Traditionally, the informal sector has been associated with strategies for meeting basic needs because of three important factors: (a) its role as producer and supplier of basic goods and services at prices which could be afforded by the poorer section of the population; (b) its capacity to absorb the rapidly growing urban labour force and generate income that enables the urban poor to satisfy its basic needs; and (c) its application of technologies appropriate to local factor endowment. These characteristics, coupled with easy entry into the sector, its size, structure and capability to adapt to changes, render the informal sector one of the most important components of any basic needs strategy. The informal sector, particularly in urban areas, has recently been expanding and proliferating. In some cases, especially where major trade and industrial policy reforms have resulted in the contraction of the formal sector, they are providing the majority of urban jobs and supplying goods and services essential to the poor. In African countries in particular, informal sector activities now employ more people than the formal sector and provide higher incomes than do rural sector activities.
Concerning technologies for basic needs, the key question is whether the technologies used in the informal sector are conducive to basic needs' satisfaction and, more importantly, whether the sector has the potential to undertake technological upgrading. A collection of studies on the technological capabilities of third world informal sector enterprises in metal-engineering activities reveals that some firms are capable of accumulation of capital, upgrading of equipment to successively more sophisticated levels, self-construction of hand-operated equipment or tools, development of new product designs, improvement of product quality, inputs of new materials, investments in human capital, and, in some cases, production of capital goods required by other informal sector enterprises. A review of the literature has uncovered considerable corroborative evidence of the innovative abilities of micro and small enterprises, many of which are in the formal sector.
Despite some major handicaps, the informal sector also is able to exhibit innovative behaviour, which implies that, under more favourable conditions, technological progress in the sector could be more robust and the rate of graduation to the formal sector, a rate now quite low, could be accelerated.