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INFORMAL ECONOMY

Sociologyindex, Sociology Books 2012

Informal economy is also known as the ‘underground economy’, or the ‘hidden economy’, refers to those economic activities which are carried on outside the institutionalized structures of the economy.

For most purposes informal economy means they are transactions not reported to the taxation department, office of unemployment insurance, worker's compensation or municipal governments.

Usually informal economy transactions are based on cash exchanges but they may be bartered for goods or services.

Toward an Understanding of the Informal Economy 
JOSEPH P. GAUGHAN, LOUIS A. FERMAN 
The ANNALS of the American Academy of Political and Social Science, Vol. 493, No. 1, 15-25 (1987) © 1987 American Academy of Political & Social Science
After surveying some of the typical content of the informal economy, the authors argue that the most substantial amount of activity in this sector is based on family and community and may not involve an immediate expectation of financial return. It would include local barter, mutual aid and self-help networks as well as other activities such as light construction and repair work. Reliance on such networks, common in preindustrial economies, continues to serve specific needs in industrial and postindustrial societies, filling in where the conventional economy falls short or fails. By its very definition, informal activity is difficult to investigate and monitor and raises questions about the legitimate concerns of government. - ann.sagepub.com/cgi/content/abstract/493/1/15

Female Participation in the Informal Economy: A Neglected Issue - MICHELE HOYMAN 
The ANNALS of the American Academy of Political and Social Science, Vol. 493, No. 1, 64-82 (1987) © 1987 American Academy of Political & Social Science
The author examines three questions: how much females participate in the informal economy; why they participate; and what the policy implications of their participation are. In the process of examining these issues, the author develops a behavioral theory of female participation, involving exit, voice, loyalty, and dual loyalty, following Hirschman's work. Using three measures—the number of individuals; the amount of time; and dollars—she finds that women participate in the informal economy as much as, and probably more than, men do. In the course of trying to explain why females participate in the informal economy, she discusses a variety of different explanations and then rejects them because they are too value laden and/or they make too many assumptions. Finally, she discusses the policy implications of more and more women having dual loyalty, such as the need for government-regulated, safe day care, and the need for revising the definition of labor force participation to reflect some of the informal activity of women. - ann.sagepub.com/cgi/content/abstract/493/1/64

Poverty and informal economy participation - Evidence from Romania
Byung-Yeon Kim, Sogang University, Seoul, South Korea.
Abstract: This paper uses a household survey of the Romanian informal economy to analyse the effects of poverty on informal economy participation. We begin by developing a simple theoretical model, which shows that the participation is driven by low income and the gap between desired and actual income level. We then estimate the determinants of households' participation in the informal economy. Empirical findings are consistent with the theoretical prediction. In addition, a positive association between husbands and wives working in the informal economy implies the deep poverty faced by a family whose head participates in the informal economy. - blackwell-synergy.com

Informal economy, wage goods and accumulation under structural adjustment theoretical reflections based on the Tanzanian experience 
Marc Wuyts, Borneostraat 197a, 2585SC, The Hague, The Netherlands; Cambridge Journal of Economics 25:417-438 (2001) Copyright © 2001 Cambridge Political Economy Society 
Abstract: Economic development in sub-Saharan Africa under structural adjustment witnessed the upsurge of informal sector development—the development of unregulated labour-intensive activities, in part export-oriented. This paper argues that two factors played an important role in shaping the dynamics of informal sector development: (1) the process of the relative cheapening of wage goods as a result of their importation, partly financed through foreign aid, thereby lowering unit-labour costs in labour-intensive production, and (2) the processes at work of subsidising real wages by other forms of economic security as a result of multiple, diversified and spatially extended livelihood strategies. While these factors undoubtedly brought a new vitality to economic development, this paper questions the long-run sustainability of this new trend for two reasons. One is its dependence on foreign aid to finance imports. The other is that it does not appear to propel endogenous increases in productivity by achieving greater synergy in intersectoral linkages between agriculture and industry. - cje.oxfordjournals.org/cgi/content/abstract/25/3/417

