Decolonising economics: An illustration of the informal economy

1. What is the problem?

Let us begin by addressing the core problem: the embedded Eurocentrism within the discipline of economics. In Decolonising Economics: An Introduction (Dutt et al., 2025), a book I recently co-authored with Devika Dutt, Carolina Alves, and Ingrid Kvangraven, we define Eurocentrism as a worldview in which a flawed narrative of capitalist development—based on a select partial understanding of the European experience—is idealised, while trajectories of the economies that do not mirror the idealised view are seen as mere deviations. In this narrative, capitalism is understood to have emerged organically through technological advancement, the progress of rational thought, and the internal dynamics of European society. Europe’s development is thus taken as both normative - meaning that it is seen as the right way to develop -and universal, assuming that all countries must follow the same path.

However, this view is fundamentally partial. It assumes that the rest of the world merely lags behind Europe on a shared linear path, destined to “catch up” by replicating Europe’s journey. In doing so, it obscures the central role of colonialism and the processes of racial subjugation—forces that were foundational not only to capitalism’s rise and development in Europe but also, simultaneously, to the active production of capitalist underdevelopment in much of the Global South (Frank, 1966; Amin, 1972; Arrighi et al, 2010). Recent estimates by Nievas and Piketty (2025) and others suggest that vast amounts of wealth were extracted from colonised regions, resulting in, for example, foreign wealth of core European countries in 1914 reaching 30% of their GDP. This extraction was critical in jumpstarting European industrialisation (Rodney, 1972). Simultaneously, colonies served as captive markets for metropolitan products—often by dismantling or suppressing indigenous production systems (Patnaik and Patnaik, 2021; Luxemburg, 2015 [1913]; Beckert, 2014; Bundy, 1979). In short, the development of the Global North was inseparable from, and dependent upon, the production of underdevelopment of the Global South. These were not sequential stages in a universal path of capitalist development, but outcomes produced together through a shared global history of how capitalism developed on a global scale.

This embedded Eurocentrism informs how contemporary development policy engages—or fails to engage—with these histories. Countries in the Global South are expected to resolve their structural deficits through a technocratic set of interventions, presented as neutral, apolitical, and technical fixes. Dispossession, political unrest, or social resistance are cast as temporary frictions, to be compensated by eventual economic gains. As Amartya Sen (1986) quotes this sharp observation by Hirschman (1981: 24), “these countries were perceived to have only interests and no passions.”

The problem, then, is multi-layered. First, an idealised and partial narrative of capitalism’s development—centered on the European experience—remains dominant. Second, the historical processes that produced capitalist underdevelopment in the Global South are ignored or downplayed. Third, development is reframed as a depoliticised, technocratic challenge, stripped of the violent and contested histories that underpinned Europe’s own trajectory. Together, these elements form the entrenched Eurocentrism that continues to shape the discipline of economics.

In the following section, the problem of eurocentrism in economics is highlighted using the example of informal labour and structural transformation and contrasted with non-eurocentric perspectives on the same topic.

2. How does this manifest in economic thinking? An illustration

2.1. Labour, informal economy, structural transformation from a Eurocentric framework

The issue of labour, informality, and structural transformation provides a particularly illustrative example. In the decades following independence, the economic development project for many newly sovereign countries was conceptualised as a process of transforming their economic structures to resemble those of the advanced capitalist economies (Rist, 1997).

Less developed economies were characterised as dual economies: a large “traditional” or agrarian segment—comprising petty producers, typically low-productive and engaged in family-based production—alongside a much smaller “modern” or industrial segment—comprising large firms with formal wage employment relations. Development, in this framework, meant shifting economic activity and employment from the traditional segment to a large, formal sector, as in the advanced capitalist economies. In the idealised model, livelihoods would increasingly be mediated through wage work and, as the process of capitalist growth and expansion continued, through formal and secure labour relations (Lewis, 1954).

