From Wikipedia, the free encyclopedia
The
informal sector of the economy,
informal economy, or
grey economy
is the part of an economy that is neither taxed nor monitored by any
form of government. Unlike the formal economy, activities of the
informal economy are not included in a country's
gross national product (GNP) or
gross domestic product (GDP). The informal sector can be described as a
grey market in
labour.
Other concepts that can be characterized as informal sector can include the
black market (shadow economy, underground economy),
agorism, and
System D. Associated idioms include "
under the table", "off the books", and "working for cash".
Although the informal sector makes up a significant portion of
the economies in developing countries, it is often stigmatized as
troublesome and unmanageable. However, the informal sector provides
critical economic opportunities for the poor and has been expanding rapidly since the 1960s. Integrating the informal economy into the formal sector is an important policy challenge.
Definition
Black market peddler on graffiti, Kharkiv
The original use of the term 'informal sector' is attributed to the economic development model put forward by
W. Arthur Lewis, used to describe employment or livelihood generation primarily within the
developing world. It was used to describe a type of employment that was viewed as falling outside of the
modern industrial sector.
An alternative definition uses job security as the measure of
formality, defining participants in the informal economy as those "who
do not have employment security, work security and social security".
While both of these definitions imply a lack of choice or agency in
involvement with the informal economy, participation may also be driven
by a wish to avoid regulation or taxation. This may manifest as
unreported employment, hidden from the state for tax, social security or labour law purposes, but legal in all other aspects.
Edgar L. Feige has proposed a taxonomy for describing unobserved
economies including the informal economy as being characterized by some
form of non-compliant behavior with an institutional set of rules.
Feige argues that circumvention of labor market regulations specifying
minimum wages, working conditions, social security, unemployment and
disability benefits gives rise to an informal economy that deprives some
workers of deserved benefits while conveying undeserved benefits to
others.
The term is also useful in describing and accounting for
forms of shelter
or living arrangements that are similarly unlawful, unregulated, or not
afforded protection of the state. 'Informal economy' is increasingly
replacing 'informal sector' as the preferred descriptor for this activity.
Informality, both in housing and livelihood generation has often
been seen as a social ill, and described either in terms of what
participant's lack, or wish to avoid. A countervailing view, put forward
by prominent Dutch sociologist
Saskia Sassen
is that the modern or new 'informal' sector is the product and driver
of advanced capitalism and the site of the most entrepreneurial aspects
of the urban economy, led by creative professionals such as artists,
architects, designers and software developers.
While this manifestation of the informal sector remains largely a
feature of developed countries, increasingly systems are emerging to
facilitate similarly qualified people in developing countries to
participate.
Characteristics
The informal sector is largely characterized by several qualities:
easy entry,
meaning anyone who wishes to join the sector can find some sort of work
which will result in cash earnings, a lack of stable employer-employee
relationships, a small scale of operations, and skills gained outside of a formal education.
Workers who participate in the informal economy are typically
classified as employed. The type of work that makes up the informal
economy is diverse, particularly in terms of capital invested,
technology used, and income generated. The spectrum ranges from self-employment or unpaid family labor to street vendors, shoe shiners, and junk collectors.
On the higher end of the spectrum are upper-tier informal activities
such as small-scale service or manufacturing businesses, which have more
limited entry.
The upper-tier informal activities have higher set-up costs, which
might include complicated licensing regulations, and irregular hours of
operation.
However, most workers in the informal sector, even those are
self-employed or wage workers, do not have access to secure work,
benefits, welfare protection, or representation.
These features differ from businesses and employees in the formal sector
which have regular hours of operation, a regular location and other
structured benefits.
