Liberalization, Informal Sector and Formal-Informal Sectors' Relationship
Informal Sector - Rahul
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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