Barriers to Skills and Capital Accumulation in the Informal Sector

experience of online sellers in the study sample may not be representative of the experience of the typical small and informal business in South Asia if it were to join the platform. It may be that younger, better educated, and women entrepreneurs are in a better position to harness the benefits of online sales channels.

Among the firms that are not able to adopt and use digital platforms effectively, this new technology may represent a threat rather than an opportunity. As such platforms make deeper inroads into markets traditionally served by informal firms, such firms may find that survival is increasingly difficult. Another concern is that digital platforms tend to accumulate market power because of inherent economies of scale in this technology and because they can acquire a hold on consumers because of behavioral biases in the way people shop online.35 The growing market power of digital platforms may squeeze profit margins among informal producers and constrain their growth possibilities. Understanding the factors that prevent informal firms from using digital platforms effectively is important.

Informal enterprises are constrained not only by product markets but also by limited access to skills and capital. The evidence is promising on interventions that provide capital or business skills to microenterprises and small businesses in the informal sector. Some programs seem to work.36 For example, a randomized study found that the Start-and-Improve Your Business Program, one of the most widely implemented business training programs in developing countries, had a positive impact on woman-owned microenterprises in Sri Lanka (de Mel, McKenzie, and Woodruff 2014). Providing grants in cash or in kind, too, has been found to have a positive impact on informal microenterprises, consistent with the hypotheses that a large segment of informal firms is credit constrained. Grants worth US$100 or US$200 significantly increased profits among microenterprises in Sri Lanka, and the positive impacts lasted for at least five years (de Mel, McKenzie, and Woodruff 2012).37

In the design of such interventions, the aspirations of the target group should matter. As with e-commerce platforms, it may be the case that only some informal business owners want to grow their businesses substantially; others may only wish to earn a good living, while staying small. Consider, for example, the fact that fewer than one-third of the informally self-employed in Sri Lanka resemble small and medium enterprises owners in terms of attributes such as cognitive ability, motivation, and a competitive attitude (de Mel, McKenzie, and Woodruff 2010). Most resemble wage workers rather than small and medium business owners.38

In this sense, interventions among informal microenterprises can be broadly divided into two types. The first type of program selectively targets informal entrepreneurs who want to grow their firms substantially and aims to help them grow into small or medium formal businesses. Targeting such a program well is critical. For example, it could be structured as a business plan competition for aspiring entrepreneurs (McKenzie 2017). Information from peers or psychometric data analysis could also be used for better targeting. For instance, Hussam, Rigol, and Roth (2022) use a cash grant experiment in India to demonstrate that peer knowledge can help target microentrepreneurs with high growth potential.

The second type of intervention helps informal business owners improve their earnings potential without necessarily expecting them to grow into big firms. Such programs should not have to be selective; rather, they should be seen as part of a multifaceted strategy to reduce the precariousness of livelihoods in the informal sector.39

Here, graduation or economic inclusion programs that simultaneously target multiple constraints to earnings growth among extreme poor households also show promise. Based on the idea that the extreme poor need a big push along multiple dimensions to be able to change their economic prospects sustainably, the programs provide productive asset transfers, intensive training and coaching, consumption support, and other support, such as health services. The pioneering Targeted Ultra-Poor Program run by BRAC, a Bangladesh nongovernmental organization, has been found to help rural women who were dependent on casual wage labor activities in agriculture to diversify into selfemployment in the nonfarm sector and increase their incomes (Bandeira et al. 2013).40

In this context, chapter 6 examines whether multifaceted programs to raise earnings potential in the informal sector should also emphasize socioemotional skills. This question is motivated by growing evidence, mostly from high-income countries, that personal traits, such as perseverance, self-control, trust, self-esteem, empathy, hostility, and the ability to engage productively in society are changeable and matter to labor market outcomes (Acosta and Muller 2018; Heckman, Stixrud, and Urzua 2006). Using new survey data from Pakistan and Sri Lanka, chapter 6 finds that, unlike cognitive ability and formal education, socioemotional traits do not have a consistent positive association with labor market returns. These findings suggest that the labor market returns to socioeconomic skills depend on economic structure and institutions and might be greater in the formal sector. More context-specific evidence on which of these skills really matter will be important in program design.

Programs intended for women microentrepreneurs may also need to address norms. In Pakistan, women were found to learn as much as men from business training, but only the latter saw an improvement in business outcomes (Giné and Mansuri 2021). This finding may be because the women lacked the agency to implement what they had learned in the business training. Leveraging peer support among women to complement training and strengthen confidence and business aspirations made a difference in a business training program in India (Field et al. 2016).