informal sector of economy in developing countries

8/8/2019 Informal Sector of Economy in Developing Countries

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2010

BhargavKaushikSchoolofArchitecture&Design1/14/2010

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InformalSectorofEconomy:ablessingindisguiseforthedevelopingcountries

BhargavKaushik(48200060)

Informalsector

is

ahidden

part

of

an

economy.

It

is

called

informal

because

it

is

not

booked,

as

in

there isnotraceofthetransactionsoccurring inthissectorundertaxationorgovernmentrecords,

which keeps it out of the formal frame of the economy. Simply put, it is like the transaction

happeningbetweenchildrenandparents,ofwhichtheydonotmaintainanyrecords.M.A.Centeno

and A. Portes quoted E.L. Feige as those actions of economic agents thatfail to adhere to the

establishedinstitutionalrulesoraredeniedtheirprotectionfordefiningthetransactionsofinformal

sector (Portes M. A., February 2003). They also mentioned that having no record posted on

government books does notmean that these businesses are illegal saying The basic difference

betweenformalandinformaldoesnothingeonthecharacterofthefinalproduct,butonthemanner

inwhich it isproducedand/orexchanged. Thus,articlesofclothing,restaurantfood,orcomputer

chipsallperfectlylicitgoodsmayhavetheiroriginsinlegallyregulatedproductionarrangements

orin

those

that

bypass

official

rules.

By

explicitly

distinguishing

between

these

three

categories

formal, informal, and illegal activities it is possible to explore their mutual relationships

systematically,ataskthatbecomesdifficultwhen illegaland informalareconfused.(PortesM.A.,

February2003).Buttounderstandtherelationbetweenthesethree(formal,informalandcriminal)

tiersofeconomyonehastolookintothecontributionmadebyeachtowardstheothertwo,which

wasexplainedby(PortesM.C.).Itisnecessarytomentionherethatinformalsectorisnotillegalin

itstradingbutitsproductsmaycomefromcertainillegalproduction.Howeverthebannedorillegal

goods soldby certain agentsnormallyoperating in the informal sectorarenot considered tobe

informal.Oncetheproductisbannedorpronouncedillegalitisillegaltodotradingofsuchproducts

aswell.Thefollowingimageshowshowthesethreefacesofeconomyareconnected.


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Therefore the informal

sector is the sourceof labor

and competitive supplier to

both the other ends of this

triangle. Noticing this key

characteristic of this sector

oneoftheUNsorganization

ILOhavealsorecognizedthe

informalsector

as

alabor

oriented sector by giving a

definition: to the non

structured sector that has

emergedintheurbancentres

as a result of the incapacity

of the modern sector to

absorbnewentrantsandclassifiesinformaleconomyas:Theinformaleconomyformspartofthe

marketeconomyinthatitproduces(legal)goodsandservicesforsaleorotherformofremuneration.

It covers informalemploymentboth in informalenterprises (smallunregisteredorunincorporated

enterprises), and outside informal enterprises. Informal entrepreneurs and workers share one

importantcharacteristic:

they

are

not

recognized

or

protected

under

existing

legal

and

regulatory

frameworks. The informal economy excludes the criminal economy and the reproductive or care

economy. (Thesaurus International Labour Organization, 2005). Thus informal economy or

informal sector of economy is an intermediate state between formal and criminal economic

activities. In order to find the reasons for having informal economy one has to look into its

characteristics.


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Figure 1: theWorldmap of Informal Economy (source: http://www.nationmaster.com/graph/eco_inf_ecoeconomy

informal)

This picture shows the nations with dominating informal economy throughout the world.

(www.nationmaster.com)

Figure2theCountrychartofInformalEconomy(source:http://www.nationmaster.com/graph/eco_inf_ecoeconomy

informal)

This graph also shows thenamesof the countries that arehaving adominant shareby informal

sectorintheirnationaleconomies.Withanaverageof33%shareinthenationaleconomy,informal

sector

has

grown

to

a

significant

height

in

all

the

continents

especially

in

the

poor

and

small


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countries. Because they apply excessive tax but do not have the capability to implement them

peacefully,inotherwordsthesenationshavesuchpoliciesthatmakeitdifficultcostlyforpeopleto

access the formalmarket to trade or consume. Therefore the alternative evolves along the thin

borderline between formal (legal) and criminal (illegal) sectors. As it can be seen inNorman A.

