Informal economy

The informal sector or informal economy as defined by governments, scholars, banks, etc. is the part of an economy that is not taxed, monitored by any form of government, or included in any gross national product (GNP), unlike the formal economy. In developing countries, some 70% of the potential working population earn their living in the informal sector. They would define this economy or sector in other words: not in what it is not, but what it is: the only way to earn a living for people who are self-employed outside the formal economy and not on anyone's payroll. Most of them live and work in this sector not because it is their wish or choice, but because they have no chance to be hired by an employer from the formal sector except for a few hours or days, with no legal right to be hired again.

In describing this sector, one should bear in mind that the informal economy is not a deviation of the formal economy, if only because all economic activities started informal and formed the basis from which the formal economy sprang, with firms and annual accounts, taxes, chambers of commerce, etc. Although the informal economy is often associated with developing countries, where up to 60% of the labour force (with as much 40% of GDP) work, all economic systems contain an informal economy in some proportion. The term informal sector was used in many earlier studies, and has been mostly replaced in more recent studies which use the newer term. The English idioms under the table and off the books typically refer to this type of economy. The term black market refers to a specific subset of the informal economy in which contraband is traded, where contraband may be strictly or informally defined.

Definition

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Black market speculant on graffiti, Kharkov

Informal economic activity is a dynamic process which includes many aspects of economic and social theory. By its nature, it is necessarily difficult to observe, study, define, and measure. No single source readily or authoritatively defines informal economy as a unit of study, although the work of economic anthropologist Keith Hart was integral in defining the term. To further confound attempts to define this process, informal economic activity is subject to permanent adaptation to changing circumstances. External regulations (and degrees of enforcement) change frequently, sometimes daily. The wish to preserve this source of income requires to adapt with even minor changes in policy. Given the complexity of the phenomenon, the simplest definition of informal economic activity might be: any exchange of goods or services involving economic value between people outside the scope of 'normal and formal 'business.

History

Black market in Shinbashi, Japan, 1946

Governments have tried to regulate (formalize) aspects of their economies for as long as surplus wealth has existed which is at least as early as Sumer. Yet no such regulation has ever been wholly enforceable. Archaeological and anthropological evidence strongly suggests that people of all societies regularly adjust their activity within economic systems in attempt to evade regulations. Therefore, if informal economic activity is that which goes unregulated in an otherwise regulated system then informal economies are as old as their formal counterparts, if not older. The term itself, however, is much more recent. The optimism of the modernization theory school of development had led most people in the 1950s and 1960s to believe that traditional forms of work and production would disappear as a result of economic progress in developing countries. As this optimism proved to be unfounded, scholars turned to study more closely what was then called the traditional sector. They found that the sector had not only persisted, but in fact expanded to encompass new developments. In accepting that these forms of productions were there to stay, scholars started using the term informal sector, which is credited to the British anthropologist Keith Hart in a study on Ghana in 1973 but also alluded to by the International Labour Organization in a widely read study on Kenya in 1972 MANAN ROHAN.

Since then the informal sector has become an increasingly popular subject of investigation, not just in economics, but also in sociology and anthropology. With the turn towards so called post-fordist modes of production in the advanced developing countries, many workers were forced out of their formal sector work and into informal employment. In a seminal collection of articles, The Informal Economy. Studies in Advanced and Less Developed Countries, Alejandro Portes and collaborators emphasized the existence of an informal economy in all countries by including case studies ranging from New York City and Madrid to Uruguay and Colombia.

Arguably the most influential book on informal economy is Hernando de Soto's El otro sendero (1986), which was published in English in 1989 as The Other Path with a preface by Peruvian writer Mario Vargas Llosa. De Soto and his team argue that excessive regulation in the Peruvian (and other Latin American) economies force a large part of the economy into informality and thus prevent economic development. While accusing the ruling class of 20th century mercantilism, de Soto admires the entrepreneurial spirit of the informal economy. In a widely cited experiment, his team tried to legally register a small garment factory in Lima. This took more than 100 administrative steps and almost a year of full-time work. Whereas de Soto's work is popular with policymakers and champions of free market policies like The Economist, many scholars of the informal economy have criticized it both for methodological flaws and normative bias.

In the second half of the 1990s many scholars have started to consciously use the term "informal economy" instead of "informal sector" to refer to a broader concept that includes enterprises as well as employment in developing, transition, and advanced industrialized economies.

Statistics

The Narantuul Market in Ulaanbaatar, Mongolia, colloquially also called Khar Zakh (Black Market)

The informal economy under any governing system is diverse and includes small-scaled, occasional members (often street vendors and garbage recyclers) as well as larger, regular enterprises (including transit systems such as that of Lima, Peru). Informal economies include garment workers working from their homes, as well as informally employed personnel of formal enterprises. Employees working in the informal sector can be classified as wage workers, non-wage workers, or a combination of both.

The above definition does not include criminal activities, that are irregular by nature. Crime cannot be included because such acts have no regulated counterpart against which they may be compared. (Of course, by their nature, informal economic activities escape regulation but that does not necessarily imply that they are unlawful or criminal.) Domestic labor, such as childcare and cooking, is in general not included when performed in the natural course of daily living'These activities are either formal or informal.

Statistics on the informal economy are unreliable by virtue of the subject, yet they can provide a tentative picture of its relevance: For example, informal employment makes up 48% of non-agricultural employment in North Africa, 51% in Latin America, 65% in Asia, and 72% in sub-Saharan Africa. If agricultural employment is included, the percentages rises, in some countries like India and many sub-Saharan African countries beyond 90%. Estimates for developed countries are around 15%.

