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Definition of informal sector
Informal sector is describes the part of a national economy in which the workers and entrepreneurs are not officially registered and elude themselves from public control or regulation. The mostly in small or micro enterprises and in (sham) self-employed organized informal sector does not pay taxes or social contributions and has no protection under public law.
Difficulties in compiling statistics
Everywhere in the world it is a problem to compile exact statistics about the dimensions of informal sectors because the concerned persons in prosperous countries are difficult to find and informal workers in general keep silent about their occupation to protect themselves.
Brazil recognized this problem and developed good enquiry methodologies so that at the Federal Statistics Office (IBGE) offers good and frequently actualized statistics about the urban informal sector. In contrast, informality receives in rich countries little consideration.
One reason for this, of course, is that in higher developed countries the informal activities are pursued in secrecy because of more rigid state control. That is why other methods are needed to get suitable statistical results. The Austrian economy professor Dr. Friedrich Schneider of the University of Linz developed an in academic circles accepted compiling method for higher developed national economies. He calculates the proportion of the shadow economy inside the total economic performance with indicators like cash-only transactions and consumption of electricity.
Significance and regional characteristics of informal sectors
throughout the world
The states with the most distinctive informal economies are mostly third-world-countries. Main factor are a low developed industrial sector and archaic economical structures in general, which are not able to create as much formal employments as necessary. The UN International Labour Organisation estimates that the worldwide percentage of occupation in the urban informal sector ranges between 20% and 70%. In Kumasi, Ghanas second largest city, for example, 70% of all occupied persons are working informally. Tanzania earns circa 58% of its total GDP in the informal sector. In most of the Asian and Latin American countries it is the same situation. More than half of Thailand’s national economic performance is afforded by not registered and unprotected labour force.
Ignored by many economists, the informal sector in higher developed economies is also growing. Germany earns about 17% of its GDP with informal work, what is equivalent to 350 billion Euros. In Italy it is 27.8%, in Canada 14% and even in the high-technology nation Japan the informal sector makes 24%. Even in the world’s biggest economy, the USA, a percentage of minimum 9% is estimated.
Forms of informality
Of course, the forms of formal activities differ. This depends primarily on the level of economic organization and development. In many countries there are as well sociocultural circumstances which define their appearance (e.g. discrimination of ethnic minorities or women, caste system).
While informality in the construction branch and in domestic services (cosmetics, household, cleaning) has a high importance throughout the world, trade or especially street trade plays almost just in underdeveloped countries a significant role. An exception here can be seen in (informal) internet trade that increases as well in high developed nations as in threshold countries.
In rich countries a strong presence of immigrants can be seen particularly in constructions and cleaning services. Especially the illegal foreigners do not have any alternative as to enter informal economy. It is estimated that 18-20 million illegal immigrants mainly of Latin American origin earn their subsistence in the USA shadow economy predominantly as nanny, gardener or causal farm labourer.
In Germany the main part of informal activities are pursued as moonlighting, as for example the tiler who works on Saturdays in addition for “cash on the barrelhead”. Schneider emanates from 21 million part-time informal labourers or 42 million who work at least 10 hours a week informally. But just the example of the tiler shows how much informal and formal economy overlap and can not be regarded separately. The informal craftsman buys his construction material and his tools in a do-it-your-self store. He pays in cash so that his expenses can not be traced and he pays also value-added tax. His money changes the sector. The store also pays taxes, energy, rent, social contributions for his employees. Its business volume increases and by that the national economic performance increases because of the informal sector.
The German government recognized that it is possible to also better the public purse at the expenses of the informal sector by raising the value-added tax. Nevertheless this will drive even more people into informality if the wage level continues declining because this reduces also the consuming power of the formal workers.
Causes for informality
Dualism theory
Originally it was assumed by the dualism theory that the informal sector is a temporary occurrence, a transition step from traditional forms of economy to a modern, formal economy. With an increasing development degree the informality would disappear. This theory is considered as disproved.
Neo-liberalism theory
According to neo-liberalism theory the increase of an informal sector is due to over or bad state regulation of the formal sector. This means in other words: the more a market is regulated the higher the barrier for informal activities is to transform and integrate into the formal economy. De facto it applies to most of the less developed countries that complicated regulations and laws as well as high tax burden give small entrepreneurs or self-employed almost no opportunity to produce or offer services formally (see clip >>> causes of informality)
In western social market-economies advocates of this theory argue therefore that the state should withdraw from economy. However the market-liberalism disregards that the informal sector itself is in big parts formed up by the mass of redundant labour force, which had got unemployed because of the exigency for profit maximization of the companies. How much the labour force then is absorbed by the informal sector depends on the quality of the social welfare system. Hence it can be concluded that the cutback of social welfare leads inevitable to an increase of informal activities. Furthermore both the dualism as well as the neo-liberalism theory ignores the interaction between formal and informal economy as well as aspects of illegality (see >>> illegality > Interaction of formal and informal trade > Informality in the industrial sector)
Intuitionalism theory
The intuitionalism theory bases on the neo-liberalism theory and complements the causes of this erroneous trend. On the one hand many enterprises would only act informally unintentionally because of lack of information about official regulations; on the other hand the state has a lack of means to control the abidance of the laws (see clip >>> causes of informality).
Theory of structural heterogeneity
Hartmut Elsenhaus accepts in his theory of structural heterogeneity the problem of entrance barriers, but considers them as politically deliberate. In his judgement an established formal entrepreneurship protects his market position, impeding the entrance of possible competitors by exercising his political influence (lobbyism). This approach, however, is difficult to prove.
To complete the five most important theories about causes for informality the rationalism theory is to mention. It is assumed that as well entrepreneurs as self-employed balance cost and benefit do decide how much they subordinate themselves under state regulation. This seems to be right observing that most of the workers of the informal sector have changed between formal and informal occupation many times during their professional career.
In the documentary Camelô, Alexandre and Flávio had formal employments before starting to work in the informal sector (cook/auxiliary janitor). Luciana and Carlos Augusto decided against formal employment because of less flexible labour time respectively lower income although they had formal job opportunities. |
