Pakistan, a nation of over 230 million people, stands at a crossroads of economic development and structural challenges. Amid its bustling cities and expansive rural landscapes lies a phenomenon that shapes the lives of millions: the informal economy. Often referred to as the "shadow," "underground," or "unrecorded" economy, this vast and intricate network of economic activity operates beyond the reach of formal regulation, taxation, and institutional oversight. From street vendors in Karachi to home-based artisans in Punjab, from small-scale farmers in Sindh to rickshaw drivers in Lahore, the informal economy is not a marginal footnote but a cornerstone of Pakistan’s economic fabric.



The informal economy in Pakistan is both a lifeline and a paradox. It employs a staggering portion of the workforce, provides goods and services to millions, and demonstrates resilience in the face of economic shocks. Yet, it also perpetuates vulnerabilities—low wages, lack of social protections, and lost revenue for the state. This article seeks to unravel the size, scope, and implications of Pakistan’s informal economy, examining its roots, its contributions, and the challenges it poses to sustainable development. By weaving together economic data, social dynamics, and policy perspectives, we aim to shed light on this often misunderstood sector and explore its dual role as both an engine of survival and a barrier to progress.

Defining the Informal Economy

Before delving into Pakistan’s context, it’s essential to clarify what the informal economy entails. The term "informal economy" encompasses all economic activities that occur outside the purview of formal legal frameworks. These activities are typically unregistered, untaxed, and unregulated by government institutions. They include self-employment, small-scale enterprises, casual labor, and even illicit transactions in some cases. Unlike the formal economy, which operates under structured labor laws, tax regimes, and business regulations, the informal economy thrives on flexibility, necessity, and improvisation.

The informal economy is not a monolith. It spans a spectrum of activities: a tailor stitching clothes in a cramped workshop, a fruit seller haggling at a roadside stall, a mechanic fixing motorcycles without a license, or a woman weaving baskets from home. These workers and businesses often lack formal contracts, social security, or access to institutional credit, yet they form the backbone of economic activity in many developing nations, including Pakistan.

Historically, the informal economy was viewed as a temporary phenomenon—a stepping stone to formalization as economies modernized. However, in countries like Pakistan, it has proven persistent and expansive, raising questions about its role in development. Is it a symptom of economic dysfunction, a driver of resilience, or both? To answer this, we must first quantify its scale in Pakistan and understand its structural underpinnings.

The Size of Pakistan’s Informal Economy

Estimating the size of Pakistan’s informal economy is akin to measuring a shadow—it shifts, it eludes precision, and it defies conventional tools. Yet, various studies and methodologies offer a window into its magnitude. The informal economy’s size is typically assessed in two ways: its contribution to gross domestic product (GDP) and its share of employment. Both metrics reveal a staggering presence in Pakistan.

Contribution to GDP

Estimates of the informal economy’s contribution to Pakistan’s GDP vary widely due to methodological differences and the sector’s inherent opacity. Conservative figures suggest it accounts for 30-35% of GDP, while more expansive estimates place it as high as 50-56%. For context, Pakistan’s formal GDP in 2023 was approximately $340 billion, according to official statistics. If the informal economy constitutes even a third of this, its value could range between $100 billion and $180 billion annually. Some analyses, adjusting for purchasing power parity (PPP), peg its worth closer to $457 billion, dwarfing the formal economy in scale.

These figures are derived from diverse approaches. The monetary method, which tracks currency circulation outside formal banking systems, suggests a significant informal footprint, as cash remains king in unregistered transactions. The electricity consumption approach, which correlates unreported economic activity with power usage, further corroborates this scale. Meanwhile, structural models like the Multiple Indicators Multiple Causes (MIMIC) framework estimate that the informal economy has hovered around 30% of GDP historically, though it may have declined slightly in recent years due to digitization efforts.

Employment Share

The informal economy’s dominance is even more pronounced in employment. According to Pakistan’s Labour Force Survey (2020-21), nearly 75% of the working-age population outside agriculture operates in the informal sector. This translates to roughly 20-25 million workers, depending on population estimates. In rural areas, the figure climbs to 75-80%, reflecting the reliance on small-scale farming, artisanal work, and petty trade. Even in urban centers, where formal opportunities are more abundant, 68-70% of non-agricultural jobs remain informal.

Key sectors include retail and wholesale trade (e.g., bazaars and street markets), construction (e.g., daily-wage laborers), transport (e.g., rickshaw and motorcycle drivers), and manufacturing (e.g., unregistered workshops). Women, in particular, are heavily represented in home-based informal work, such as embroidery, stitching, and food preparation, often invisible to official statistics.

