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Bridging the gap: How transit infrastructure shapes formality in developing economies

In the bustling streets of developing nations, where informal economies thrive alongside the formal, the question of how to integrate these parallel worlds into a cohesive economic system is ever-present. Central to this discourse is the role of transit infrastructure, a vital component in the urban fabric that has shown promising potential in reducing informality and fostering economic development. This article delves into the multifaceted relationship between transit infrastructure and economic informality, uncovering how improved transportation systems can pave the way for a more formalized and inclusive economic landscape in developing countries.

Train

Economic informality, characterized by unregistered businesses, untaxed employment, and unregulated trade, is a double-edged sword. On one hand, it offers livelihoods to millions who might otherwise be excluded from the formal economy. On the other, it limits access to social security, stifles potential tax revenues, and hampers the potential for sustainable economic growth. The crux of the matter lies in finding pathways to transition these informal sectors into the formal economy, thereby unlocking benefits for individuals and the state alike.

Transit infrastructure stands out as a pivotal factor in this transition. Access to reliable, affordable, and extensive transportation networks can significantly impact the informal sector in several key ways. Firstly, it enhances accessibility to formal job markets. By bridging the distance between residential areas and commercial or industrial centres, public transit systems enable individuals to seek employment opportunities beyond their immediate vicinity. This accessibility not only fosters job mobility but also encourages participation in the formal economy, as individuals gain access to regulated employment with legal protections and social benefits.

Commuters

Moreover, transit infrastructure facilitates the integration of informal businesses into the formal economy. Market access is a critical determinant of business success; therefore, improved transportation networks can expand market reach for small-scale, informal enterprises. This expanded access can lead to increased revenue, encouraging these businesses to register formally and integrate into the legal economic framework. Furthermore, the physical infrastructure development often accompanying transit projects can spur local economic activity, creating a conducive environment for business formalisation.

The impact of transit infrastructure on reducing informality is also evident in its role in urban planning and land use. Effective transit systems encourage higher-density, mixed-use development patterns, which are more conducive to formal economic activities. These development patterns can lead to more regulated and structured economic zones, such as commercial districts and industrial parks, where formal businesses are more likely to thrive. Additionally, the presence of robust transit systems can increase property values and, by extension, local tax revenues, providing municipalities with the financial resources to further invest in infrastructure and social services, thereby reinforcing the formal economy.

However, the transition from informality to formality through transit infrastructure is not automatic. It requires strategic planning and policy intervention to ensure that the benefits of improved transportation are equitably distributed and that supportive measures are in place to facilitate the formalisation process. These may include regulatory reforms to lower the barriers to formalisation, financial services to support small businesses, and social programs to ensure that workers transitioning from the informal to the formal sector are protected.

Transit infrastructure holds considerable promise in reducing informality in developing countries. By enhancing access to formal employment opportunities, expanding market reach for informal businesses, and fostering urban development patterns that support formal economic activities, improved transportation systems can serve as a cornerstone in the efforts to formalise the informal sector. However, realising this potential requires a comprehensive approach that combines infrastructure development with targeted policy interventions. As developing countries continue to urbanise and seek sustainable paths to economic growth, the role of transit infrastructure in shaping the formal-informal nexus will undoubtedly remain a critical area of focus.

Written and researched by Sejal Singh, Former LCCI International Business Researcher and Assistant.