Self-employment and poverty in developing countries

Poverty and undersupported labor markets are linked

The first Millennium Development Goal (MDG), for good reason, is to eradicate extreme poverty and hunger. Several other MDGs have been met on a global scale, including the target of halving the proportion of people without access to improved sources of water and reaching parity in primary education between girls and boys. The United Nations reports that extreme poverty is falling in every region of the world and that the poverty reduction target of cutting global poverty in half by 2015 has been met [3]. Despite this progress, worldwide poverty remains enormous. Accordingly, the international community is calling for a new target for MDG 1: eliminating extreme poverty by 2030.

Because labor is the main asset of the poor, unemployment is often thought to be the main reason for poverty. This is wrong. In a given week, some 200 million people are unemployed and earning nothing [4]. This is a large number, but it pales beside the 900 million people who are employed but earn so little, in cash or in kind, that they and their families cannot achieve a standard of living of even $2 per person a day [4]. What differentiates people who are poor from those who are not, then, is not whether they are employed, but how much they and other household members earn from the work they do.

Most workers in developing countries are self-employed

In developing economies, as noted, many poor people—often a majority—are self-employed. They work in individual or household enterprises in both urban and rural areas and inside and outside agriculture. Self-employed individuals who do not employ others are sometimes called “own-account workers.”

More than half of workers in low-income countries (53%) and more than a third in lower-middle-income countries (36%) are self-employed, mainly in agriculture in both cases. Rates of self-employment or casual employment are particularly high in South Asia and Sub-Saharan Africa; South Africa is an outlier, with only 19% of the employed population self-employed (Figure 1; Illustration). Also, in Sub-Saharan Africa, most new nonfarm jobs are generated by people starting household enterprises. Fully half of the extremely poor in urban areas operate a nonagricultural business, according to an 18-country study [5].

Self-employment is not the same as entrepreneurship or informal employment

Self-employment is sometimes equated with entrepreneurship, but this can be misleading. To many people, “entrepreneurship” conjures the image of a risk-taker setting up a business with the intent of making it grow and prosper. In developing countries, however, the goal of much self-employment is far more modest: to earn money for a time—preferably, a short time—before transitioning to a more remunerative activity.

An example is saving money to buy a package of 20 cigarettes and then selling them individually at a higher unit price and surviving on the profits. Workers (mostly young men) engaged in such survival self-employment can hardly be called “entrepreneurs” in the everyday sense of the term. They engage in such activities reluctantly and only until they can find something better. The majority of self-employment enterprises lack the potential to grow, as studies in Sri Lanka and West Africa demonstrate.

Self-employment is also sometimes equated with working informally. But equating the two is unhelpful. “Working informally” and the associated terms “informal economy” and “informal sector” are not defined consistently, so “informality” means different things to different people. And even when the conceptualization is clear, as when informal employment refers to work outside the protection and regulation of the state, it is difficult to take this concept to data.

While many people who engage in unprotected and unregulated work are paid workers, not self-employed, there are only vague estimates of how many there are. Even less is known about how many self-employed people are engaged in informal activity according to the unprotected/unregulated definition and how many are not. The evidence points to most own-account enterprises and other very small firms being unregistered despite government efforts to get them to register [6].

Does self-employment reflect choice—or lack of choice?

The literature distinguishes two quite different reasons for self-employment. Clearly, a large number of people are self-employed because they do not have the possibility of being wage employees, a condition they would prefer. In this sense, they are self-employed because they have no choice. They are too poor to remain unemployed and earn nothing. A much smaller group of people are self-employed because they were previously wage employees and could have continued in wage employment but left their jobs willingly to create their own enterprises.

Controversy remains over the relative importance of choice and no-choice routes to self-employment, and more research is needed to investigate this issue in specific countries. But regardless of whether the percentage of people who are working in self-employment because they have no choice is 80% or 60%, the number is enormous.