In Ulyssea (2018) we learn that there are three views that try to
explain the causes of informality. The first view argues that the
informal sector is a reservoir of potentially productive entrepreneurs
who are kept out of formality by high regulatory costs, most notably
entry regulation. The second sees informal forms as “parasite forms”
that are productive enough to survive in the formal sector but choose to
remain informal to earn higher profits from the cost advantages of not
complying with taxes and regulations.6 The third argues that informality
is a survival strategy for low-skill individuals, who are too
unproductive to ever become formal. A study on informality in Brazil
shows that the first view corresponds to 9.3 percent of all informal
forms, while the second (the “parasite view”) corresponds to 41.9
percent. The remaining forms correspond to low-skill entrepreneurs who
are too unproductive to ever become formal and use informality as a
survival strategy. These results therefore suggest that informal forms
are to a large extent “parasite forms” and therefore eradicating them
(e.g., through tighter enforcement)could in principle produce positive
effects on the economy.
The most prevalent types of work in the informal economy are home-based workers and
street vendors.
Home-based workers are more numerous while street vendors are more
visible. Combined, the two fields make up about 10–15% of the
non-agricultural workforce in developing countries and over 5% of the
workforce in developed countries.
While participation in the informal sector can be stigmatized,
many workers engage in informal ventures by choice, for either economic
or non-economic reasons. Economic motivations include the ability to
evade taxes, the freedom to circumvent regulations and licensing
requirements, and the capacity to maintain certain government benefits.
A study of informal workers in Costa Rica illustrated other economic
reasons for staying in the informal sector, as well as non-economic
factors. First, they felt they would earn more money through their
informal sector work than at a job in the formal economy. Second, even
if workers made less money, working in the informal sector offered them
more independence, the chance to select their own hours, the opportunity
to work outside and near friends, etc. While jobs in the formal economy
might bring more security and regularity, or even pay better, the
combination of monetary and psychological rewards from working in the
informal sector proves appealing for many workers.
The informal sector was historically recognized as an opposition
to formal economy, meaning it included all income earning activities
beyond legally regulated enterprises. However, this understanding is too
inclusive and vague, and certain activities that could be included by
that definition are not considered part of the informal economy. As the
International Labour Organization
defined the informal sector in 2002, the informal sector does not
include the criminal economy. While production or employment
arrangements in the informal economy may not be strictly legal, the
sector produces and distributes legal goods and services. The criminal
economy produces illegal goods and services.
The informal economy also does not include the reproductive or care
economy, which is made up of unpaid domestic work and care activities.
The informal economy is part of the market economy, meaning it produces
goods and services for sale and profit. Unpaid domestic work and care
activities do not contribute to that, and as a result, are not a part of
the informal economy.
History
Governments have tried to regulate 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
and some international organizations quickly took up the term informal
sector (later known as the informal economy or just informality), which
is credited to the British anthropologist
Keith Hart in a 1971 study on
Ghana published in 1973, and was coined by the
International Labour Organization in a widely read study on
Kenya in 1972.
In "The Underground Economies: Tax Evasion and Information Distortion"
Edgar L. Feige
examined the economic implications of a shift of economic activity from
the observed to the non-observed sector of the economy. Such a shift
not only reduces the government's ability to collect revenues, it can
also bias the nation's information systems and therefore lead to
misguided policy decisions. The book examines alternative means of
estimating the size of various unobserved economies and examines their
consequences in both socialist and market oriented economies. Feige goes on to develop a taxonomic framework that clarifies the distinctions between informal,
illegal,
unreported and unrecorded economies, and identifies their conceptual
and empirical linkages and the alternative means of measuring their size
and trends.
Since then the informal sector has become an increasingly popular subject of investigation, not just in economics, but also in
sociology,
anthropology and
urban planning. 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 one of the more influential books on the 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. Feige's review of the Other Path
places the work in the context of the informal economy literature. Whereas de Soto's work is popular with policymakers and champions of free market policies like
The Economist, some 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.
Among the surveys about the size and development of the shadow
economy (mostly expressed in percent of official GDP) are those by Feige
(1989), and Schneider and Enste (2000). In these surveys an intensive
discussion about the various estimation procedures of the size of the
shadow economy as well as a critical evaluation of the size of the
shadow economy and the consequences of the shadow economy on the
official one can be found. The most recent survey paper on the subject
reviews the meaning and measurement of unobserved economies and is
particularly critical of estimates of the size of the so-called "shadow
economy" that employ Multiple Indicator multiple cause methods which
treat the shadow economy as a latent variable.
