The informal sector, informal economy, or grey economy[1][2] is that 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.[3]
Other terms used to refer to the informal sector can include the black market, the shadow economy, the underground economy, the agora, and System D. Associated idioms include "under the table", o the books and
working for cash.
Although the informal sector makes up a signicant portion of the economies in developing countries - about
41% in 2000 according to the ocial GNI metric[4] - it
is often stigmatized as troublesome and unmanageable.
However the informal sector provides critical economy
opportunities for the poor[3][5] and has been expanding
rapidly since the 1960s.[6] As such, integrating the infor- The term is also useful in describing and accounting for
mal economy into the formal sector is an important policy forms of shelter or living arrangements that are similarly
unlawful, unregulated, or not aorded protection of the
challenge.[3]
state. Informal economy is increasingly replacing informal sector[3] as the preferred descriptor for this activity.
Denition
1.1 Characteristics
The informal sector is largely characterized by several
qualities: easy entry, meaning anyone who wishes to join
the sector can nd some sort of work which will result in cash earnings, a lack of stable employer-employee
relationships,[12] a small scale of operations, and skills
gained outside of a formal education.[3] Workers who participate in the informal economy are typically classied
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.[3][12]
The spectrum ranges from self-employment or unpaid
family labor[12] to street vendors, shoe shiners, and junk
HISTORY
collectors.[3] On the higher end of the spectrum are tribute to that, and as a result, are not a part of the inupper-tier informal activities such as small-scale ser- formal economy.[5]
vice or manufacturing businesses, which have more limited entry.[3][12] The upper-tier informal activities have
higher set-up costs, which might include complicated li2 History
censing regulations, and irregular hours of operation.[12]
However, most workers in the informal sector, even
those are self-employed or wage workers, do not have
access to secure work, benets, welfare protection, or
representation.[5] These features dier from businesses
and employees in the formal sector which have regular
hours of operation, a regular location and other structured
benets.[12]
The most prevalent types of work in the informal economy are home-based workers and street vendors. Homebased workers are more numerous while street vendors
are more visible. Combined, the two elds make up about
10-15% of the non-agricultural workforce in developing
countries and over 5% of the workforce in developed
countries.[5]
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 benets.[13] 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 oered 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 psychic rewards from working in the informal sector proves
appealing for many workers.[14]
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
denition are not considered part of the informal economy. As the International Labor Organization dened
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.[5] 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 prot.
Unpaid domestic work and care activities do not con-
3.1
rators emphasized the existence of an informal economy Statistics on the informal economy are unreliable by
in all countries by including case studies ranging from virtue of the subject, yet they can provide a tentative picNew York City and Madrid to Uruguay and Colombia.[15] ture of its relevance: For example, informal employment
Arguably the most inuential book on informal economy makes up 48% of non-agricultural employment in North
is Hernando de Soto's El otro sendero (1986),[16] which Africa, 51% in Latin America, 65% in Asia, and 72%
was published in English in 1989 as The Other Path with in sub-Saharan Africa. If agricultural employment is ina preface by Peruvian writer Mario Vargas Llosa.[17] De cluded, the percentages rise, in some countries like India
90%.
Soto and his team argue that excessive regulation in the and many sub-Saharan African countries beyond [5]
Estimates for developed countries are around 15%.
Peruvian (and other Latin American) economies force
a large part of the economy into informality and thus In developing countries, the largest part of informal work,
prevent economic development. While accusing the rul- around 70%, is self-employed. Wage employment preing class of 20th century mercantilism, de Soto admires dominates. The majority of informal economy workers
the entrepreneurial spirit of the informal economy. In a are women. Policies and developments aecting the inwidely cited experiment, his team tried to legally register formal economy have thus a distinctly gendered eect.
a small garment factory in Lima. This took more than
100 administrative steps and almost a year of full-time
work. Whereas de Sotos work is popular with policy- 3.1 Estimated size of countries informal
makers and champions of free market policies like The
economy
Economist, many scholars of the informal economy have
criticized it both for methodological aws and normative The table below shows the estimated values of the size of
bias.[18]
the informal economy in 110 developing, transition and
In the second half of the 1990s many scholars have OECD countries.