A Comparative Perspective

Pakistan’s informal economy is not an anomaly among developing nations. India’s informal sector, for instance, employs over 90% of its workforce, while Bangladesh’s informal economy exhibits similar traits of scale and resilience. However, Pakistan’s low tax-to-GDP ratio—among the world’s lowest at 10-13%—and its persistent economic informality set it apart, signaling deeper structural issues.

The Scope of the Informal Economy

Beyond its size, the scope of Pakistan’s informal economy reveals its diversity and embeddedness. It permeates every layer of society, from urban slums to rural hamlets, and spans industries that range from subsistence to semi-industrial.

Urban Informal Economy

In cities like Karachi, Lahore, and Islamabad, the informal economy thrives in plain sight. Street vendors line roadsides, selling everything from fresh produce to secondhand electronics. Rickshaws and qingqis (motorcycle rickshaws) navigate congested streets, offering affordable transport where public systems falter. Small workshops churn out textiles, furniture, and metal goods, often employing apprentices who learn trades informally. These activities are not peripheral—they sustain urban life, filling gaps left by formal infrastructure.

Karachi, Pakistan’s economic hub, exemplifies this dynamism. Its sprawling informal markets, such as Empress Market and Saddar, pulse with activity, employing thousands and serving millions. Yet, these markets operate with minimal oversight, relying on informal networks of trust rather than legal contracts.

Rural Informal Economy

In rural Pakistan, the informal economy is intertwined with agriculture, the nation’s economic backbone. Smallholder farmers, lacking formal land titles or access to credit, sell surplus produce through informal channels. Artisans craft pottery, rugs, and tools, often bartering goods in local economies. Women, excluded from formal labor markets due to cultural norms, contribute through home-based work, their efforts unrecorded but essential.The rural-urban divide is not absolute. Migration fuels a circular flow, as rural workers seek informal jobs in cities during lean seasons, returning home with cash to sustain families. This fluidity underscores the informal economy’s role as a safety net.

Gender Dimensions

Gender shapes the informal economy profoundly. Women constitute a significant but undercounted portion of informal workers, particularly in rural areas and home-based settings. Cultural constraints often limit women’s mobility, pushing them into activities like sewing, food processing, or handicrafts. These jobs offer flexibility but little security, with wages far below those of male counterparts. The International Labour Organization (ILO) notes that 75% of Pakistan’s impoverished informal workers are women, highlighting a stark gender disparity.

Illicit and Semi-Legal Activities

The informal economy’s scope extends to gray areas—smuggling, unlicensed trade, and petty crime. Pakistan’s porous borders with Afghanistan and Iran facilitate informal cross-border commerce, from fuel to consumer goods. While these activities bolster livelihoods, they also complicate governance and revenue collection.

Drivers of the Informal Economy

Why does Pakistan’s informal economy persist and grow? Its drivers are multifaceted, rooted in economic necessity, institutional failures, and social realities.

Economic Necessity

Poverty and unemployment are primary catalysts. With 40% of Pakistanis living below the poverty line and a youth bulge straining formal job creation, the informal sector absorbs those excluded from the formal economy. For many, it’s not a choice but a survival strategy. A daily-wage laborer earning 500 rupees ($1.80) cannot afford the luxury of formal registration or compliance.

High Tax Burden and Regulatory Complexity

Formal businesses face steep taxes and a labyrinthine bureaucracy, deterring entry into the regulated sphere. The cost of compliance—registration fees, tax filings, labor law adherence—outweighs benefits for small enterprises. Informal actors, by contrast, evade these burdens, gaining a competitive edge. Corruption exacerbates this: bribes to officials often replace formal taxes, reinforcing informality.

Weak Institutional Capacity

Pakistan’s institutions struggle to enforce regulations or provide incentives for formalization. The Federal Board of Revenue (FBR) lacks the reach to monitor millions of micro-transactions, while labor laws are poorly implemented outside large firms. This vacuum allows the informal economy to flourish unchecked.

Cultural and Historical Factors

Informality is embedded in Pakistan’s socio-cultural fabric. Traditional bazaar systems, kinship-based trade, and oral agreements predate modern governance structures. These norms persist, blending with modern economic pressures to sustain an informal ecosystem.

Globalization and Economic Shocks

Globalization has dual effects. It opens markets for informal exporters (e.g., handicrafts), yet it also disrupts formal industries, pushing workers into unregistered work. Economic crises—like the 2022 floods or the COVID-19 pandemic—amplify this shift, as formal jobs vanish and informal ones adapt.

Implications of the Informal Economy

The informal economy’s implications are a double-edged sword, offering benefits while posing systemic challenges.