This transformation was expected to occur through economic growth—either by expanding the modern sector to absorb those released from the traditional segment, or by growing and formalising small informal firms. This vision closely aligned with the Eurocentric model outlined earlier, in which the Global South was imagined as occupying an earlier stage of development that would eventually follow the North’s trajectory. Moreover, it assumed that transformation could be engineered through a set of technocratic, macro-structural or micro-targeted interventions—treating development as essentially apolitical, with any short-term losses compensated by long-term aggregate gains (Sen, 1986).

However, this transformation has not materialised, despite periods of high growth (LaPorta and Shleifer, 2014; Rodrik and Stiglitz, 2023). Nowhere is this more evident than in the persistence—and, in many cases, expansion—of the informal economy. Here, the informal economy refers to family-based petty enterprises (often without wage workers and closely resembling the production and labour processes of the traditional sector that growth was meant to displace) and wage employment under precarious, insecure conditions. Today, 86% of the workforce in South Asia and 81% in Africa are informally employed (ILOstat). In India, despite three decades of sustained growth, around 50% of the workforce remains entirely outside any wage relation—a figure that has barely shifted over this period (Abraham and Kesar, 2025).

When economists trained in Global North paradigms encountered the scale of urban and industrial informality, they applied their own frameworks to interpret it. Informality appeared as an anomaly, a puzzle. The International Labour Organization (ILO), for example, sent multiple investigative “missions” to the Global South and eventually coined the term “informal economy” (Hart, 1973; Bangasser, 2000).

In dominant accounts, informality came to be understood primarily as activity existing outside the formal scope of the state—unregulated, untaxed, and lacking official recognition. The policy prescription, accordingly, was to integrate this sphere into the formal regulatory and fiscal framework, thereby extending to its state protections, market access, and services. Missing from this view, however, was any serious engagement with how the informal economy—and the specific production and labour structures within it—had been historically produced and sustained by the very development trajectories pursued under Eurocentric models.

Even economists who focused on the production structures of the informal economy often treated it as a temporary glitch—an inefficiency that growth would eventually eliminate as the structural transformation comes to pass. In starker interpretations, informal firm owners were seen as reluctant entrepreneurs needing encouragement to expand, or as dynamic but constrained micro-entrepreneurs. In both framings, the solution was to provide loans, micro-credit, insurance, or other forms of support. The underlying assumption was that the economic structure was already capitalist in its logic and rationality; the problem lay with individual behaviours or specific constraints to be removed (LaPorta and Shleifer, 2014; Maloney, 2007; Ullyssea, 2020).

In all these accounts, the informal economy is cast as a transitional phase: either destined to wither away through structural transformation, or able to flourish, especially once formalised, within what is assumed to be an already transformed economic structure.

Yet with the recent resurgence of informality in the Global North—manifesting as gig platform work, zero-hour contracts, and other forms of precarious employment—the narrative has shifted. Informality is now rebranded as the emergence of a new working class and a glimpse into the “future of work.” This reframing conveniently overlooks the fact that such conditions have long been the past and present of work for the majority in the Global South (Breman and van der Linden, 2014; Munck, 2002)—not as a novelty, but, as I shall argue below, as a structural feature of capitalist development in its uneven and exclusionary form.[1]

2.2. Labour, informal economy, structural transformation from a non-Eurocentric framework

In contrast to the Eurocentric account, there have long been alternative explanations for persistence of informality and the lack of labour absorption—particularly from the Global South—that challenge the universalising, technocratic discourse of economic development. These perspectives reject the idea that informality is merely a temporary glitch or a celebrated sign of entrepreneurial dynamism. Yet, they have been marginalised or overlooked by Western scholars and institutions that continue to rely on Eurocentric frameworks.

