Decoding the Informal Economic Sector of Pakistan
Hafsa Adeen - 27/08/25
In markets across Pakistan, the informal economy is visible in street vendors, roadside cobblers, and home-based garment workers, all operating outside official regulation. This is Pakistan’s informal economy: unregistered, untaxed, and almost entirely unregulated. It’s not a fringe activity. A 2021 report from the Pakistan Institute of Development Economics (PIDE) estimated that roughly 60–70% of the country’s workforce operates here. And that number hasn’t budged much, partly because the big structural reforms everyone talks about never really happen. From daily wage labourers to home-based manufacturers, most people in this space have no legal protection, no access to banks, and no safety net. They work because there’s work, not because it’s secure.
How Big Is It, Really?
Globally, informal economies vary in size, but Pakistan’s is one of the biggest. SMEDA puts its contribution at around 40% of GDP. Research from CISS–AJK lands it closer to 35.6% - which, at purchasing power parity, works out to about $661 billion. Studies by G. M. Arif and Nasir Iqbal suggest it’s been growing steadily, quietly fueling the economy even while staying outside the rules.
Women make up a large part of this workforce, though you wouldn’t always see it in official stats. In rural areas, many earn through embroidery, carpet weaving, beadwork, and dress stitching. In cities, the work shifts to things like sack sewing, labelling, and small-scale production. Most of it happens at home, on a per-piece basis. The pay is painfully low. The Informal Economy Monitoring Study (2014) found that in Lahore, the median piece rate for home-based workers was just $0.32 per item. According to the International Labour Organisation (ILO), 97% of these workers rely entirely on such informal jobs, and more than a third don’t get a single day off, juggling paid work and household duties at the same time.
A Lifeline and a Trap
For many families, these earnings are all that keep them afloat. That’s why people keep working, even if it means six or seven days a week. When poverty closes doors, the informal sector leaves at least a small window open.
But that window comes with risks. Child labour is common, whether in zip-making, beadwork, or crop processing. According to the ILO, the Pakistan Labour Force Survey 2017-18 reported 13.7 per cent of children aged 10-17 years as being engaged in child labour.
These tasks bring in much-needed cash but rarely lead to anything better. And because the government doesn’t formally recognise this work, there’s little in the way of legal support, training, or benefits. The result is a sector that sustains millions, but also keeps them locked into low-pay, low-security jobs.
Causes Behind Informality
Pakistan’s informal sector didn’t just spring up overnight. It’s the outcome of decades of weak institutions, shaky governance, and, perhaps most importantly, a trust gap between the state and its citizens. In 2017, for instance, the Global Political Review recorded a labour force participation rate of 32.3% — but a large chunk of that work happened well outside any official record.
1. Corruption and Tax Evasion
One big driver is corruption coupled with tax evasion. A LUMS study revealed that for every Rs100 collected in taxes, only Rs38 actually makes it into the government’s hands. The rest leaks away through a web of collectors, middlemen, and questionable “arrangements.” When businesses see so little return in public services, it’s no wonder they question the point of registering or paying taxes.
2. Complex Tax and Regulatory Systems
The problem is made worse by Pakistan’s complicated tax and regulatory systems. For small shopkeepers or daily wage workers, the mountain of forms, fees, and sometimes outright bribes makes the formal route more expensive than staying off the books. And with tax enforcement weak at best, the rules themselves almost seem to encourage informality.
3. Limited Access to Finance
Access to finance, or rather, the lack of it, is another barrier. Without bank accounts, credit, or affordable loans, small businesses are forced to run on cash alone, which keeps them invisible to the formal economy. Poverty compounds the issue; when survival is the priority, compliance with red tape naturally falls to the bottom of the list.
4. Weak Property Rights
Finally, failures in recognising and protecting property rights push many into the shadows. If contracts can’t be enforced or ownership isn’t clearly recorded, people rely on informal arrangements instead. Over time, this blurs the lines between unrecorded, unreported, informal, and even illegal economic activity, until you end up with a vast parallel economy operating right alongside the official one.
Socio-economic Impact, Challenges in Formalisation, and Gender Dimensions
In Pakistan, a mix of illiteracy, low skills, and a fast-growing population has left millions struggling to find steady, formal work. Even graduates aren’t spared; many end up in the informal economy simply because there aren’t enough proper jobs to go around. As CSSPrepForum points out, using data from the Economic Survey 2008–09, public debt has been climbing by roughly 12% each year since 1999–2000. That debt burden leaves the state with little room to invest in job creation.
About 40% of people live below the poverty line, often without reliable food, healthcare, clean water, or schooling. Poverty like this pushes families to send children to work — whether in markets, small workshops, or doing odd jobs from home. According to ResearchGate, the informal sector now produces output worth 50–90% of the formal economy and employs around 60% of Pakistan’s workforce. With so little trust in institutions, poor access to banking, and almost no investment in technology, it’s hard for people to break out of this cycle.