Positive Contributions

Employment and Livelihoods: The informal sector employs millions who would otherwise be jobless, reducing poverty and social unrest. It’s a buffer against economic volatility, sustaining households during downturns.Resilience and Flexibility: Informal businesses adapt swiftly to market changes, unlike rigid formal firms. A street vendor can pivot from selling fruit to snacks based on demand, showcasing entrepreneurial agility.Affordability: Goods and services from the informal sector—cheap transport, low-cost clothing—cater to low-income consumers, enhancing access where formal markets fall short.Innovation: Necessity breeds ingenuity. Informal workers devise creative solutions, from makeshift repairs to novel micro-businesses, fostering grassroots entrepreneurship.

Negative Consequences

Revenue Loss: The informal economy’s tax evasion starves the state of funds. Pakistan’s tax-to-GDP ratio languishes at 10-13%, limiting investments in education, healthcare, and infrastructure—sectors critical for development.Worker Vulnerability: Informal workers lack social protections—pensions, health insurance, or minimum wages. Accidents, illness, or old age can plunge them into destitution.Unfair Competition: Formal businesses struggle against untaxed informal rivals, stifling industrial growth. A registered textile firm, for instance, faces higher costs than an unregistered workshop.Governance Challenges: Informality undermines data collection, policy planning, and law enforcement. The state cannot govern what it cannot measure.Social Inequities: Low wages and poor conditions in the informal sector perpetuate income inequality, particularly for women and marginalized groups.

Case Studies: Snapshots of Informality

To ground this analysis, consider three vignettes from Pakistan’s informal economy:The Karachi Street Vendor: Ali, a 35-year-old fruit seller, earns 800 rupees daily. He pays no taxes, rents no shop, and relies on a borrowed cart. His income supports five family members, but a single illness could derail his fragile stability.The Punjab Home Weaver: Fatima, a 28-year-old mother, stitches clothes from her village home. She earns 200 rupees per piece, working late into the night. Her work is unrecorded, her rights unprotected, yet she sustains her children’s education.The Lahore Rickshaw Driver: Bilal, a 40-year-old migrant, drives a rickshaw 12 hours daily. His 1,000-rupee income is cash-based, untaxed, and unregulated. He saves for his village family but lacks insurance or savings for emergencies.These stories reflect the informal economy’s scale and stakes—millions of Alis, Fatimas, and Bilals define Pakistan’s economic reality.

Policy Pathways Forward

Addressing the informal economy requires balancing its benefits with its drawbacks. A heavy-handed push for formalization risks alienating workers, while inaction perpetuates inefficiencies. Here are pragmatic strategies:

Incentivizing Formalization

Simplified Registration: Streamline business registration with low-cost, one-window systems, reducing bureaucratic hurdles.Tax Breaks: Offer temporary tax exemptions for newly formalized micro-enterprises, easing the transition.Access to Credit: Expand microfinance and digital banking to informal workers, linking loans to registration.

Strengthening Institutions

Capacity Building: Bolster the FBR and labor departments to monitor and support informal sectors without coercion.Digital Tools: Leverage mobile technology to track transactions and integrate informal actors into the tax net gradually.

Supporting Workers

Social Safety Nets: Extend health insurance and pensions to informal workers via subsidized programs, encouraging trust in formal systems.Skills Training: Invest in vocational programs to boost productivity and employability, bridging informal and formal spheres.

Learning from Global Examples

Pakistan can draw lessons from peers. India’s PM SVANidhi scheme offers micro-loans to street vendors, nudging them toward formalization. Bangladesh’s garment sector transitioned informal workshops into regulated exporters, blending flexibility with oversight. These models suggest a phased, inclusive approach.

Conclusion

Pakistan’s informal economy is a tapestry of resilience and fragility, woven from necessity and opportunity. Its size—spanning a third to half of GDP and three-quarters of employment—underscores its centrality. Its scope, from urban markets to rural crafts, reflects its diversity. Yet, its implications challenge the nation to rethink development.

This sector is not a problem to be eradicated but a reality to be harnessed. It sustains millions, drives local economies, and adapts where formal systems fail. Yet, its untaxed, unregulated nature hampers progress, leaving workers vulnerable and the state underfunded. The path forward lies in integration, not elimination—bridging the informal and formal through incentives, support, and innovation.

As Pakistan navigates economic crises and demographic shifts, the informal economy will remain a defining force. Understanding its contours is the first step toward a future where all Pakistanis, from street vendors to factory owners, share in prosperity. The question is not whether the informal economy matters—it does—but how Pakistan can transform its shadow into light.