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.
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 58.7% of non-agricultural
employment in Middle East - North Africa, 64.6% in
Latin America, 79.4% in
Asia, and 80.4% in
sub-Saharan Africa. If agricultural employment is included, the percentages rise, in some countries like
India and many sub-Saharan African countries beyond 90%. Estimates for developed countries are around 15%.
In recent surveys, the informal economy in many regions has declined
over the past 20 years to 2014. In Africa, the share of the informal
economy has decreased to an estimate of around 40% of the economy.
In developing countries, the largest part of informal work,
around 70%, is self-employed. Wage employment predominates. The majority
of informal economy workers are women. Policies and developments
affecting the informal economy have thus a distinctly gendered effect.
Estimated size of countries' informal economy
To
estimate the size and development of any underground or shadow economy
is quite a challenging task since participants in such economies attempt
to hide their behaviors. One must also be very careful to distinguish
whether one is attempting to measure the unreported economy, normally
associated with tax evasion, or the unrecorded or non observed economy,
associated with the amount of income that is readily excluded from
national income and produce accounts due to the difficulty of
measurement.
There are numerous estimates of
tax noncompliance as measured by tax gaps produced by
audit methods or by "top down" methods
Friedrich Schneider and several co-authors
claim to have estimated the size and trend of what they call the
"shadow economy" worldwide by a currency demand /MIMIC model approach
that treats the "shadow economy" as a latent variable.
Trevor S. Breusch
has critiqued this work warning the profession that" The literature
applying this model to the underground economy
abounds with alarming Procrustean tendencies. Various kinds of sliding
and scaling of the results are carried out in the name of
"benchmarking", although these operations are not always clearly
documented. The data are typically transformed in ways that are not only
undeclared but have the unfortunate effect of making the results of the
study sensitive to the units in which the variables are measured.
The complexity of the estimation procedure, together with its deficient
documentation, leave the reader unaware of how these results have been
shorted to fit the bed of prior belief. There are many
other results in circulation for various countries, for which the data
cannot be identified and which are given no more documentation than "own
calculations by the MIMIC method". Readers are advised to
adjust their valuation of these estimates accordingly.
Edgar L. Feige
finds that Schneider's shadow economy "estimates suffer from conceptual
flaws, apparent manipulation of results and insufficient documentation
for replication, questioning their place in the academic, policy and
popular literature".
Comparison of shadow economies in EU countries according to estimates by Friedrich Schneider
German shadow economy 1975–2015, Friedrich Schneider University Linz
Since the establishment of the Single Market (Maastricht 1993) the
total EU shadow economy has been growing systematically to approx. 1.9
trillions € in preparation of the EURO driven by the motor of the European shadow economy, Germany, which has been generating approx. 350 bn € per annum
since then (see also diagram on the right). Hence, the EU financial
economy has developed parallel an efficient tax haven bank system to
protect and manage its growing shadow economy. As per the Financial
Secrecy Index (FSI 2013) currently Germany and some neighbouring countries, range among the world's top tax haven countries.
The diagram below clearly shows that national informal economies
per capita vary only moderately in most EU countries. It is because
market sectors with high informal part (above 45%)
like "building and construction" or "agriculture" are rather
homogeneously distributed over the countries, whereas sectors with low
informal part (below 30%)
like "financial and business" (in Switzerland, Luxembourg), "public and
personal services" (in Scandinavian countries) as well as "retail,
wholesale and repair" are dominant in countries with extremely high GDP
per capita i.e. industrially highly developed countries. The diagram
also shows that in absolute numbers the shadow economy per capita is
related to the wealth of a society (GDP). Generally spoken, the higher
GDP the higher shadow economy, albeit non-proportional.
There is a direct relation between high self-employment of a country to its above average shadow economy.
