CAUSE

The origin of informality is not found in a religious or ethic problem, nor a cultural shortcoming. It is found in the inefficiency of the law. In all regions of the developing world, employment in the informal economy has risen rapidly over the past two decades. There are informals because people, given their small incomes, cannot work otherwise, cannot pay taxes, cannot comply with the law, cannot have access to formally build housing because they cannot afford it. It is not a cultural shortcoming; it is not an ethnic heritage; it is not a mental problem; it is legal discrimination.

Why has the informal economy continued to grow?

1) The first set of factors relates to the pattern of economic growth. Some countries have seen capital-intensive growth while others have seen very little growth, or none at all. In both cases, not enough jobs are provided for those seeking work. Because of this lack of employment, people have to seek work in other places. Some find employment or create their own work in the informal economy. Those people, who are not qualified for a high-tech formal job, may also seek employment in the informal economy.

2) The second set of factors deals with economic crisis and economic restructuring. Evidence shows that the informal economy tends to expand during periods of economic adjustment, whether it's due to economic crises or economic reforms. When public enterprises are closed or downsized, the laid off workers move into the informal economy. This is also because households need to add to their formal sector incomes with informal earnings because of cutbacks in public services or inflation.

3) The third set of factors relates to the globalization of the world economy. Investment patterns and global trade tend to privilege capital and disadvantage labour. It especially privileges those companies that can move quickly and easily across borders. It is especially a disadvantage to lower-skilled workers that cannot migrate easily or at all. These people try to increase their global competitiveness by moving to countries that have low labour costs or moving to informal employment.

More reasons to join the Informal Economy:

  • In Peru, it takes a year or more to legally start a business-and it costs, in government fees, 31 times the minimum monthly wage.
  • The informal economy offers a last resort for employment for thousands of worker
  • Hernando de Soto argues that "because Government bureaucracies are the problem in Peru, black markets are the solution." He says, "the informal economy has arisen because the formal economy is tightly boung by thousands of regulations. In Peru, there are more than 500,000 laws and executive orders governing even the simplest of daily living needs. Given that burden, illegal solutions are all that remain."

 

 

Effects

  • Informal activities have legal ends but employ illicit means. This means that they are activities that do not have a criminal content, but must be carried out illicitly, even though they are licit and desirable activites for the whole country. From an economic point of view, the most important characteristic of informal activities is that society in general and those directly involved benefit more if the law is violated than if it is followed.
  • Informality is a situation where people want to work legally, but cannot.
  • The army of street vendors is part of an underground economy that helps create 85% of Latin America's new jobs.
  • More than a third of Peru's gross domestic product is linked to the informal sector. (Hernando de Soto of Liberty and Democracy Institute)
  • The political system distributes no goods and services to the informal sector. Small-scale entrepreneurs have to rely on themselves much more in the informal sector than those in the formal sector.
  • Black markets are based on equality. Informal markets hold no bias towards men and women of all races and religions.

 

 

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