Governments, policy-makers and academics have come to recognize and acknowledge the vital role played by the informal sector in facilitating economic development especially in the third world. To realize the full potential of the informal sector as a possible engine of growth, more research is needed as to how the state can create a favorable institutional, regulatory and policy environment that allows productive employment, income generation and growth of the informal sector. The dissertation goes beyond the neo-liberal theory informed antagonistic pathways that characterize the relationship between the state and informal sector in the literature because they operate at opposing logics. I argue that such one-dimensional assessment of state-informal sector relations is highly problematic and flawed because the state is packaged as a unitary category with no differentiation and critical interrogation. The dissertation unpacks the state and identifies different types of states with varying abilities and capacities to engage the informal sector productively. Secondly, the antagonistic pathways framework of analysis is counterproductive and limits the possibilities of the state engaging the informal sector positively for mutual development. An alternative scenario is possible but contingent on the character of the state or a state that goes beyond "the Smithian Watchman" to a developmental one. Using Botswana as a case study, the dissertation appropriates survey and interview data to interrogate how the developmental state engages the informal sector for mutual development or otherwise.