INFORMAL INDUSTRY
AND MICRO-ENTERPRISES
INFORMAL INDUSTRY
Definition: (contrast with a formal company that is registered
as such, keeps financial records, and pays taxes)
- an informal enterprise is an extra-legal enterprise (not
necessarily illegal – it will often be tolerated);
- it is not normally required to keep financial records;
- it may pay for a license, but does not normally pay
corporation taxes (but may pay informal taxation – eg bribes
to local officials and police).
DO NOT ESSENTIALIZE ABOUT INFORMAL ACTIVITY:
it is highly diversified – a few are successful & people prefer
to work in it – but it also has some very marginal and
precarious employment.
IMPORTANCE
• Worldwide it employs more people than any other sector
(excluding agriculture). It consists of myriad microenterprises in manufacturing, repair, service and sales.
- barbers under shade trees/shoeshine/
- mobile vehicle/bicycle repairs at the side of the road
- snacks/cafes/tea shops under cardboard roofs
- smiths/carpenters/weavers/tanners/
- parking & other guards (+ protection racket) + nannies/ayah
- fruit & veg/ charcoal/ wood sellers at periodic markets
- hawala, micro-credit, informal housing
• In Malawi with 12 m pop, only 50,000 have formal jobs the rest work in agriculture and informal enterprises.
IT IS ALSO IN RICH COUNTRIES
• And referred to as the black market, the underground
economy, or plain crime - eg every “cash job” is part of the
informal economy – unrecorded and untaxed
• Some estimates put the underground economy in AICs as
high as 25-30% of GDP.
• Some is criminal (drugs, protection, gambling) some is
mainly tax evasion (inc the rich, not just the marginalised).
• Its size is estimated by the amount of money spent +
savings, minus what was paid out (and recorded) in wages,
interest, dividends, growth of credit and transfer payments.
ECONOMIST 9 Sept 2006
• estimates of the size of the informal sector as % of
GDP:
- Sub-Saharan Africa - 42%
- Latin Am & Carib - 41%
- E Europe and C Asia - 38%
- S Asia
- 36%
- Mid East & N Africa - 27%
- E Asia and Pacific - 23%
- OECD (high income) - 18%
INFORMAL HOUSING - DHAKA
WHY IS THE INFORMAL SECTOR SO LARGE
• EG: In India, 75% of all non-agricultural employment is in
the informal sector:
1. Ease of entry - most micro-enterprises are undercapitalized
– avoids the legal process & costs of becoming registered.
2. You avoid paying taxes
3. For many women & kids it is the only possible livelihood –
often extension of domestic work eg taking in laundry,
selling surplus food from shamba; charcoal, boarders.
4. Work in the informal sector is highly gendered – esp with
the epidemic of AIDS which has made millions of women
(often grandmothers) the primary caregivers.
5. Pressure to leave overpopulated countryside + magnet of
the city >big migration – but then its very hard to find a job.
THE CENTRAL DEBATE
(Maloney 2004)
• Is the informal sector:
1. An employer of last resort – mainly marginal, residual, and labour
market segment that acts as a form of labour storage?
2. A vibrant sector based on micro-enterprises, some of which grow to
become larger and successful with a “voluntary” workforce.
Maloney uses findings from Latin America to argue for #2.
I would argue that
a) It is both – Maloney essentialises a very diverse sector; some
activities are dead end – a few offer promise of growth.
b) He does not consider the business cycle – in recession it grows as
laid off workers, new workers and family members enter it to
survive.
c) He does include the very smallest enterprises in his study/review.
d) He does not include women’s enterprises
DUAL LABOUR MARKET INTERPRETATION
• Sees 2 labour market segments: a well paid formal segment with
promise of promotion, job security, regulated work conditions (=
GOOD JOBS), and a marginal informal segment with low wages, no
career progress, job insecurity, and precarious work = BAD JOBS).
• Barriers to entry in the formal sector (capital/ skills/ incorporation/
machinery and equipment) make it difficult to move from informal
into the formal sector i.e. mobility between the 2 segments is very
difficult.
• Family labour – much of it unpaid – is crucial to success in the
informal sector + extended family are often big part of customer base.
