Informal economy

In economics, the term informal economy (or second economy in the South African context) refers to all economic activities that fall outside the formal economy regulated by economic and legal institutions. It refers to the general market income category (or "sector") wherein certain types of income and the means of their generation are "unregulated by the institutions of society, in a legal and social environment in which similar activities are regulated."cite conference
author=Alejandro Portes and William Haller
title=The Informal Economy
editor=N. Smelser and R. Swedberg (eds.)
booktitle=Handbook of Economic Sociology, 2nd edition
publisher=Russell Sage Foundation

Simply put, it is economic activity that is neither taxed nor monitored by a government; and is not included in that government's Gross National Product (GNP); as opposed to a formal economy.

Although the informal economy is often associated with developing countries —where up to 60% of the labor force (with as much 40% of GDP) works, 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.


Informal economic activity is a dynamic process which includes many aspects of economic and social theory including exchange, regulation, and enforcement. 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.

To further confound attempts to define this process, informal economic activity is temporal in nature. Regulations (and degrees of enforcement) change frequently, sometimes daily, and any instance of economic activity can shift between categories of formal and informal 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 in which the act escapes regulation of similar such acts.


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. 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 ILO in a widely read study on Kenya in 1972.

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 the informal economy is Hernando de Soto's "El Otro Sendero" (1986), [cite book
title=El Otro Sendero
author=Hernando de Soto
id=ISBN 9500704412
] which was published in English in 1989 as "The Other Path" with a preface by Peruvian writer Mario Vargas Llosa.cite book
title=The Other Path: The Economic Answer to Terrorism
author=Hernando de Soto
id=ISBN 0060160209
publisher=Harper Collins
] 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.Fact|2007-12-5|date=December 2007

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.

ome facts

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.

The above definition rejects the inclusion of certain activities including crime and domestic labor. Crime cannot be included because such acts have no regulated counterpart against which they may be compared.Fact|date=May 2007 (Of course, by their nature, informal economic activities escape regulation and may then "become" criminal.) Domestic labor, such as childcare and cooking, cannot be included when performed in the natural course of daily living and to one's own benefit. Such activities can easily be performed for others and exchanged for goods and services with economic value and depending on broader conditions, these can be either formal or informal economic activities. However, when performed for personal benefit they have no external economic value (they cannot be exchanged).

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%.cite web
title=Men and Women in the Informal Economy
publisher=International Labour Organisation
id=ISBN 92-2-113103-3

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.

ee also

*Hernando de Soto
*International Labour Organization
*Rotating Savings and Credit Association


External links

* cite journal
title=The Informal Economy in Latin America
author=Enrique Ghersi
publisher=Cato Institute
journal=Cato Journal
An article by a collaborator of de Soto.
* cite web
title=The Commission on Legal Empowerment of the Poor
publisher=United Nations Development Program
Co-chaired by de Soto and former secretary of state Madeleine Albright.
* cite web
title=Formalizing the informal economy: The Case of Street Vendors in Mexico City
author=John C. Cross
date=January, 1995
A working paper describing attempts to formalize street vending in Mexico.
* cite book
title=Unlocking Human Potential
author=World Institute for Development Economics Research
publisher=United Nations University
date=September 17–18, 2004

* cite journal
title=A Homegrown Mass Transit System in Lima, Peru: A Case of Generative Planning
author=Douglas Uzzell
journal=City & Society
date=November 22 2004

* [ 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 archived online discussion: [ "How to Tackle the Problem of Rising Informality?"]
* World Bank archived online discussion: [ "Can Formal Property Titling Programs Ensure Increased Business Investments and Growth?"]
* World Bank archived online discussion: [ "The Informal Economy: Large and Growing in Most Developing Countries"]
* Policy note on [ The Informality Tr
* Policy note on [ Rising Informality - Reversing the Tide]
* [ Paper] estimating the size of the informal economy in 110 developing, transition and developed countries
* cite book
title=The Memory Bank
author=Keith Hart
publisher=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

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