Hey everyone, it’s Paul Krugman here, and I wanted to share something I’ve been thinking about a lot lately. I’ve been traveling the world, talking to people from all walks of life, and one thing keeps coming up: the informal economy. It’s bigger than you think, and it’s everywhere. Think of the street vendor selling hot dogs outside your office, the woman braiding hair in her living room, or the handyman fixing your neighbor’s leaky faucet. These are all part of the informal economy, and it’s a huge part of how many people make a living.
A Glimpse into the Informal Economy
Let me tell you a story. I was in a bustling market in South America, surrounded by vibrant colors, the smell of spices in the air, and the constant hum of people bartering and trading. It was a fascinating experience, seeing firsthand how people were making a living outside of the traditional system. I met a woman there, Maria, who sold handcrafted jewelry. She told me she couldn’t afford the permits and taxes required to open a formal shop, so she set up her stall in the market. Maria’s story isn’t unique. Millions of people around the world, especially in developing countries, rely on the informal economy for survival.
The Secret Handshake Economy
The informal economy is like a hidden world, operating outside the usual rules and regulations. Think of it like a secret handshake economy. It’s a place where people work without official contracts, pay taxes differently, and often don’t have the same protections as those working in regular jobs.
The Informal Sector
Remember when W. Arthur Lewis talked about the ‘informal sector‘ back in 1955? He was describing how people created jobs and earned a living outside the formal economy. That’s what we’re talking about here. The informal sector is like a separate economy within the main economy. It’s where people find work when they can’t find it in the regular job market. It’s often a safety net for those struggling to make ends meet.
The Informal Economy and Government Taxation
The informal economy operates outside the purview of government taxation. That means the government doesn’t always know how much money is being made or who is making it. The informal economy remains largely unmonitored by government agencies, making it difficult to track and regulate. This can make it hard for governments to collect taxes and provide services like healthcare and education.
The Informal Economy: A Vital Part of Any Economy
The informal economy is an integral part of any economy, regardless of its development stage. It’s like the underground river that feeds the main river. In developing countries, the informal economy makes up a substantial proportion of their overall economic activity. It’s a huge source of employment and income, especially in places where there aren’t many regular jobs. For those living in poverty, the informal sector often provides crucial economic opportunities for survival and income generation.
The Growth and Evolution of the Informal Economy
Since the 1960s, the informal sector has experienced a rapid expansion, reflecting global economic shifts and trends. It’s been growing and changing for a long time, and it’s not going away anytime soon. Integrating the informal economy into the formal sector represents a significant and complex policy challenge for governments worldwide. It’s a tough problem for governments to solve because it’s hard to bring something so informal into the formal system.
The Informal Economy and GDP
Think about it this way, a country’s GNP or GDP does not typically include the activities of the informal economy, leading to an underestimation of overall economic output. This means that the official figures for how much a country produces might be lower than they actually are because they don’t include the informal economy. Interestingly, Italy has incorporated estimates of informal economic activity into its GDP calculations, acknowledging its contribution to the national economy.
The Informal Economy: A Grey Market in Labor
The informal sector can be aptly described as a grey market in labor, operating outside traditional employment regulations and structures. It’s like a market that exists in the shadows, where the rules aren’t always clear. The black market, characterized by illegal activities and transactions, can be considered a subset of the broader informal sector. The black market is the part of the informal economy that deals with illegal things.
The Shadow Economy, the Underground Economy, and Agorism
The shadow economy, encompassing unreported and untaxed economic activity, can also be categorized as part of the informal sector. This is the part of the economy that’s hidden from the government’s view. The underground economy, often associated with illicit operations and hidden transactions, falls under the umbrella of the informal sector. This is the part of the economy that operates in secrecy. Agorism, a philosophy advocating for a market-based society free from government intervention, can be considered a form of informal sector activity. This is a philosophy that supports a free market without government interference.
