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An Essay on the Informal Sector of Economy

Bhargav Kaushik (48200060)

Informal sector is a hidden part of an economy. It is called informal because it is

not booked, as in there is no trace of the transactions occurring in this sector

under taxation or government records, which keeps it out of the formal frame of

the economy. Simply put, it is like the transaction happening between children

and parents, of which they do not maintain any records. M.A. Centeno and A.

Portes quoted E.L. Feige as those actions of economic agents that fail to adhere

to the established institutional rules or are denied their protection for defining

the transactions of informal sector (Portes M. A., February 2003). They also

mentioned that having no record posted on government books does not mean

that these businesses are illegal saying The basic difference between formal

and informal does not hinge on the character of the final product, but on the

manner in which it is produced and/or exchanged. Thus, articles of clothing,

restaurant food, or computer chips all perfectly licit goods may have their

origins in legally regulated production arrangements or in 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, a task that becomes difficult when illegal and

informal are confused. (Portes M. A., February 2003). But to understand the

relation between these three (formal, informal and criminal) tiers of economy

one has to look into the contribution made by each towards the other two, which

was explained by (Portes M. C.). It is necessary to mention here that informal

sector is not illegal in its trading but its products may come from certain illegal

production. However the banned or illegal goods sold by certain agents normally

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operating in the informal sector are not considered to be informal. Once the

product is banned or pronounced illegal it is illegal to do trading of such products

as well. The following image shows how these three faces of economy are

connected.

Therefore the informal

sector is the source of

labor and competitive

supplier to both the

other ends of this

triangle. Noticing this

key characteristic of

this sector one of the

UNs organization ILO

have also recognized

the informal sector as a

labor oriented sector by

giving a definition: to

the non-structured

sector that has

emerged in the urban

centres as a result of the incapacity of the modern sector to absorb new

entrants and classifies informal economy as: The informal economy forms part

of the market economy in that it produces (legal) goods and services for sale or

other form of remuneration. It covers informal employment both in informal

enterprises (small unregistered or unincorporated enterprises), and outside

informal enterprises. Informal entrepreneurs and workers share one important

characteristic: they are not recognized or protected under existing legal and

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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.

Figure 1: the World map of Informal Economy (source:http://www.nationmaster.com/graph/eco_inf_eco-economy-informal)

This picture shows the nations with dominating informal economy throughout the

world. (www.nationmaster.com)

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Figure 2 the Country chart of Informal Economy (source:http://www.nationmaster.com/graph/eco_inf_eco-economy-informal)

This graph also shows the names of the countries that are having a dominant

share by informal sector in their national economies. With an average of 33%

share in the national economy, informal sector has grown to a significant height

in all the continents especially in the poor and small countries. Because they

apply excessive tax but do not have the capability to implement them

peacefully, in other words these nations have such policies that make it difficult

costly for people to access the formal market to trade or consume. Therefore the

alternative evolves along the thin borderline between formal (legal) and criminal

(illegal) sectors. As it can be seen in Norman A. Loayzas paper to World Bank

the Economics of the Informal Sector where he concluded The model

concludes that in economies where the statutory tax burden is larger than

optimal and where the enforcement system is too weak, the relative size of the

informal sector is negatively correlated with the rate of economic growth; in

other words, changes, both in policy parameters and the quality of government

institutions, that promote an increase in the relative size of the informal

economy will also generate a reduction in the rate of economic growth (Loayza,

1997).

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Apart from this basic characteristic of the informal sector, there are many

prominent features of the agents or enterprises working in this sector, such as 1)

Registration: the formal registration with the government or agencies of

government is the first to be missing. This is the primary character that makes

them detached from the governments grasp. 2) Scale of operation: these

traders often keep their business within their hands grasp, so that at times they

can easily move from place to place. Another reason for not having their

business growth concentric is so that they can operate unnoticed by the

authorities. 3) Self employment: this is the key character of any entity working

in this sector, employment opportunity is there but mostly it operates like a

cottage industry, where the labor is not counted and hence the labor is from the

household. Similarly, these worker, traders or makers want to make a living out

of the business that they do being informal, however they may have helping

hands or employee which will be on informal basis, like part-time, piece wise, job

wise pay. This flexibility attracts a huge number of urban populations, especially

the poor, since there is less physical risk involved and plenty of opportunities

popping up every day. 4) Place of business: a very interesting feature, they do

not always operate in conventional market places, like shopping malls or

department stores, they follow the people, the customers, where ever there is

sufficient number of customers they would go and trade there itself, irrespective

of context, convenience or problems. 5) Willingness: the motive is the main

strength of these traders, they all are working in the same way to get the same

think to their respective pockets, to earn money, to make a living. All these

characteristics are requirement of growth for the developing nations to cope up

with the global development.

In conclusion, the informal sector is not an illegal part of economy, but

unorganized. This sector of economy contributes majorly in most nations world

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wide that are less developed. Even in developing, transition and developed

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

employment and willingness to earn makes this sector to thrive in their

respective territories even in the times of recession or global melt down.

Works Cited(n.d.). Retrieved from www.nationmaster.com:

http://www.nationmaster.com/graph/eco_inf_eco-economy-informal

Loayza, N. A. (1997). The Economics of the Informal Sector . Policy Research

Department Centre, World Bank.

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

State*. Princeton University, 4.

Portes, M. C. (n.d.). World Underneath: the Origins, Dynamics, and Effects of the

informal Economy.

Thesaurus - International Labour Organization. (2005). Retrieved fromInternational Labour Organization: http://www.ilo.org/public/libdoc/ILO-

Thesaurus/english/tr1890.htm