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What counts as an informal business?
The International Labour Organization’s (ILO) Recommendation No. 204 defines the informal economy as economic activities by workers and economic units that are not covered, or are insufficiently covered, by formal arrangements in law or in practice. It excludes illicit activities. Informality is therefore not another word for illegal business.
The category covers different situations: own-account operators working alone or with contributing family members, businesses that employ workers, cooperatives, and social and solidarity economy units. It also includes informal employment relationships, including some jobs within otherwise formal businesses. Informality occurs across sectors and in public and private spaces.
That range matters for policy. Before choosing a service or rule change, specify whether the intervention is for workers, enterprises, employment relationships—or more than one. A measure suitable for an employer with staff may not fit a street vendor working alone, and a programme for a business unit may miss workers whose employment relationship is informal.
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What inclusion in an entrepreneurial ecosystem means
An inclusive entrepreneurial ecosystem makes the goods and services that entrepreneurs need genuinely accessible to the particular groups it aims to serve. The ILO’s Inclusive Entrepreneurship Ecosystems Development approach puts groups such as women, young people and refugees at the forefront and calls for strategies grounded in local incentives and capacities.
The ILO describes the ecosystem as a set of connected conditions: the business and policy environment, finance, business development services, human capital, entrepreneurial culture, and access to functioning markets. As the ILO puts it: “The success and ability of entrepreneurs to thrive and create jobs are influenced by a complex network of interrelated factors – including the overall business and policy environment, the availability of finance and required business development services (BDS), the level of human capital, the prevailing entrepreneurial culture, and the accessibility and functioning of markets.”
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In practice, a service can exist on paper and still be out of reach because of its cost, eligibility rules, documentation, location, language or hours. A finance offer will not solve a market-access barrier; a skills course will not make an unaffordable permit affordable. Diagnose the barrier and how it interacts with other conditions before adding another standard course or loan.
A practical sequence for building inclusion
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Map who is informal and how their work connects to the formal economy
Start with an assessment suited to the national and local context. Identify the factors, characteristics, causes and circumstances of informality, and state the unit of analysis: worker, enterprise, employment relationship or a combination. Distinguish groups and sectors rather than treating informal businesses as a single population. ILO Recommendation No. 204 calls for this kind of context-specific assessment.
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Give affected people a voice in diagnosis and decisions
Consult representative employers’ and workers’ organizations, including membership-based organizations of informal workers and economic units. At the local level, planning bodies can give informal entrepreneurs and workers a direct role in decisions that affect them. Involvement should extend beyond a one-time consultation: participants should help shape the policy, take part in implementation and contribute to review.
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Identify connected barriers and existing incentives
Examine regulation and the broader business environment, finance, business services, skills, cultural norms and market access together. For each existing service, check who can actually use it and what prevents others from doing so. Ask whether requirements, cost, location, language or timing exclude the people the service is meant to reach, and whether another policy creates a conflicting burden or incentive.
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Coordinate support across institutions
Build an integrated package rather than treating formalization as a standalone registration campaign. Coordinate government bodies and stakeholders, and align business support with employment, social protection and development policy. A business should not have to navigate disconnected systems when seeking advice, finance, registration or protection.
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Make transition to formality viable and rights-respecting
ILO Recommendation No. 204 frames transition around fundamental rights, income security, livelihoods and entrepreneurship. Support the creation and sustainability of formal enterprises and decent jobs, while preventing existing formal jobs from becoming informalized. A registration total alone cannot show whether entrepreneurs gained viable businesses, workers gained protection or livelihoods were put at risk.
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Review results with participants and adapt
Regularly assess whether policies improve access and outcomes, consulting representative organizations as part of the review. Check enterprise and worker outcomes, protection, job quality and whether services address the barriers identified by informal businesses. Adapt a measure when it fails to improve access or protection.
Match policy options to the barrier
Potential measures should follow local diagnosis, not a universal checklist. The OECD’s analysis of Egypt, Iraq and Jordan describes examples including changes to make social insurance more affordable and accessible, training and wage subsidies (including temporary support for groups such as women and young people), easier business registration, access to inclusive financial services, and fairer, more consistent enforcement. These are examples from a report focused on the MENA region, not a prescription proven to work everywhere.
| Measure | Barrier it may address | Questions to resolve locally |
|---|---|---|
| More affordable and accessible social insurance | Cost or procedural hurdles to coverage | Can operators meet the contribution cost and enrollment requirements? Do the process and service fit their working conditions? |
| Training or wage subsidies | Skills needs or the cost of hiring and retaining workers | Does the offer address a locally identified need? Can the intended participants access it, and is any subsidy temporary or ongoing? |
| Simpler registration and inclusive financial services | Administrative obstacles to formalizing or accessing finance | Are steps, documentation and costs manageable? Does the financial service fit the target businesses rather than only formally established firms? |
| Fairer, more consistent enforcement | Uneven application of rules | Are obligations understandable and applied consistently? Does enforcement accompany a viable route to compliance and protection? |
Use an inclusion test before adopting a measure
- Access: Can the intended operators meet the cost, documentation, location, language and time requirements?
- Fit: Does the intervention address a diagnosed local constraint, or simply deliver a standard programme?
- Voice: Did informal business representatives help shape the measure, and can they influence revisions?
- Livelihoods and rights: Does the path protect fundamental rights, income security, livelihoods and decent work as formal coverage expands?
- Coordination: Do business services, registration, finance, labour and social protection agencies work together?
- Review: Are outcomes checked with participants, and will the measure change if it fails to improve access or protection?
What the available evidence can—and cannot—show
The ILO’s Small Matters report describes a database based on household, labour and other statistical surveys conducted in 99 countries between 2009 and 2018. That figure is the coverage of the report’s evidence base, not an estimate of the current share of employment in informal businesses. The report assesses the contribution of self-employment and micro- and small enterprises to employment in formal and informal economies.
ILO Recommendation No. 204 sets out policy principles; it is not a measured impact study establishing which intervention works best across countries. The available material supports a process of local diagnosis, participation, coordinated action and review, but does not establish a single intervention with the strongest causal effect in every context.
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