From a Global South perspective, informality is not a recent phenomenon suddenly emerging in the 1980s. Rather, the production and labour structures that define what is now called the informal sector are organisationally similar to those long found in traditional agrarian segments: petty, family-based, subsistence-oriented units, typically operating without wage labour. Though integrated into the market, they remain low in productivity and oriented toward survival of the household out of which they are based, rather than towards accumulation as a standard capitalist firm. They have been referred to by McGee (1973) as the Peasant in the cities. In this sense, the informal sector in urban areas reproduces the same structural features as the peasant or traditional sectors identified in earlier development theory—such as Lewis’s so-called non-capitalist sector. The only shift has been that these sorts of production structure are now not only limited to the rural traditional livelihoods but pervade all economic sectors. What we see today is therefore not something entirely new, but the persistence of an enduring dualism in newer forms: a reproduction of the traditional–modern divide, now embedded even within urban and industrial contexts (Abraham and Kesar, 2025).

Viewed through a critical non-Eurocentric lens, the issues of informal economy is not simply one of anomalies to be resolved through growth or policy tweaks. They are structural features of postcolonial development trajectories. Persisting not as a deviation from the Eurocentric norm, but as a direct outcome of the specific ways capitalism has unfolded in the Global South and globally.

Some dependency theorists, for example, have explained this persistence through the lens of selective imperialist penetration. According to this view, capital from the Global North selectively transforms only those sectors of Southern economies into capitalist that are necessary to serve its own growth imperatives, leaving other sectors untouched. This creates deeply uneven patterns of development. Others, such as Patnaik (1997, 2008), Gerry (1987), Wolpe (1972), Harris-White (2014), Rakowski [eds] (1994), Moser, (1978) have argued that the informal economy serves important economic functions for the expanding formal capitalist sector. It supplies cheap wage goods and raw materials, and helps maintain low wages for formal sector workers, thereby supporting the profitability of capitalist production and remains in a subordinate relation to it. It is, therefore, in interest of the formal capitalist accumulation process for this informal sector to continue to persist at low levels in order to subsidise it.

More recently, scholars such as Kalyan Sanyal (2007) have shifted the focus from the international to the domestic dynamics of capitalist development within postcolonial economies. Sanyal and others argue that the absence of a unilinear structural transformation cannot be explained solely by external constraints; it is also driven by the internal logic of capitalism’s unfolding in these economies (Bhattacharya R. and Sanyal, K., 2009; Chakrabarti, 2016; Bhattacharya S, Kesar, and Mehra, 2022). As the formal capitalist sector expands, it appropriates resources—land, markets, information networks—previously used by informal activities. For example, a large retail chain may out-compete street hawkers, or corporate agribusinesses may buy out land of small farmers (Bhaduri, 2014; Bhaduri and Banerjee, 2025). Yet, because the formal sector is often highly capital-intensive, its capacity to absorb labour into secure, well-paid jobs has remained limited. As a result, those displaced from informal activities are not integrated into the formal economy.

These workers, now dispossessed, are compelled to secure their livelihoods by reconstituting their means of livelihood. In doing so, they not only survive precariously but also reproduce the very structures of informality that the growth process was supposed to eliminate (Kesar, 2023). This survival is not illegal, although they may operate on the fringes of legality, but are often State sanctioned and even facilitated by the state through measures such as small loans, micro-insurance, or cash transfers (Sanyal, 2007). These welfare measures become necessary in the absence of any structural solution that states are willing—or able—to implement. The result is a cycle of dispossession and then informalisation that repeats itself. Crucially, this is not due to a lack of capitalist growth, but rather is a consequence of its exclusionary form. Informality, in this view, is neither residual nor transitional—it is actively produced and reproduced by the logic of contemporary capitalist expansion, with dispossession at its core.

What this reveals is the contradictory nature of capitalism’s development and expansion—a process that must continually stabilise itself. At the global scale, this produces a “core” as the marker of development and a “periphery” as the marker of underdevelopment. At the domestic level, it creates a formal sector (as the marker of capitalist progress) and an informal sector (as the marker of capitalist underdevelopment).