In developing countries, the largest part of informal work, around 70%, is self-employed, in developed countries, wage employment predominates. The majority of informal economy workers are women. Policies and developments affecting the informal economy have thus a distinctly gendered effect.

A report from World Bank estimates the informal economies of 162 countries for the years of 1999 to 2007.

Gender

Women tend to make up the greatest portion of the informal sector, often ending up in the most erratic and corrupt segments of the sector. Sixty percent of female workers in developing countries are employed by the informal sector. The reasoning behind why women make up majority of the informal sector is two-fold. Firstly, it could be attributed to the fact that employment in the informal sector is the source of employment that is most readily available to women. Secondly, a vast majority of women are employed from their homes (most likely due to the large number of women who are involved in care work) or are street vendors, which both are classified in the informal sector Furthermore, men tend to be overrepresented in the top segment of the sector and women overpopulate the bottom segment. For example, very few women are employers who hire others and more women are likely to be involved in smaller scale operations. Labor markets, household decisions, and states all propagate this gender inequality. The gender gap in terms of wage is even higher in the informal sector than the formal sector

Issues from within

Workers in the informal sector earn less income, have unstable income, and don’t have access to basic protections and services. Informal businesses also lack the potential for growth, trapping employees in menial jobs indefinitely. On the other hand the informal sector can allow a large proportion of the population to escape extreme poverty and earn an income that is satisfactory for survival.

From the viewpoint of governments, the informal sector can create a vicious cycle. Being unable to collect taxes from the informal sector, the government may be hindered in financing public services, which in turn makes the sector more attractive. Conversely, some governments view informality as a benefit, enabling excess labor to be absorbed, mitigating unemployment issues.

Expansion

The informal sector has been expanding as more economies have started to liberalize. This pattern of expansion began in the 1960s when a lot of developing countries didn’t create enough formal jobs in their economic development plans, which lead to the formation of an informal sector that didn’t solely include marginal work and actually contained profitable opportunities. In the 1980s, the sector grew alongside formal industrial sectors. In the 1990s, an increase in global communication and competition lead to a restructuring of production and distribution, often relying more heavily on the informal sector. Over the past decade, the informal economy is said to account for more than half of the newly created jobs in Latin America. In Africa it accounts for around eighty percent. Many explanations exist as to why the informal sector has been expanding in the developing world throughout the past few decades. It is possible that the kind of development that has been occurring has failed to support the increased labor force in a formal manner. Expansion can also be explained by the increased subcontracting due to globalization and economic liberalization. Finally, employers could be turning toward the informal sector to lower costs and cope with increased competition.

Poverty

The relationship between the informal sector and poverty certainly isn’t simple nor does a clear, causal relationship exist. An inverse relationship between an increased informal sector and slower economic growth has been observed though. Average incomes are substantially lower in the informal economy and there is a higher preponderance of impoverished employees working in the informal sector.

Possible improvements

Ways to improve the informal sector include formalizing informal jobs through regulation by the state. The issue with this policy is that so many different types of informality exist. It would be extremely difficult to create solutions to meet so many diverse circumstances. Another possible improvement would be to provide better protections and benefits in the informal sector, but creating protection programs could lead to a disconnect between the labor market and protections, which may not actually improve informal employment. It might also be possible to create other methods of generating income through microloans or land rights when access to the formal sector is limited. This is not a satisfactory solution to effectively combat the issues underlying the informal sector though.

See also

• Agorism
• Casual employment
• Doing business as
• Hernando de Soto
• International Labour Organization
• Keith Hart
• Rotating Savings and Credit Association
• Substantivism

External links

• Enrique Ghersi (1997). "The Informal Economy in Latin America" (PDF). Cato Journal. 17 (1). Cato Institute. Retrieved 2006-12-18. An article by a collaborator of de Soto.
• "The Commission on Legal Empowerment of the Poor". United Nations Development Program. Co-chaired by de Soto and former secretary of state Madeleine Albright.
• John C. Cross (January, 1995). "Formalizing the informal economy: The Case of Street Vendors in Mexico City". Archived from the original on 2006-12-13. Retrieved 2006-12-18. {{cite web}}: Check date values in: |date= (help) A working paper describing attempts to formalize street vending in Mexico.
• World Institute for Development Economics Research (September 17–18, 2004). Unlocking Human Potential. United Nations University. Retrieved 2006-12-18. {{cite book}}: Check date values in: |date= (help)
• Douglas Uzzell (November 22, 2004). "A Homegrown Mass Transit System in Lima, Peru: A Case of Generative Planning". City & Society. 1 (1): 6–34. doi:10.1525/city.1987.1.1.6. {{cite journal}}: |access-date= requires |url= (help)
• Cheats or Contributors? Self Employed People in the Informal Economy A report by east London Charity Community Links and Microfinance organisation Street UK providing analysis of the motivations of informal workers.
• Need not Greed - People in low-paid informal work A report by east London Charity Community Links explores the experience of people on low incomes, doing informal paid work.
• World Bank policy note on The Informality Trap: Tax Evasion, Finance, and Productivity in Brazil
• World Bank policy note on Rising Informality - Reversing the Tide
• Paper estimating the size of the informal economy in 110 developing, transition and developed countries
• Keith Hart (2000). The Memory Bank. Profile Books. The link is to an online archive of Keith Hart's works.
• The Americas: Decent work - a rarity Independent news reports and features about the world of labour in the Americas by IPS Inter Press Service