The informal sector in Third World cities was initially identified as the mechanism by which the poor managed to survive under adverse conditions. Subsequent studies showed how interdependent informal activities were with those in the formal sector. Most studies interpreted this as evidence of the dependent and interstitial character of the informal economy. This paper argues that, from the point of view of structural arrangements, the opposite is more accurate. The informal sector provides a subsidy to formal sector consumption and cheapens labour costs directly when used in a ‘contract’ capacity by formal enterprises.