A genuinely decolonised lens would therefore reject the notion of capitalism’s unfolding as a linear, technocratically manageable process of transformation. Instead, it would place at the center the recognition that capitalism’s expansion is inherently dichotomising—producing markers of underdevelopment not as a sign of failure or absence, but as a direct outcome of its own dynamics.

3. Why is decolonisation necessary?

The illustration above highlights stark differences between Eurocentric and non-Eurocentric approaches to understanding informality and structural transformation. More importantly, these approaches lead to different prescriptions of what needs to be done. Decolonisation is not only a theoretical debate—it directly shapes how we frame problems and the kinds of solutions we can imagine.

In Eurocentric framing, the resolution is often sought through one of following avenues. In many cases, higher growth in more productive sectors is seen as crucial to absorbing labour into the formal economy. Much of industrial policy today, even where it relies heavily on state involvement, assumes that further industrial development will naturally resolve the problem of labour absorption, especially when supported by institutions, such as infrastructural development ((Chang and Andreoni, 2020; Rodrik, 2004; Linder and Strulik, 2014). In other instances, the issue is reframed as one of constraints on the growth of small firms, shifting the focus toward improving access to credit, expanding small loan schemes, or providing insurance and lowering costs to register formally in order to help such firms grow (Ulyssea, 2020; Straub, 2005). At other times, the emphasis is placed on individuals, with interventions targeting the entrepreneurial capabilities and education of those working in the informal economy (Duflo and Banerjee, 2011; Bobba et al, 2021). Across these variants, the underlying assumption remains that the problem lies in insufficient growth, underdeveloped institutions, or limited individual capacity—and that, once these deficiencies are addressed, the transition to a predominantly formal economy will naturally follow.

The decolonised approaches outlined earlier locate the problem elsewhere. They argue that it is not the absence of growth, but rather the very form of growth that produces informality. This is not an argument against investment in productive sectors, particularly in economies where large sections of the population still struggle to meet basic needs. Rather, it challenges the assumption that investment and growth in more productive sectors will necessarily resolve the issue of informal work and unabsorbed surplus labour. Productive investment may well raise output, but it does not automatically address the structural dynamics that keep much of the workforce in precarious and insecure forms of employment or, at times, in mass open unemployment. Moreover, in an integrated global economy where capital is highly mobile but labour is not, downward pressure on labour security can persist even in the most industrialised and productive segments of the labour market.

From this perspective, much of what is currently pursued in the name of development, decent work, or social protection—such as cash transfers, micro-credit schemes, or small-scale insurance—amounts to managing, rather than resolving, informality. They are mechanisms for governing the poor through welfarist means (Sanyal, 2007; Chatterjee, 2011) and manage the symptoms without addressing the structural causes. Rather than rethinking a development model that has failed to deliver on its promise, such measures sustain it—offering minimal subsistence to those excluded from formal employment, and in doing so, maintaining the political stability of an unstable system whose exclusionary growth process leaves vast numbers without secure livelihoods.

What follows from this alternative diagnosis of the decolonising approaches is a shift in focus: rather than tying the welfare of labour to the hope of a full capitalist transition—an expectation rooted in a Eurocentric imagination that has repeatedly failed to materialise in the Global South—the emphasis moves to recognising that processes such as dispossession and the production of underdevelopment are not peripheral “externalities” of growth, but central outcomes of its current form. This recognition makes it possible to design policies and shape politics that directly confront these dynamics, rather than assuming they will be resolved in due course.

It also opens the way for moving beyond provide some form of subsistence at the margins for an excluded workforce through piecemeal measures, such as conditional cash transfers, micro-loans, etc, toward more radical forms of redistribution. Here, redistribution is not conceived as a temporary safety net to be maintained until people are absorbed into the formal economy, but as part of a fundamentally different way of organising economic and labour processes. This reframing makes it possible to think about resolving labour precarity as a goal in its own right, distinct from - and not subordinate to - growth or industrialisation. In doing so, it creates space to imagine economic systems in which secure and meaningful work with earnings to live a life of dignity is a core focus of our technological shifts and economic policies rather than something that emerges as a by-product of growth, industrialisation, or the release of constraints to growth of small firms and entrepreneurs.