System D: Resourcefulness and Entrepreneurship in the Informal Economy
System D, a term used to describe resourceful and entrepreneurial activities within the informal economy, represents another facet of the informal sector. This term describes the creativity and ingenuity of people working in the informal economy. The term ‘informal sector‘ originates from the economic development model proposed by W. Arthur Lewis in 1955, highlighting its historical significance. It’s a term that’s been around for a while and has a rich history. W. Arthur Lewis used the term ‘informal sector‘ to describe the generation of employment and livelihoods outside the formal economy. He was one of the first to recognize its importance.
Job Security and the Informal Economy
Another way to think about the informal economy is through the lens of job security. An alternative definition of the informal economy centers around the concept of job security, or rather the lack thereof. Participants in the informal economy often lack employment security, work security, and social security, highlighting the precarious nature of their livelihoods. This means that people working in the informal economy often don’t have the same job security as those in the formal economy. The desire to avoid regulation or taxation often drives participation in the informal economy, particularly for small businesses and entrepreneurs. This is because it can be easier and cheaper to operate outside the formal system. The informal economy may manifest as unreported employment, making it difficult to accurately assess its size and impact. This makes it hard to know exactly how big the informal economy is.
Edgar L. Feige and the Taxonomy of Unobserved Economies
Edgar L. Feige proposed a comprehensive taxonomy for classifying and understanding unobserved economies, including the informal sector. He was a pioneer in studying this hidden part of the economy. The informal economy is characterized by non-compliant behavior with established institutional rules and regulations. It operates by its own rules. Circumventing labor market regulations often gives rise to the informal economy, as individuals and businesses seek alternative income-generating opportunities. This happens when people try to find ways to earn a living outside the regular job market.
Benefits and Protections, or Lack Thereof
The informal economy can deprive some workers of deserved benefits and protections, highlighting the need for improved labor standards. This means that people working in the informal economy might not have the same rights and protections as those working in regular jobs. Conversely, the informal economy may convey undeserved benefits to others, creating an uneven playing field within the labor market. This can create unfair competition between businesses in the formal and informal economies. The term ‘informal economy‘ is increasingly replacing the term ‘informal sector‘, reflecting a broader understanding of its scope and complexities. This reflects our growing understanding of this important part of the economy.
Saskia Sassen and the Informal Economy in Advanced Capitalism
Saskia Sassen viewed the emerging ‘informal‘ sector as both a product and a driving force of advanced capitalism, highlighting its intricate relationship with modern economic systems. She saw the informal economy as a complex and interconnected part of the modern economy. The informal sector often serves as the breeding ground for the most entrepreneurial aspects of the urban economy, fostering innovation and dynamism. It’s a place where new ideas and businesses can thrive. Creative professionals, such as artists, architects, designers, and software developers, frequently lead and shape the informal sector, contributing to its vibrancy and diversity. This makes the informal economy a rich and diverse part of the urban landscape.
The Enduring Nature of Informality: A Historical Perspective
Governments have consistently attempted to regulate aspects of their economies, seeking to maintain order and control over economic activities. They try to create rules and regulations to manage the economy. Archaeological and anthropological evidence indicates that people across all societies have historically adjusted their economic activities to circumvent regulations, highlighting the enduring nature of informality. This shows that the informal economy has been around for a long time and is a part of human history. Informal economic activity encompasses any unregulated activity within an otherwise regulated system, underscoring its inherent contrast with formal economic structures. It’s like a parallel universe within the formal economy. Informal economies have existed for as long as their formal counterparts, suggesting their deep-rooted presence throughout history. This shows that the informal economy is not a new phenomenon.
Conclusion
This is just a snippet of what I’ve seen and learned about the informal economy. It’s a complex and fascinating world that deserves our attention. It’s a vital part of the global economy, and understanding it is crucial for creating a more just and equitable world. Keep an eye out for the informal economy around you. It’s everywhere, and it’s a vital part of our world.