The informal dividend: how unrecorded economies stabilise the Global South

In much of the Global South, the decisive labour market is not the one visible in payroll data.

Informality is typically framed as a defect: a missing tax base, a regulatory failure, an embarrassment to modernity. In practice, it is often what prevents a downturn from becoming a social rupture. When growth slows, credit tightens, and prices rise, the informal sector does what formal institutions cannot do quickly. It reallocates labour, compresses margins, substitutes inputs, and keeps money moving at street level. In a world of tighter external finance and more volatile currencies, this “informal dividend” has become one of the Global South’s least acknowledged stabilisers.

What the informal economy actually is

Informality is not simply illegality. It is a spectrum of activity operating outside full registration, taxation, or labour regulation. Some of it is avoidance. Much of it is survival. The distinction matters because policy failure begins with misdiagnosis. Governments treat informality as an attitude when it is, more often, an architecture: what emerges when compliance is expensive, enforcement is arbitrary, and the formal economy does not convert effort into livelihood at scale.

Why it stabilises: the shock-absorber logic

Formal systems are slow by design. Payroll jobs do not appear overnight. Bank credit does not expand when balance sheets are stressed. Procurement does not become clean because inflation is rising. Informal systems, however, adjust rapidly. They create micro-incomes through petty trade, services, repair work, transport, food vending, and short-cycle production. They are imperfect, but they are fast. In a downturn, speed is a form of macro-stability.

How informality reshapes inflation

Informality changes how inflation is lived and how it is measured. When formal retailers reprice sharply, informal traders often compress margins, downgrade quality, reduce quantities, or switch inputs. That can protect households in the short run, but it also shifts inflation from “prices” to degradation. The consumer does not experience an index. They experience smaller packs, lower durability, fewer proteins, longer search time, and a creeping loss of dignity in consumption.

The tax story most governments tell themselves

States tend to see informality as a missing tax base. That is true, but incomplete. Informality is also a verdict on the state’s offer. People do not register because they do not receive predictable returns: reliable utilities, fair licensing, enforceable contracts, reasonable inspections, and access to credit. In many systems, formalisation is less an economic transition than a political negotiation with a bureaucracy citizens do not trust.

How to upgrade without destroying the buffer

The objective should not be to “eliminate informality”. It should be to reduce its penalties while preserving its flexibility. That means three priorities. First, make entry into legality cheap and fast: low fees, same-day registration, renewal without humiliation. Second, make formality useful: access to credit, procurement, insurance, and dispute resolution. Third, stop using enforcement as fiscal theatre. Predictable rules create compliance. Arbitrary rules create markets for bribery.

The real thesis

The informal economy is the Global South’s silent stabiliser, but it is also a ceiling. It prevents collapse, yet it can trap labour in low-productivity loops when states fail to build conversion ladders into scalable firms. The dividend is real. The policy error is to treat it as deviance rather than evidence. In 2026, countries that thrive will be those that formalise gently: not through punishment, but by making legality genuinely worth the price.