The Battle Against Informality

The seventh World Urban Forum (WUF), held in Medellín this April, brought together nearly 25,000 participants to discuss urban issues under the umbrella theme Urban Equity in Development – Cities for Life.  A central question in the WUF was how to achieve equity in cities, particularly through smart urban planning and governance.

In one of the closing panels for the WUF, the Colombian Minister of Housing, City and Territory made a statement that encapsulated much of the discussion on this topic throughout the week:  high informality means high inequity.  The general sense coming out of the WUF was that in order to achieve more equitable cities, the “battle against informality” across sectors must be won.  As is common in debates regarding formality, a number of speakers cited Peruvian economist Hernando de Sotoas support for the notion that winning the battle against informality was key to reducing poverty and inequity.

But does informality always lead to bad outcomes for the poor?  In order to understand the effects of winning the battle against informality, we need to consider both what formality does, and whom it serves.

Although speakers who themselves were living or working in informal conditions were not in abundance at the WUF, there were a few interventions that helped shed light on the answer to this question.  The first came from a woman who had been an informal vendor in Medellín, and had been assigned a space in a shopping center to sell her wares as an alternative to selling them in public space.  She talked about how she had been required to make improvements to the space to comply with health and sanitation codes, and how these improvements had sunk her into debt.  She was forced to leave the space, unable to pay the costs of maintaining it and the interest rates on her debt. Many of the shopping center vendors, like her, returned to occupying public space illegally, risking being removed from that space in order to make ends meet.

A second came from a city official, who was discussing public housing projects in Medellín.  He talked about how there was in fact sometimes a preference by poor and displaced people for informal conditions, given the higher costs of living in public housing.  While they were able to hold title to their homes in public housing – in some cases, for the first time in their lives – this title came along with the burden of paying higher prices for public utilities, administration fees, and property taxes.  In some cases, people were simply unable to bear these costs without going into debt.

These two examples demonstrate how in both labor and housing markets, formality can provide a significant benefit to the poor in the form of some guarantee of not being summarily removed from their home or place of work.  In more informal labor and housing conditions, this sense of stability is unavailable to them, as is the ability to safely invest in workplaces and homes over the long term.  At the same time, this stability comes with real costs, such as taxes, fees, expenses related to compliance, and debt: the costs of formality.  In the difficult calculations made in poor households, informality may in fact be the winning option, despite its risks.

Who, then, does formality serve, if not necessarily the poor?  A final intervention at one of the WUF’s closing panels spoke to this question as well.  One of the moderator’s questions was posed to the representative of a large construction industry association.  He asked what the main obstacles were to the industry’s work in cities.  Her response: clean title to land.  In order to make land move easily in the market, and available for use by private industry, she argued that land needed to be taken out of environmental and administrative limbo, “or informality will win the battle.”  While clean title might come along with costs too difficult to bear by the poor, it was key to the success of private investment in development projects.

By raising these questions, I am not arguing that providing access to formal housing or labor markets is unimportant or unrelated to equitable outcomes.  Opening avenues to formal labor and housing can be important ways of providing stability and permanence for the poor, and closing the resource and opportunity gaps that have had such devastating impacts on equity in our cities.  But I think it is important to question the assertion that a fully planned, fully mapped, fully “formal” city will necessarily have positive outcomes in terms of equity.  And it is also important to consider the specifics of access to formal labor and housing, paying close attention to what this access to formality does, and whom it serves.

Although de Soto is often simply cited as the classic proponent of formality – references to him at the WUF were no exception – I would argue that a closer reading of his work actually also gives us tools to consider these more critical questions.  In The Mystery of Capital, de Soto does indeed suggest that the granting of private title to informally held assets will allow the poor to bring these assets into the capitalist economy, spurring economic development.  But de Soto does not advocate for a simple flat granting of private title.  Rather, he suggests incorporating informal local practices of property into the formal property system, such that the formal system reflects how people “actually arrange their lives.”  He finds that these informal arrangements are often more advantageous to the poor than existing formal systems.  Through incorporating them into formal law, according to de Soto, formality will gain legitimacy in the eyes of the poor, and the equity gap will begin to close.

As opposed to a blind battle against informality, this approach allows for hybrid solutions, acknowledging the advantages and costs of both formality and informality.  It also opens possibilities for reducing the costs of formality for the poor.  In practice, for example, such an approach might mean allowing the informal vendor in Medellín to legally work in public space rather than moving to a shopping center, or the slum dweller to have his occupation of an existing plot legally recognized rather than moving to a titled unit in a public housing project.  These solutions might not save all the costs of formality, and informality could still be the winning option in poor households under certain circumstances.  But an openness to hybrid solutions could allow for a more productive conversation about what formality actually does, and whom it actually serves, as part of a collective effort to work toward more equitable outcomes.

And so perhaps, rather than mobilizing de Soto in a battle against informality in our cities, we can use him to call a truce.