Importance of the Informal Sector in Bangladesh Economy

Do you know the importance of the informal sector in the Bangladesh economy? After reading this article you can know everything regarding the informal sector.

What is the service sector?

The tertiary or service sector of an economy includes and a wide range of service activities in developing countries.

It includes very low-value-added activities in the informal sector, such as rickshaw pulling, barbershops on pavements, domestic service, and street traders. The informal sector describes all those activities that are no formally regulated by the government because they do not come under any legal regulatory frameworks.

Very low value-added service sector activities are likely to be unregulated in this way, and these activities, therefore, belong to the informal sector.

But the service sector also includes formal sector(regulated) activates that have higher value-added, and which can, therefore, provide higher wages to those employed in these activities.

These activities include the retail and wholesale trades, formal sector transportation like the operation of trucks, buses and trains, banking and finance, communication in all its forms including the media and telecommunications, and the entertainment industry in its various forms.

Importance of the Informal Sector
Importance of the Informal Sector

What is the informal sector?

The informal sector in most developing countries accounts for the biggest share of employment. In Bangladesh, only 10% of the workforce has regulation and so only 10% of the total number of workers would count as members of the formal sector.

This implies that 90% of the workforce in Bangladesh works in the informal sector. This includes workers in the informal agricultural, industrial, and service sectors, but around half of this total in the informal service sector.

The informal service sector includes a vast range of activates, including domestic service as servants, drivers, or cooks, shining shoes on pavements, providing haircuts on street corners, selling peanuts or flowers in railway stations, or footpaths, and operating cycle rickshaws and pushcarts.

Why do so many people work in the informal sector?

One reason why unemployment is so low in countries like Bangladesh is that the poor cannot afford to be unemployed. Since the poor have little savings, they cannot survive for very long without finding some gainful activity to fall back on.

This is where the informal sector comes in because it allows the poor to find an avenue of employment, even though the informal sector provides very low incomes.

The informal sector includes activates in industry, agriculture, and services, but the informal service sector is particularly important because it requires almost no capital to enter5 this sector and so it serves as a final resort for all those who fail to find work anywhere else.

In industry, the informal sector includes small workshops like unregulated grapes, or very small factories employing two or three people making, say, metal or wood products. Most of the agriculture is informal in a country like Bangladesh because most farms are very small and they employ very few workers whose jobs and employment conditions are not regulated by any regulations.

But informal sector activities in both industry and agriculture still require some capital or land for the owners, and many of the jobs in these sectors are in the form of self-employment for small producers and their families. Jobs for outsiders in the informal agricultural and industrial sectors are therefore in very limited supply.

In contrast, informal service sector jobs usually do not require the workers to set themselves up in business, and so this sector tenders to absorb all those who cannot find jobs elsewhere.

Advantages and disadvantages informal sector

In one sense, therefore, informal sector service activates represent an escape route for the poor who would otherwise find it even more difficult to survive.

But in another sense, they represent and wasteful use of human resources that could be more productively employed in higher-wage sectors if only jobs were available in those areas.

The size of informal service sector activates thus might reflect the lack of a development dynamic in an economy, and its failure to generate high-wage employment in rapidly growing industrial, agricultural, or high value-adding service sectors.

However, many development experts disagree and argue instead that the informal sector should not be undervalued in a developing country since it provides vital employment opportunities and is a source of dynamism in the economy.

According to this view, governments should make it easier for people to enter the informal sector, they should pass legislation to protect assets and businesses in the informal sector, and there should be government policies to encourage activity in this sector. They see this as the best way to reduce poverty and provide employment opportunities.

However, the absence of regulation is the very factor that allows the informal sector to pay low wages and engage in “gray” activates that might become more default if regulated by the government. It is not clear how the government can encourage the informal sector and still ensure that it remains informal.

A more important point is that while the informal sector is indeed dynamic, it is primarily a low wage sector. It plays an important role in absorbing people who are not finding a job elsewhere. But the important challenge for developing countries must be to create high wage sectors so that the low-wage informal service sector o longer remains so important.

From informal to formal the importance and challenge of moving to high-value-added services

Importance of the Informal Sector

The service sector in advanced countries accounts for a large and growing share of total GDP because of the growth of high-value-added services. But in contrast, developing countries usually have a large service sector that is composed mostly of low-value-added service activities.

This reflects the fact that many developing countries are not able to provide employment in industry, in agriculture or in high-wage services for most of its population, and these people have little alternative but to find some income in service sector activities that provide very little income because they add very little value to the economy.

How to make the move?

The challenge for developing countries is therefore how to move away from low-value-adding service activates while increasing the scope of high-value-adding activities. This challenge raises the question about the role f the informal sector in developing countries because many of the low-value-added jobs in the service sector are in the informal sector.

Who will provide the services?

A further set of issues in most developing countries is how to improve the efficiency of service delivery by the state. The state is often a critical provider of services in all countries in areas such as health and education. The question of whether the state is the best and most efficient provider of these serves or whether some other provider would be better.

There are two alternatives. The first is to privatize service delivery to private schools, hospitals, aid charities, and the second is to rely on Non-Governmental organizations or NGOs. In developing countries, the second alternative, that of NGO service delivery, is most often considered as the option.

This is because the private sector in developing countries is often not well developed, and in any case, the private sector would not be able to make a profit in providing services to the very poor. But the state is equally often criticized for being inefficient, for suffering from corruption and for not being able to manage service delivery at a low cost.

Increasingly, attention in developing countries has shifted to NGOs as an alternative method of delivering services. Bangladesh was one of the first countries where the NGO model was developed, and Bangladesh is therefore often cited as an example of a successful NGO-led service delivery model. However, the role of NGOs in service delivery is problematic and there are both costs as well as benefits of relying excessively on NGOs.

What about finance?

Finally, the financial sector is a critical sector in developing countries. Development requires that adequate finance should be available for growing enterprises and for new enterprises. However, the financial sector in most developing countries is often inefficient, suffers from poor regulating by the state and loan repayment is often very poor in the formal sector banks, which had become a model for many other with the development of micro-credit by Grameen Bank, which has become a model for many other countries in the world. However, while Grameen Bank is a very successful model.

It does not address the serious problems faced by industrial borrowers in Bangladesh who need an efficient banking system that can lend them large amounts of the capital of long-term industrial and commercial development.

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