Abstract
The previous chapters have dealt with important economic characteristics of poor countries. Each of them actually provides some explanation also for the large size of the informal sector in low-income countries. Exclusion from the merits of formal institution is a dimension of poverty that often makes the family, mutual assistance groups or other informal community networks the only source for obtaining a minimum level of social protection and livelihood security. Being denied access to official product and labour markets, moreover, means that poor people have to live from subsistence farming, unregistered homework, small-scale trade or from employment by informal firms. Informal economic activity is often a reaction of individuals and firms to the high transaction costs associated with entering the formal sector. For example, a substantial number of companies in Angola, Benin or Djibouti operate in the informal economy, as the legal registration of their activities would cost them more than twice their respective country’s annual per capita income (World Bank and IFC 2008). Property titles are also mostly exchanged informally in countries such as Nigeria or Senegal where formal registration of property transactions costs more than 20% of the property value (ibid.). In other countries, property registers are not established at all, which means all property is, by default, possessed informally. The discussion in Chap. 4 has shown that wherever necessary formal institutions are absent or ineffective, people will invent informal alternatives or have to resort to traditional ways of organising social and economic life.
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Notes
- 1.
The term informal economy is used here to indicate the conceptual whole of informal economic activity, spanning across both production and employment relationships. It is sometimes also called the “extralegal”, “shadow”, “unofficial”, “unprotected”, “underground”, “parallel”, “dual”, “grey” or “black” economy. Note that the term “informal” in the sense that an activity or arrangement is outside the reach of formal law has a different connotation than its use in the later theoretical analysis where informal institutions denote people’s culturally derived values, norms or mental models.
- 2.
This is partially due to an ambitious squatter settlement upgrading programme, the Favela-Bairro, which was started in the 1990s with funding from the Inter-American Development Bank and aimed at integrating the favelas, at least physically, into the surrounding urban neighbourhoods (Perlman 2005). That objective may, however, be undermined by recent plans by the city authorities to build walls around Rio’s favelas that will effectively result in a segregation of residents of the favelas from the rest of Rio society (The Gringo Times 2009).
- 3.
To account for the increasing informalisation of employment relations in the formal sector, which results, among others, from a growing number of outsourcing and sub-contracting arrangements, the ILO recently complemented its measures of “employment in the informal sector” by a measure of “informal employment”. Although the concept of “employment in the informal sector” includes all jobs in informal sector enterprises, “informal employment” is defined as comprising the total number of informal jobs, whether carried out in formal sector enterprises, informal sector enterprises, or households. So far, the ILO has compiled statistics mostly on employment in informal sector enterprises only (Hussmanns 2004).
- 4.
This is done by choosing a base year in which the size of the informal economy is assumed to be low or zero.
- 5.
Countries represented in the table have been selected because data on both output and employment-based calculations were available for close reference periods. Note that the selected estimates on informal employment draw on data that comprise urban and rural areas, but exclude non-market production and agricultural activities.
- 6.
The interested reader may turn to The Economic Journal, Volume 109 of June 1999, which contains a series of contributions that discuss this controversy. See especially Dixon (1999) and Tanzi (1999).
- 7.
A more detailed review of cooperative forms, their origins, advantages, as well as related case studies, can be found in Schwettmann (1997) and Birchall (2003), on whose findings this discussion draws. See also Mitullah (2004) for a discussion on self-support organisations of small-scale traders and street vendors in Africa.
- 8.
Membership in a savings and credit cooperative is but one important way for poor people to obtain the financial resources necessary for engaging in productive businesses. Another source of finance accessible to informal firms is to borrow from informal moneylenders, relatives and friends. However, these loans are usually very small and have high interest rates and short repayment periods. They are therefore only suited to finance the short-term working capital needs of informal enterprises and home-based producers. An increasingly important source of investment funding not only for informal firms in low-income countries are workers’ remittances. The volume of these transfers of migrants to their home countries has significantly grown in recent years. According to the World Bank’s latest estimates, remittance inflows to developing countries have reached 328 billion US Dollars in 2008, making remittances the largest source of private capital for many low-income countries (Ratha et al. 2009).
- 9.
SEWA also served as a model for the Self-Employed Women’s Union (SEWU) in South Africa, as well as for women’s associations and trade unions in several other developing countries.
- 10.
See, for instance, Schneider (2007, 2002), and Schneider and Enste (2000).
- 11.
A most extreme case of a heavy-handed intervention against informal economic activities is Robert Mugabe’s infamous 2005 “Operation Murambatsvina” (meaning “Restore Order”), in which the government ordered the destruction of tens of thousands of unregistered shanty dwellings, informal traders’ markets and street stalls in urban townships across the country. The implementation of this policy left an estimated 700,000 people homeless or deprived of their livelihood, and adversely affected some 2.4 million additional people (Freedom House 2009).
- 12.
For instance, in a statement on the characteristics of the informal sector, the scientific Advisory Council of the German Ministry for Economic Cooperation and Development (BMZ) recommends policies to promote the informal economy in anticipation of its positive contributions for the development of poor countries (BMZ 1999). A more balanced view has been adopted by the International Labour Organization, which acknowledges the informal sector as a “convenient, low-cost way of creating employment”, but emphasises that its promotion must orient at the objective to “eliminate progressively the worst aspects of exploitation and inhuman working conditions in the sector” (International Labour Office 1991, p. 58).
- 13.
This view is advanced, among others, by Friedman et al. (2000), Johnson et al. (2000) and Marcouiller and Young (1995).
- 14.
- 15.
An interesting approach for aligning formal law with informal business practices is offered by Cooter (1994).
- 16.
The relation between the effectiveness of the formal legal system and the size of the informal sector is confirmed by findings from a new cross-country database on the contribution of small- and medium-sized enterprises (SME) to total employment and GDP in both the formal and informal sectors. According to these data, the contribution of SMEs to GDP is roughly the same in low- and high-income countries, whereas about three quarters of all SMEs in low-income countries operate in the informal economy; this proportion reverses in high-income countries where less than one quarter of all SME activity is unregistered (World Bank 2004; and Ayyagari et al. 2003).
- 17.
De Soto (2000) provides evidence on how large this potential actually is.
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Altmann, M.P. (2011). Informal Economic Activity. In: Contextual Development Economics. The European Heritage in Economics and the Social Sciences, vol 8. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-7231-6_5
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