Women in informal jobs face even steeper hurdles — lower pay than men, limits on mobility, and no childcare options. That means extra stress and health problems. Children missing school keep the poverty cycle alive. And with weak governance plus government schemes that rarely reach the people who need them, the shift to a formal economy remains a distant hope for millions.
International Comparison
The size of informal economies varies significantly across countries. According to IMF data, about 57% of Pakistan’s workforce is engaged in informal employment, placing it among nations with relatively high but not the highest levels of informality. For example, Benin and Afghanistan report much larger informal sectors, with estimates around 96% and 86%, respectively.
A study referenced on ResearchGate comparing China with another developing country highlights that factors such as a country’s stage of development, cultural context, and government policies play crucial roles in shaping informal economies. Moreover, drawing lessons from these comparisons, prioritizing improved education, simplifying regulations, and strengthening institutions can foster greater trust and encourage more businesses and workers to formalize, contributing to better economic stability and improved living standards.
Policy Recommendations
To reduce informality in Pakistan, the government must take clear, focused action. As tandfoline.com highlights, taxing the agriculture sector is vital since it supports about 70% of the population. Strengthening the Federal Board of Revenue by tackling illegal transportation and improving documentation will help formalize many informal activities.
Better verification and record-keeping of land and property are also needed to cut down fraud and informal deals. Lastly, the government should create simple, accessible programs that guide people in moving from informal to formal work, addressing the root causes of informality.
Conclusion
Pakistan’s informal economy is more than just numbers; it is the daily reality for millions. While it provides a lifeline, it also reflects deeper problems: poverty, weak governance, and the absence of formal opportunities. Tackling these issues calls for realistic, sustained action rather than quick fixes.
By improving data collection, strengthening institutions, and introducing simple pathways into formal work, Pakistan can reduce informality without harming those who depend on it. Informality is not inherently negative, but without better management and fair reforms, it will keep millions trapped in low-security, low-pay jobs. The goal should be inclusion, not punishment, bringing people into the formal fold in a way that works for them.
References
1. Dawn.com. (2024, March 15). Pakistan's informal economy: scale and implications. Dawn. https://www.dawn.com/news/1924927
2. Institute of Infrastructure Policy and Sustainable Development (IIPS). (2023, August 1). Informal Economy in Pakistan: Size, Impact, and Policy Implications. IIPS. https://iips.com.pk/informal-economy-in-pakistan-size-impact-and-policy-implications/
3. Modern Diplomacy. (2023, May 2). The Impact of Pakistan’s Informal Economy on its Overall Economic Development. Modern Diplomacy. https://moderndiplomacy.eu/2023/05/02/the-impact-of-pakistans-informal-economy-on-its-overall-economic-development/
4. Institute of Strategic Studies Islamabad (ISSI). (2024, January 10). Addressing the Challenge of Pakistan’s Informal Economy. ISSI. https://issi.org.pk/issue-brief-on-addressing-the-challenge-of-pakistans-informal-economy/
5. ResearchGate. (2023, June 5). Pakistan Informal Economy. ResearchGate. https://www.researchgate.net/publication/371167309_Pakistan_Informal_Economy
6. International Labour Organization (ILO). (2017, June 1). Informal economy of Pakistan. ILO. https://www.ilo.org/sites/default/files/wcmsp5/groups/public/@asia/@ro-bangkok/@ilo-islamabad/documents/publication/wcms_554877.pdf
7. Scribd. (2024, February 20). Informal economy of Pakistan. Scribd. https://www.scribd.com/document/691468643/Informal-economy-of-Pakistan
8. Global Political Review. (2022, November 1). Estimation and Causes of Informal Economy in Pakistan. GPR Journal. https://www.gprjournal.com/article/estimation-and-causes-of-informal-economy-in-pakistan
9. Express Tribune. (2023, December 18). Pakistan’s Undocumented Economy. The Express Tribune. https://tribune.com.pk/story/2449373/pakistans-undocumented-economy
10. CSS Prep Forum. (2024, April 12). Socio-Economic Challenges Faced by Pakistan. CSS Prep Forum. https://cssprepforum.com/socio-economic-challenges-faced-by-pakistan/
11. Taylor & Francis Online. (2020, January 1). Pakistan’s informal economy: an analysis. Taylor & Francis Online. https://www.tandfonline.com/doi/full/10.1080/20430795.2020.1711501#d1e3040
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Author Information
Hafsa Adeen
Author,, Research & Publications Department,
Roshni
Email: hafsaadeen7@gmail.com