technology, and even exporting goods informally through regional markets. In several countries, informal microenterprises outperform small formal firms in efficiency and adaptability. Yet, the lack of legal recognition limits their growth potential and access to finance. The paper underscores the heterogeneity within the informal sector: it is a vast and diverse ecosystem rather than a uniform underclass. Some entrepreneurs are survivalists seeking subsistence, while others are opportunity-driven innovators who consciously avoid formalization to maintain flexibility and minimize risk.

Women at the Core: The Feminization of Informal Enterprise

One of the most insightful sections of the report delves into the gendered dimensions of informality. Across sub-Saharan Africa and South Asia, women constitute the majority of informal entrepreneurs, operating primarily in food processing, textiles, retail, and domestic services. Informality offers women flexibility to balance economic and family responsibilities, especially in societies where cultural norms restrict their participation in formal employment. However, it also confines them to low-margin, labor-intensive activities with limited upward mobility. The study observes that despite these constraints, women display exceptional resourcefulness, using mobile money, rotating savings groups, and community networks to overcome barriers to finance and market access. The authors advocate for gender-responsive policies that integrate women-led informal businesses into national development agendas through training, microcredit, and digital empowerment programs.

Breaking Barriers: From Survival to Transformation

The persistence of informality, according to the paper, is rooted in structural factors such as weak governance, complex tax regimes, poor infrastructure, and limited access to financial institutions. For millions, remaining informal is a pragmatic strategy in the face of unfriendly business environments. Yet informality also reproduces inequality, leaving entrepreneurs without legal protection, social insurance, or stability. To address this paradox, the study calls for a new policy paradigm, one that seeks to “formalize from within.” This means simplifying registration, reducing compliance costs, and offering incentives rather than punishments. Successful examples from Rwanda, Ghana, and Kenya demonstrate how microfinance, cooperative licensing, and local enterprise hubs can gradually integrate informal entrepreneurs into the formal economy without undermining their flexibility. The authors insist that formalization should not be pursued as an end goal, but as a pathway toward inclusive, sustainable development.

Digital Revolution: The New Face of Informality

A particularly timely section of the paper examines how digital technologies are reshaping informal entrepreneurship. Mobile banking, e-commerce, and social media platforms have enabled small traders and artisans to reach broader markets and manage transactions with unprecedented ease. Informal entrepreneurs now use WhatsApp, Facebook Marketplace, and M-Pesa to advertise, receive payments, and expand their operations. The report highlights that this “digital informal economy” is bridging the gap between the traditional street market and the formal e-economy. However, the researchers caution that digitization alone does not guarantee formalization; many online businesses remain unregistered and vulnerable to platform monopolies or data exploitation. They urge governments to adopt “smart regulation” that nurtures innovation while ensuring equitable digital participation for informal workers and microenterprises.

A Call for Recognition and Reform

The ESRF and UNU-WIDER researchers deliver a persuasive message: informal entrepreneurs are not the hidden problem of development; they are its unrecognized foundation. By embracing a developmental approach that values flexibility, creativity, and local context, governments can transform the informal economy from a coping mechanism into a driver of inclusive growth. The paper envisions a future where the street vendor, the home-based tailor, and the mobile trader are no longer treated as peripheral figures, but as central agents of transformation in a rapidly changing global economy. Informal entrepreneurship, it concludes, is a story of resilience and human agency, a testament to the ingenuity of those who, in the absence of structure, build their own pathways to progress.