In highly industrialized countries where shadow economy (per capita) is
high and the huge private sector is shared by an extremely small elite
of entrepreneurs a considerable part of tax evasion is practised by a
much smaller number of (elite) people. As an example German shadow
economy in 2013 was 4.400 € per capita, which was the 9th highest place
in EU, whereas according to OECD only 11.2% of employed people were
self-employed (place 18). On the other hand, Greece's shadow economy was only 3.900 € p.c (place 13) but self-employment was 36.9% (place 1).
An extreme example of shadow economy camouflaged by the financial
market is Luxembourg where the relative annual shadow economy is only
8% of the GDP which is the second lowest percentage (2013) of all EU
countries whereas its absolute size (6.800 € per capita) is the highest.
Map
of the national shadow economies per capita in EU countries. The red
scale represents the numbers displayed by the red bars of the diagram on
the left.
Social and political implications and issues
According
to development and transition theories, workers in the informal sector
typically earn less income, have unstable income, and do not have access
to basic protections and services.
The informal economy is also much larger than most people realize, with
women playing a huge role. The working poor, particularly women, are
concentrated in the informal economy, and most low-income households
rely on the sector to provide for them.
However, informal businesses can 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.
Also, in developed countries, some people who are formally employed may
choose to perform part of their work outside of the formal economy,
exactly because it delivers them more advantages. This is called
'moonlighting'. They derive social protection, pension and child
benefits and the like, from their formal employment, and at the same
time have tax and other advantages from working on the side.
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, and mitigating
unemployment issues.
Recognizing that the informal economy can produce significant goods and
services, create necessary jobs, and contribute to imports and exports
is critical for governments.
As the work in informal sector is not monitored or registered
with the state, its workers are not entitled to social security, nor can
they form
trade unions.
Gender
A group of Indian women making bamboo products they intend to sell in Dumka, Jharkhand
A girl selling plastic containers for carrying Ganges water, Haridwar, India
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. In developing countries, most of the female non-
agricultural labor force is in the informal sector.
Major occupations in the informal sector include home-based workers
(such as dependent subcontract workers, independent own account
producers, and unpaid workers in family businesses) and
street vendors, which both are classified in the informal sector. In India, women working in the informal sector often work as
ragpickers,
domestic workers, coolies, vendors, beauticians, construction laborers, and garment workers.
Female representation in the informal sector is attributed to a variety of factors. One such factor is that
employment in the informal sector is the source of employment that is most readily available to women.
A 2011 study of poverty in Bangladesh noted that cultural norms,
religious seclusion, and illiteracy among women in many developing
countries, along with a greater commitment to family responsibilities,
prevent women from entering the formal sector.
According to a 2002 study commissioned by the ILO, the connection
between employment in the informal economy and being poor is stronger
for women than men. While men tend to be over-represented in the top segment of the informal sector, women overpopulate the bottom segment.
Men are more likely to have larger-scale operations and deal in
non-perishable items while few women are employers who hire others. Instead, women are more likely to be involved in smaller-scale operations and trade food items.
Women are under-represented in higher-income employment positions in
the informal economy and over-represented in lower-income statuses. As a result, the gender gap in terms of wage is higher in the informal sector than the formal sector.
Labor markets, household decisions, and states all propagate this
gender inequality.
Political power of agents
Workers in the informal economy lack a significant voice in government policy.
Not only is the political power of informal workers limited, but the
existence of the informal economy creates challenges for other
politically influential actors. For example, the informal workforce is
not a part of any trade union, nor does there seem a push or inclination
to change that status. Yet the informal economy negatively affects
membership and investment in the trade unions. Laborers who might be
formally employed and join a union for protection may choose to branch
out on their own instead. As a result, trade unions are inclined to
oppose the informal sector, highlighting the costs and disadvantages of
the system. Producers in the formal sector can similarly feel threatened
by the informal economy. The flexibility of production, low labor and
production costs, and bureaucratic freedom of the informal economy can
be seen as consequential competition for formal producers, leading them
to challenge and object to that sector. Last, the nature of the informal
economy is largely anti-regulation and free of standard taxes, which
diminishes the material and political power of government agents.