The self-employed are largely poor. The international network Women in Informal Employment: Globalizing and Organizing (WIEGO) finds that the self-employed are concentrated in high-poverty-risk, low-average-earnings categories [7]. In the words of one study of the working poor: “Perhaps the many businesses of the poor are less a testimony to their entrepreneurial spirit than a symptom of the dramatic failure of the economies in which they live to provide them with something better” [5].

How policies harm the working poor: Hindrances, restrictions, and regulations

Street vendors are ubiquitous through the developing world. They sell handicrafts, ice cream, lottery tickets, and just about everything else. But South Africa is different [8]. In cities like Johannesburg, Cape Town, and Durban street vending is entirely absent or confined to a very restricted area. The reason is local government policies: for example, Durban had issued just 872 trading permits as of 2005, far fewer than the number of people who want to be street traders. The government arrests, fines, or jails unlicensed traders and confiscates their inventory. This all-too-real threat deprives countless people of a livelihood.

Some regulations are needed to protect against abuses. Products that are illegal or dangerous need to be regulated. And some sales practices are threatening to customers, who need to be protected. But some regulations and restrictions needlessly hinder the self-employed poor and prevent them from earning even a meager living.

Two groups of beneficial policy measures to support the self-employed

Policy interventions to boost the labor market earnings of the self-employed can be put into two broad groups: those that raise the returns to the self-employed in their current activities and sectors, and those that help the self-employed transition into new, better-paying wage activities.

Policies that can raise the returns to the self-employed in their current activities and sectors include:

• adopting a positive policy stance toward the self-employed that avoids hampering them;

• designing productive inputs (such as irrigation equipment) that can raise the productivity of the self-employed;

• providing poor farmers with more to work with, such as more land, equipment, extension and outreach services, and fertilizer and other inputs;

• facilitating off-farm wage employment and self-employment in rural nonfarm enterprises;

• making capital available to the poor at affordable rates;

• building skills and business know-how;

• stimulating microfinance and microfranchising.

Other policies can expand opportunities for wage employment so that the self-employed poor can move into more remunerative employment. These include general measures affecting labor markets:

• Stimulating job-enhancing economic growth.

• Working toward a more open, but not predatory, international trade environment.

• Encouraging more foreign aid.

• Harnessing the energies of private companies.

Policies can also include labor market measures aimed specifically at generating more wage employment:

• Avoiding prematurely high labor costs.

• Removing excessive barriers to employment.

• Increasing workers’ skills and productive abilities in areas where job vacancies go unfilled because people lack the skills needed to fill them.

• Establishing workfare and other programs aimed at creating jobs for the poor.

The highest priority interventions vary from country to country, and from place to place and group to group within a country. Countries have different objectives and different tradeoffs and constraints on both the policy and the budget sides. The constraints bind differently, the most obstructive constraints differ by circumstances, and the most cost-effective way of intervening to relax the constraints also varies. The World Bank’s 2013 World Development Report entitled Jobs offers an eight-way typology for prioritizing policy interventions for different categories of countries [9].

In all countries, however, policies are needed that provide opportunities for poor, self-employed workers to earn more at their current activity or move into more remunerative activities. To be avoided are policies, evident in many countries, that make life more difficult for the self-employed and deprive them of the opportunity to earn a living.

As always, no single policy or group of policies will work everywhere. But there are some particularly promising interventions that have succeeded in multiple contexts, and some of them are highlighted in what follows.

Some especially promising policy interventions to assist the self-employed poor

Four interventions appear to be particularly effective and could guide future efforts to improve employment opportunities for the poor [2]:

• focusing economic growth on improving the earning opportunities of the poor;

• creating off-farm employment opportunities;

• training people for wage employment; and

• making microcredit affordable.

These policy priorities are not the only potentially powerful policy interventions. Entrepreneurship policies might also be worth pursuing [10]. But these four policy priorities hold particular promise and have demonstrated their effectiveness in a range of settings.