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 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 classied as wage
workers, non-wage workers, or a combination of both.[6]
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.[20][21] 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.[5] However, informal businesses can also lack the
potential for growth, trapping employees in menial jobs
indenitely. 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.[22] 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 benets 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 nancing public services, which in turn
5
to benet from employment benets and social protection is not universally applicable. While the characteristics of
programs.[5]
a formalized economy - full employment and an extensive welfare system - have served as eective methods
of organizing work and welfare for some nations, such
a structure is not necessarily inevitable or ideal. Indeed,
5 Expansion and growth
development appears to be heterogeneous in dierent localities, regions, and nations, as well as the type of work
The informal sector has been expanding as more
practiced.[3][26] For example, at one end of the spectrum
economies have started to liberalize.[20] This pattern of
of the type of work practiced in the informal economy are
expansion began in the 1960s when a lot of developing
small-scale businesses and manufacturing; on the other
countries didnt create enough formal jobs in their ecostreet vendors, shoe shiners, junk collectors and domesnomic development plans, which led to the formation
tic servants.[3] Regardless of how the informal economy
of an informal sector that didnt solely include marginal
develops, its continued growth that it cannot be considwork and actually contained protable opportunities.[6]
ered a temporary phenomenon.[3]
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 infor- 6 Policy suggestions
mal sector.[6] Over the past decade, the informal economy
is said to account for more than half of the newly created As it has been historically stigmatized, policy perspecjobs in Latin America. In Africa it accounts for around tives viewed the informal sector as disruptive to the naeighty percent.[6] Many explanations exist as to why the tional economy and a hindrance to development.[27] The
informal sector has been expanding in the developing justications for such criticisms include viewing the inworld throughout the past few decades. It is possible formal economy as a fraudulent activity that results in a
that the kind of development that has been occurring loss of revenue from taxes, weakens unions, creates unhas failed to support the increased labor force in a for- fair competition, leads to a loss of regulatory control on
mal manner. Expansion can also be explained by the in- the governments part, reduces observance of health and
creased subcontracting due to globalization and economic safety standards, and reduces the availability of employliberalization. Finally, employers could be turning to- ment benets and rights. These characteristics have led to
ward the informal sector to lower costs and cope with many nations pursuing a policy of deterrence with strict
increased competition.
regulation and punitive procedures.[27]
According to the Swedish International Development
Cooperation Agency (SIDA), the key drivers for the
growth of the informal economy in the twenty-rst century include:[3]
limited absorption of labour, particularly in countries with high rates of population or urbanisation;
1. Markets function eciently on their own; government interference would only lead to ineciency
and dysfunction.
2. The informal economy functions outside of government control, largely because those who participate
wish to avoid regulation and taxation.
3. The informal economy is enduring; suitable regulation and policies are required.
As informal economy has signicant job creation and in diculties faced by women in gaining formal em- come generation potential, as well as the capacity to meet
the needs of poor consumers by providing cheaper and
ployment
more accessible goods and services, many stakeholders
support government
Historically, development theories have asserted that as subscribe to the third perspective and
[3][28]
Embedded in the
intervention
and
accommodation.
economies mature and develop, economic activity will
third
perspective
is
the
signicant
expectation
that govshift from the informal to the formal sphere. In fact,
ernments
will
revise
policies
that
have
favored
the
formal
much of the economic development discourse is centered
[3]
sphere
at
the
expense
of
informal
sector.
around the notion that formalization indicates how developed a countrys economy is.[26] However, evidence sug- Theories of how to accommodate the informal econgests that the progression from informal to formal sectors omy argue for government policies that, recognizing the
See also
Agorism
Casual employment
Doing business as
Hernando de Soto
International Labour Organization
Keith Hart
REFERENCES
Substantivism
System D
Virtual economy
Informal housing
8 References
[1] http://www.utsandiego.com/news/2010/may/30/
hidden-economy-a-hidden-danger/
[2] http://www.economist.com/node/2766310
[3] The Informal Economy: Fact Finding Study. Department for Infrastructure and Economic Cooperation. Retrieved 20 November 2011.