Whatever the significance of these concerns are, the informal sector can
shift political power and energies.
Poverty
Informal vendors in Uttar Pradesh
The relationship between the informal sectors and poverty certainly
is not 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.
In addition, workers in the informal economy are less likely to benefit
from employment benefits and social protection programs.
For instance, a survey in Europe shows that the respondents who have
difficulties to pay their household bills have worked informally more
often in the past year than those that do not (10% versus 3% of the
respondents).
Children and child labour
A girl weaving a rug in Egypt
Children work in the informal economy in many parts of the world.
They often work as scavengers (collecting recyclables from the streets
and dump sites), day laborers, cleaners, construction workers, vendors,
in seasonal activities, domestic workers, and in small workshops; and
often work under hazardous and exploitative conditions.
It is common for children to work as domestic servants across
Latin America and parts of
Asia.
Such children are very vulnerable to exploitation: often they are not
allowed to take breaks or are required to work long hours; many suffer
from a lack of access to education, which can contribute to social
isolation and a lack of future opportunity.
UNICEF
considers domestic work to be among the lowest status, and reports that
most child domestic workers are live-in workers and are under the
round-the-clock control of their employers. Some estimates suggest that among girls, domestic work is the most common form of employment.
During times of economic crisis many families experience
unemployment and job loss, thus compelling adolescents to supplement
their parents’ income by selling goods or services to contribute to the
family economy. At the core, youth must compromise their social
activities with other youth, and instead prioritize their participation
in the informal economy, thus manufacturing a labor class of adolescents
who must take on an adult role within the family. Although it revolves
around a negative stigma of deviance, for a majority of individuals,
mostly people of color, the informal economy is not an ideal choice but a
necessity for survival. Participating in the informal economy is
becoming normalized due to the lack of resources available in low-income
and marginalized communities, and no matter how hard they have to work,
will not advance in the economic hierarchy. When a parent is either
unemployed or their job is on low demand, they are compelled to find
other methods to provide for themselves but most importantly their
children. Yet, due to all the limitations and the lack of jobs, children
eventually cooperate with their parent/s and also work for their
family's economic well-being. By having to assist in providing for the
family, children miss out on their childhood because instead of engaging
in activities other youth their age participate in, they are obligated
to take on an adult role, put the family first and contribute to the
family's well-being.
The participation of adolescents in the informal economy, is a
contentious issue due to the restrictions and laws in place for youth
have to work. One of the main dilemmas that arise when children engage
in this type of work, is that privileged adults, denounce children
participation as forced labor. Due to the participant being young, the
adults are viewed as “bad” parents because first they cannot provide for
their children, second they are stripping the child from a “normal”
childhood, and third, child labor is frowned upon. Furthermore, certain
people believe that children should not be working because children do
not know the risks and the pressure of working and having so much
responsibility, but the reality is that for most families, the children
are not being forced to work, rather they choose to help sustain their
family’s income. The youth become forced by their circumstances, meaning
that because of their conditions, they do not have much of a choice.
Youth have the capability to acknowledge their family’s financial
limitations and many feel that it is their moral obligation to
contribute to the family income. Thus, they end up working without
asking for an allowance or wage, because kids recognize that their
parents cannot bring home enough income alone, thus their contribution
is necessary and their involvement becomes instrumental for their
family's economic survival.
Emir Estrada and Pierrette Hondagneu-Sotelo have gone to
predominantly Latinx communities of Los Angeles, CA. to observe the
daily actions of street vendors. They analyze why adults participate in
the informal economy. Although it revolves around a negative stigma of
deviance, for a majority of individuals, the informal economy is not an
ideal choice but an action necessary for survival. While witnessing the
constant struggle of Latinx individuals to make ends meet and trying to
earn money to put food on the table, they witnessed how the
participation of children either benefits the family or even hurt it.
Through field notes derived from their participation, Estrada states,
“children are not the ‘baggage’ that adult immigrants simply bring
along. In the case of street vendors, we see that they are also
contributors to family processes”.