4. How can you begin engaging with decolonised economics?

If Eurocentric economics obscures these realities, how can we shift toward alternatives? Decolonising economics isn’t just about critique—it requires actively rethinking how we study, teach, and practice economic. How, then, should you—as a student or practitioner—engage with decolonised perspectives and ways of thinking?

First, it is important to recognise that alternative approaches to economics have long existed, but they have been systematically marginalised. They must be engaged with not as isolated papers, but as complete research paradigms that have been grappling with these questions for decades. Like all research traditions, these frameworks are themselves internally contested, with unresolved questions that remain open for debate and development. In a co-authored paper (Bhattacharya, Kesar, Mehra, 2022), for example, we have reviewed one such research strand following the framework on informal economy by Sanyal (2007) and outlined key questions that still require engagement. The point is not to take these approaches as finished products, but to participate in advancing them.

A first step is to actively seek out experts working within these critical traditions and follow their scholarship. Where possible, visit universities in the Global South—often on fellowships or exchange programmes—where such alternative strands of thinking have been cultivated. You can also create opportunities to invite these scholars to speak at your own universities and research centres, fostering spaces for dialogue and exchange that include, rather than exclude, these perspectives.

Second, decolonisation is not merely a metaphor or an intellectual exercise. It demands the willingness to extend its questions and critiques into practice, often challenging what is institutionally acceptable within prevailing Eurocentric frameworks. This is particularly difficult today, at a time when serious decolonisation movements are under severe threat. Yet it is also a moment when the stakes have been laid bare, making the task of grappling with these implications all the more urgent. Decolonisation must therefore be part of academic discourse not simply for knowledge’s sake, but because knowledge and research exist to help us understand the world in order to change it.

Engaging with decolonised economics also involves re-examining the categories we use to make sense of the world. Some of these categories may simply align with a Eurocentric approach without us being aware of it. Consider, for example, the category of development. Is it simply a set of indicators? If so, why are certain indicators privileged over others—why might poverty be chosen over inequality, or vice versa (Sen, 1983)? If indicators are linked to underlying processes, such as structural transformation, why are indicators that are based on an idealised version of Europe's development used as the primary markers of development? What values are embedded in structural transformation as it is currently defined? Is it the only possible path? Does it work for the vast majority of people? Are there alternative processes that could lead to development?

Critical scholars have pointed out that the post-war development project was never a neutral or empty category. It was built on the assumption that development meant a (Eurocentric) capitalist development, and that underdevelopment meant the absence of capitalism (Rist, [1997] 2014). Yet, as we have argued earlier, the markers of underdevelopment can be outcomes of capitalim’s expansion itself just as much as the markers of development are—and the two are structurally linked. Why, then, is development so narrowly defined as capitalist development, foreclosing the possibility of defining it in other ways? Could industrialisation and technological progress be pursued without organising labour processes in ways that do not provide worker ownership rights over what is produced or exploit them, or rely on cheap labour and unequal exchange relations with the Global South? Such arrangements are not natural, despite what Eurocentric frameworks might imply—they have been  – and continue to be - actively instituted through violence, dispossession, expropriation, and exploitation.

The heart of engaging with decolonised economics lies in cultivating critical thinking—asking questions that are often absent from mainstream frameworks. When economics is reduced to a technical skill set, the best that can be done is to apply those skills within pre-existing (Eurocentric) paradigms. What is needed instead is the capacity to rethink those paradigms themselves, to interrogate how they came into being, and to imagine alternatives. Skills and tools can always be acquired and even replaced. What matters most is the ability to think beyond predictive bounds—to be able to imagine different worlds, social systems, and economic processes, and to contribute to making them possible.