[4] Friedrich Schneider (July 2002). SIZE AND MEASUREMENT OF THE INFORMAL ECONOMY IN 110
COUNTRIES AROUND THE WORLD.
[5] Women and Men in the Informal Economy (PDF).
International Labour Organisation. 2002. ISBN 92-2113103-3. Retrieved 2006-12-18.
[6] Carr, Marilyn and Martha A. Chen. 2001. Globalization
and the Informal Economy: How Global Trade and Investment Impact on the Working Poor. Background paper commissioned by the ILO Task Force on the Informal
Economy. Geneva, Switzerland: International Labour
Oce.
[7] Lewis, William (1955). The Theory of Economic Growth.
London: Allen and Unwin.
[8] Report on conditions of work and promotion of livelihoods
in the unorganised sector. New Delhi: National Commission for Enterprises in the Unorganised Sector. 2007.
[9] Williams, Colin C. (2005). A Commodied World?: Mapping the limits of capitalism. London: Zed Books. pp. 73,
74.
[10] Jonatan Habib Engqvist and Maria Lantz, ed. (2009).
Dharavi: documenting informalities. Delhi: Academic
Foundation.
[11] Wilson, David (9 February 2012). Jobs Giant: How Matt
Barrie Build a Global Empire. The Age. Retrieved 20
March 2012.
[12] Meier, Gerald M.; Rauch, James E. (2005). Leading Issues in Economic Development (8 ed.). New York: Oxford
University Press. pp. 371375.
[13] Grxhani, Klarita. The Informal Sector in Developed
and Less Developed Countries: A Literature Review.
Public Choice 120 (3/4): 267300.
[30] http://www.impots.gouv.fr/portal/dgi/public/
popup?espId=1&typePage=cpr02&docOid=
documentstandard_1740
[16] Hernando de Soto (1986). El Otro Sendero. Sudamericana. ISBN 950-07-0441-2. Retrieved 2006-12-18.
[17] Hernando de Soto (1989). The Other Path: The Economic Answer to Terrorism. Harper Collins. ISBN 0-06016020-9.
[32] Employment, Social Policy, Health and Consumer Affairs (Press release). 19 June 2014. Retrieved 17 July
2014.
9 Further reading
Enrique Ghersi (1997). The Informal Economy
in Latin America (PDF). Cato Journal (Cato Institute) 17 (1). Retrieved 2006-12-18. An article by a
collaborator of de Soto.
John C. Cross (January 1995). Formalizing the
informal economy: The Case of Street Vendors in
Mexico City. Archived from the original on 200612-13. Retrieved 2006-12-18. A working paper
describing attempts to formalize street vending in
Mexico.
World Institute for Development Economics Research (September 1718, 2004). Unlocking Human Potential. United Nations University. Retrieved 2006-12-18.
Douglas Uzzell (November 22, 2004). A Homegrown Mass Transit System in Lima, Peru: A Case
of Generative Planning. City & Society 1 (1): 634.
doi:10.1525/city.1987.1.1.6.
Cheats or Contributors? Self Employed People in
the Informal Economy A report by east London
Charity Community Links and Micronance 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. Prole
Books. The link is to an online archive of Keith
Harts works.
10
Frey, B.S. (1989). How large (or small) should the
underground economy be? In E.L. Feige (Ed.), The
underground economy: Tax evasion and information
distortion, 111129. Cambridge: Cambridge University Press.
Temkin, Benjamin (2009).
Informal SelfEmployment in Developing Countries:
Entrepreneurship or Survivalist Strategy?
Some
Implications for Public Policy. Analyses of Social
Issues and Public Policy 9 (1).
Temkin, Benjamin; Jorge, Veizaga (2010). The
Impact of Economic Globalization on Labor Informality. New Global Studies 4 (1).
10
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