Estrada's findings demonstrate that children are working in order to
help contribute to their household income, but most importantly, they
play a vital role when it comes to language barriers. The kids are not
simply workers, they achieve an understanding of how to manage a
business and commerce.
Expansion and growth
The division of the economy into formal and informal sectors has a long heritage. Arthur Lewis in his seminal work Economic Development with Unlimited Supply of Labour,
published in the 1950s, was the celebrated paradigm of development for
the newly independent countries in the 1950s and 1960s. The model
assumed that the unorganized sector with the surplus labour will
gradually disappear as the surplus labour gets absorbed in the organised
sector. The Lewis model is drawn from the experience of capitalist
countries in which the share of agriculture and unorganized sector
showed a spectacular decline, but it didn't prove to be true in many
developing countries, including India. On the other hand, probabilistic
migration models developed by Harris and Todaro in the 1970s envisaged
the phenomenon of the informal sector as a transitional phase through
which migrants move to the urban centers before shifting to formal
sector employment. Hence it is not a surprise to see policy invisibility
in the informal sector. Curiously, the informal sector does not find a
permanent place in the Marxian theory since they anticipate the
destruction of the pre-capitalist structure as a result of the
aggressive growth of capitalism. To them, in the course of development,
'the small fish is being eaten by the big fish'. Therefore, neither in
the Marxian theory nor in the classical economic theory, the unorganized
sector holds a permanent place in the economic literature.
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 led 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 led
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.
Such extreme competition between industrial countries occurred
after the expansion of the EC to markets of the then new member
countries Greece, Spain and Portugal, and particularly after the
establishment of the
Single European Market (1993,
Treaty of Maastricht).
Mainly for French and German corporations it led to systematic increase
of their informal sectors under liberalized tax laws, thus fostering
their mutual competitiveness and against small local competitors. The
continuous systematic increase of the German informal sector was stopped
only after the establishment of the EURO and the execution of the
Summer Olympic Games 2004,
which has been the first and (up to now) only in the Single Market.
Since then the German informal sector stabilized on the achieved 350 bn €
level which signifies an extremely high tax evasion for a country with
90% salary-employment.
- limited absorption of labour, particularly in countries with high rates of population or urbanisation
- excessive cost and regulatory barriers of entry into the formal economy, often motivated by corruption
- weak institutions, limiting education and training opportunities as well as infrastructure development
- increasing demand for low-cost goods and services
- migration motivated by economic hardship and poverty
- difficulties faced by women in gaining formal employment
Historically, development theories have asserted that as economies
mature and develop, economic activity will shift from the informal to
the formal sphere. In fact, much of the economic development discourse
is centered around the notion that formalization indicates how developed
a country's economy is; for more on this discussion see the page on
fiscal capacity.
However, evidence suggests that the progression from informal to
formal sectors is not universally applicable. While the characteristics
of a formalized economy – full employment and an extensive welfare
system – have served as effective methods of organizing work and welfare
for some nations, such a structure is not necessarily inevitable or
ideal. Indeed, development appears to be
heterogeneous in different localities, regions, and nations, as well as the type of work practiced.
For example, at one end of the spectrum of the type of work practiced
in the informal economy are small-scale businesses and manufacturing; on
the other "street vendors, shoe shiners, junk collectors and domestic
servants." Regardless of how the informal economy develops, its continued growth that it cannot be considered a temporary phenomenon.
Policy suggestions
As it has been historically stigmatized, policy perspectives viewed
the informal sector as disruptive to the national economy and a
hindrance to development.
The justifications for such criticisms include viewing the informal
economy as a fraudulent activity that results in a loss of revenue from
taxes, weakens unions, creates unfair competition, leads to a loss of
regulatory control on the government's part, reduces observance of
health and safety standards, and reduces the availability of employment
benefits and rights. These characteristics have led to many nations
pursuing a policy of deterrence with strict regulation and punitive
procedures.
In a 2004 report, the Department for Infrastructure and Economic Cooperation under
SIDA explained three perspectives on the role of government and policy in relation to the informal economy.