• Many people in LDCs migrate from rural areas to cities for work – but
jobs in the formal sector are very hard to secure – so they end up
working in the informal sector which in big cities like Nairobi (5m)
Mexico City (20m), Sao Paulo (22m), Hangzhou (8m), Kolkata (18m)
and Dhaka (12m) is huge.
MOLONEY’S VIEW:
• Using panel data from Argentina, Brazil and Mexico, he traces
career paths. Many working in the I.S. do so voluntarily b/c its a
better job than what they can find in the formal sector.
• The bulk of his analysis focuses on male self-employed or
owners of unregistered micro-enterprises with <5 employees: he
says this is the largest sector within the informal sector. But it is
also the most successful and least marginal. It excludes
women’s micro-enterprises – and he seems to bundle together
the slightly larger more successful enterprises with the some
very marginal ones.
• He says (p.1160) that some of these workers may be living in
poverty, but this still may be better than a formal job. But most
of these workers have no hope of a formal sector job. The issue
of choice doesn’t arise – informal work isn’t voluntary for many
of these workers.
THE INTERNATIONAL LABOUR OFFICE (ILO) ANALYSIS
Like Maloney, the ILO sees the informal sector more as a
solution than a problem:
• 1. Often economically efficient – even profit making
• 2. Easy to start up – few barriers to entry
• 3. Uses indigenous resources – low import content
• 4. Uses family labour – stabilises the family
• 5. Uses labour intensive technologies
• 6. It’s a training ground at low cost
• 7. Provides marginalized women with a chance to cope
THE GENDERED INFORMAL SECTOR
• Within the heterogeneous I.S. some activities are dominated by
women, and overall more women than men are engaged – why?
- single mothers struggling to survive;
- men find formal work easier to secure;
- women add it on to home-making – taking in laundry; childcare;
baking; mending;
- AIDS epidemic leaves mothers, aunts, grandmothers struggling
to raise orphans or families without fathers.
• There are obvious D of L:
- men make gravel and cut up wrecked cars,
- women knit and make quilts; but often they manage local trade
and markets, esp in West Africa
- children watch goats, guard cars, mow lawns and babysit;
INFORMAL ACTIVITY IN AICs
• Often more than 20% of GNP
• 2 forms – legal and illegal (black market/ underground
economy); some in grey area in between;
• Legally: crafts, neighbourhood jobs eg snow clearance, car
wash, landscaping/ mowing, babysitting, taxidermy, ethnic
economies, web sites, photographers; Kijiji, successful
ones may transition from informal to micro-enterprise.
• Underground/ illegal/ black market: cash renovations,
plumbing, car repairs, drugs, prostitution, professional EBay & yard sales, tax forms, poaching, theft, electronic &
card fraud, grow-ops (pot exports to US are BCs biggest
agric export);
Angel finance –informal venture capital financing for micro-start-ups
(friends, family and fools!!) who often require entrepreneurs to accept
much of the risk in a new venture - now bigger than formal venture K.
ETHNIC ECONOMIES
•
1.
2.
3.
4.
•
Immigrant groups often create economies within their group due to:
language problems
qualifications not recognized
obligations to other family members
religious or other cultural differences;
Activities include local foods and restaurants, imports from home
country, hawala and other money transfer systems/remittances for
migrant workers, crafts, travel, books & DVDs.
• Some see it as an exploitative dead end - low pay, long hours when
demanded, few benefits, dependency on earlier immigrants.
• Other see it as a valuable stepping stone to a good career with
progressive integration in the host society.
• ? the outcome depends on the individual, jobs opportunities,
boom/slump, institutions, laws and cultural barriers.
CONCLUSION
• This sector is huge: biggest in LDCs (up to 70% workforce in
some cities) – and up to 20% of GDP in AICs.
• It has extremely diverse inc goods and services;
• Much of it is artisanal – and in some cases uses the new
technologies that neo-artisanal actors deploy.
• Most activities are gendered – many women depend on informal
work, and occupy key positions in many informal activities.
• In LDCs it has often grown as investments in formal activities
by TNCs or for export by domestic firms in large cities have
created a well-paying formal sector, which then attracts waves of
rural migrants few of whom get these “dream” good jobs - the
rest are marginalised and get informal jobs, a few of whom
succeed.