Loayzaspaper toWorld Bank the Economicsof the Informal Sectorwherehe concluded The

modelconcludesthatineconomieswherethestatutorytaxburdenislargerthanoptimalandwhere

theenforcementsystemistooweak,therelativesizeoftheinformalsectorisnegativelycorrelated

with the rate of economic growth; in otherwords, changes, both in policy parameters and the

qualityof

government

institutions,

that

promote

an

increase

in

the

relative

size

of

the

informal

economywillalsogenerateareductionintherateofeconomicgrowth(Loayza,1997).

Apartfromthisbasiccharacteristicoftheinformalsector,therearemanyprominentfeaturesofthe

agentsorenterprisesworkinginthissector,suchas1)Registration:theformalregistrationwiththe

governmentoragenciesofgovernment isthefirsttobemissing.This istheprimarycharacterthat

makesthemdetachedfromthegovernmentsgrasp.2)Scaleofoperation:thesetradersoftenkeep

theirbusinesswithintheirhandsgrasp,sothatattimestheycaneasilymovefromplacetoplace.

Another reason for not having their business growth concentric is so that they can operate

unnoticedbytheauthorities.3)Selfemployment:thisisthekeycharacterofanyentityworkingin

thissector,employmentopportunity istherebutmostly itoperates likeacottage industry,where

thelaborisnotcountedandhencethelaborisfromthehousehold.Similarly,theseworker,traders

ormakers

want

to

make

aliving

out

of

the

business

that

they

do

being

informal,

however

they

may

havehelpinghandsoremployeewhichwillbeoninformalbasis,likeparttime,piecewise,jobwise

pay.Thisflexibilityattractsahugenumberofurbanpopulations,especiallythepoor,sincethere is

lessphysicalriskinvolvedandplentyofopportunitiespoppingupeveryday.4)Placeofbusiness:a

very interesting feature, theydonotalwaysoperate inconventionalmarketplaces, like shopping

mallsordepartment stores, they follow thepeople, thecustomers,whereever there is sufficient

numberofcustomerstheywouldgoandtradethere itself, irrespectiveofcontext,convenienceor


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problems.5)Willingness:themotive isthemainstrengthofthesetraders,theyallareworking in

thesamewaytogetthesamethinktotheirrespectivepockets,toearnmoney,tomakealiving.

Allthesecharacteristicsarerequirementofgrowthforthedevelopingnationstocopeupwiththe

globaldevelopment.

Inconclusion,the informalsector isnotan illegalpartofeconomy,butunorganized.Thissectorof

economy contributes majorly in most nations worldwide that are less developed. Even in

developing, transition anddeveloped countries the informal sector has a significant share in the

national market. The key features of this sector, like scale of business, place of business, self

employmentandwillingnesstoearnmakesthissectortothriveintheirrespectiveterritoriesevenin

thetimesofrecessionorglobalmeltdown.

WorksCited(n.d.). Retrieved fromwww.nationmaster.com:http://www.nationmaster.com/graph/eco_inf_eco

economyinformal

Loayza,N.A. (1997). TheEconomicsof the Informal Sector .PolicyResearchDepartmentCentre,

WorldBank.

Portes, M. A. (February 2003). The Informal Economy in the Shadow of the State*. Princeton

University,4.

Portes,M.C.(n.d.).WorldUnderneath:theOrigins,Dynamics,andEffectsoftheinformalEconomy.

Thesaurus International Labour Organization. (2005). Retrieved from International Labour

Organization:http://www.ilo.org/public/libdoc/ILOThesaurus/english/tr1890.htm

informal sector of economy in developing countries

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