- Markets function efficiently on their own; government interference would only lead to inefficiency and dysfunction.
- The informal economy functions outside of government control,
largely because those who participate wish to avoid regulation and
taxation.
- The informal economy is enduring; suitable regulation and policies are required.
As informal economy has significant job creation and income
generation potential, as well as the capacity to meet the needs of poor
consumers by providing cheaper and more accessible goods and services,
many stakeholders subscribe to the third perspective and support
government intervention and accommodation.
Embedded in the third perspective is the significant expectation that
governments will revise policies that have favored the formal sphere at
the expense of the informal sector.
Theories of how to accommodate the informal economy argue for
government policies that, recognizing the value and importance of the
informal sector, regulate and restrict when necessary but generally work
to improve working conditions and increase efficiency and production.
The challenge for policy interventions is that so many different
types of informal work exist; a solution would have to provide for a
diverse range of circumstances.
A possible strategy would be to provide better protections and benefits
to informal sector players. However, such programs could lead to a
disconnect between the labor market and protections, which would not
actually improve informal employment conditions. In a 2014 report monitoring street vending,
WIEGO
suggested urban planners and local economic development strategists
study the carrying capacity of areas regularly used by informal workers
and deliver the urban infrastructure necessary to support the informal
economy, including running water and toilets, street lights and regular
electricity, and adequate shelter and storage facilities.
That study also called for basic legal rights and protections for
informal workers, such as appropriate licensing and permit practices.
An ongoing policy debate considers the value of government tax
breaks for household services such as cleaning, babysitting and home
maintenance, with an aim to reduce the shadow economy's impact. There
are currently systems in place in Sweden and France
which offer 50 percent tax breaks for home cleaning services. There has
also been debate in the UK about introducing a similar scheme, with
potentially large savings for middle-class families and greater
incentive for women to return to work after having children. The
European Union
has used political measures to try and curb the shadow economy.
Although no definitive solution has been established to date, the EU
council has led dialogue on a platform that would combat undeclared
work.
The
World Bank's 2019
World Development Report on
The Changing Nature of Work
discusses the extension of social assistance and insurance schemes to
informal workers given that, in 2018, 8 in 10 people in developing
countries still receive no social assistance and 6 in 10 work
informally.
Asia-Pacific
The International Labour Organization mentioned that in most developing nations located in the Asia-Pacific,
the informal sector comprises a significant and vital percentage of the
labor force. This sector constitutes around 60 percent of the labor
force. Informal economy
includes economic activities of laborers (legally and in practice)
which are not or inadequately covered by official employment contracts
or agreements. Informal employment means payment of wagers may not be
guaranteed and retrenchment can be implemented without prior notice or
compensation from employers. There are generally substandard health and
safety conditions as well as nonexistence of social benefits which
include sick pay, pension, and health coverage.
The informal economy absorbs a larger part of the ever-growing
workforce in urban hubs. In 2015, urban populations of Asian countries
started to grow while the service sector also continued to increase.
These developments contributed to the extensive expansion of urban
informal economy in practically all of Asia.
In India, the country’s informal sector accounted for over 80
percent of the non-agricultural industry during the last 20 years.
Inadequate employment denotes the option for majority of India’s
citizens is to find work in the informal sector which continues to grow
because of the contract system and outsourcing of production.
An article in First Post (June 2018) said approximately 1.3 billion
people or more than 68 percent of employed persons in the Asia-Pacific
earn through the informal economy. It is prevalent in the countryside
(around 85 percent) and almost 48 percent in urban locations. 2 billion
of the global population (61 percent) works in the informal sector.
According to an article published in Eco-Business in June 2018, the
informal sector has emerged as an essential component of the economic
environment of cities in this region. Henceforth, the importance of
contribution of informal workers deserves recognition.
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![The total national GDP of EU countries, and its formal and informal (shadow economy) component per capita[36][41]](https://en.wikipedia.org/wiki/File:Total_GDP_2013.png)
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