Consumer Participation in the Informal Economy 
Kevin F McCrohan, George Mason University, James D. Smith, University of Michigan 
Journal of the Academy of Marketing Science, Vol. 15, No. 4, 62-68 (1987) DOI: 10.1177/009207038701500408 © 1987 Academy of Marketing Science
This study investigates consumer use of informal suppliers in order to determine if there is a segment that is prone to deal with this type of vendor. Based on a national probability sample of households the authors found that such a segment exists and that the demographic profile of this segment is congruent with prior research on income tax evasion. The authors conclude that there appears to be a probable relationship between a propensity to evade income taxes and the heavy use of informal suppliers. - jam.sagepub.com/cgi/content/abstract/15/4/62

Women of the Shadows: Appalachian Women's Participation in the Informal Economy 
Kathleen McInnis-Dittrich 
Affilia, Vol. 10, No. 4, 398-412 (1995) © 1995 SAGE Publications
This qualitative study of 23 Appalachian women identified four patterns of participation in the informal economy. The unique needs of these women illustrate the necessity for differential approaches to welfare reform and the ethical dilemma of social workers who are caught between their knowledge that these women use illegal, unre ported income to supplement insufficient welfare benefits and the punitive social policies and poor employment prospects that give the women no choice. - aff.sagepub.com/cgi/content/abstract/10/4/398

A Model of the Informal Economy in the Transition Setting 
SIMON JOHN COMMANDER, London Business School; Institute for the Study of Labor (IZA)
ANDREI TOLSTOPIATENKO, World Bank 
Abstract: The informal economy has burgeoned in many transition economies but particularly in the Former Soviet Union. While the variation in the size of the informal economy has been related to differences in tax regimes and the degree of transparency in the legal and commercial system the causality is far from obvious and other factors -- such as the importance of non-monetary compensation or social benefits -- seem to be important. This paper sets up a model of a formal and informal sector where multiple job-holding is feasible. The informal sector can choose to employ part time labour or full time workers; the latter will be subject to payroll taxation. The informal sector in this model makes its decisions contingent on the behaviour of the formal sector and parameters, such as tax rates and the probability of being caught evading taxes. The model allows us to retrieve the ratio of the types of employment in each sector and their associated levels. With the closed form, a set of simulations are run that indicate the effect of shocks to demand and/or financing of social benefits on labour allocation. The distribution of employment across full and part time employment is very sensitive to the scale of subsidy given to benefits, as well as the tax regime and incidence. - papers.ssrn.com/sol3/papers.cfm?abstract_id=148915

Social capital, social liabilities, and political capital: Social networks and informal manufacturing in Nigeria 
Kate Meagher (kate.meagher@africa.ox.ac.uk) is a British Academy post-doctoral fellow at the African Studies Centre, University of Oxford. 
African Affairs 2006 105(421):553-582; doi:10.1093/afraf/adi123 
This article addresses the question of why social networks have failed to promote economic development in Africa when they have been associated with economic growth in other parts of the world. Detailed field research traces the role of social networks in the economic organization of two dynamic informal enterprise clusters in the town of Aba in south-eastern Nigeria, an area renowned for the density of its popular economic networks and for the rapid development of small-scale manufacturing under Nigeria’s structural adjustment programme. Focusing on the role of embedded social institutions and their restructuring amid the competitive pressures of rapid liberalization, I consider the extent to which social networks in Aba constitute ‘social capital’ capable of promoting economic development in the context of ongoing liberalization, ‘social liabilities’ that undermine accumulation through a social logic of redistribution and parochialism, or ‘political capital’ through which popular forces are incorporated into the ‘shadow structures’ of predatory states. This article challenges the essentialism of much of the contemporary literature on African social networks, arguing for a sharper focus on the specific institutional capacities of indigenous economic institutions. It calls for greater attention to the role of rapid liberalization and state neglect in explaining the developmental failures of African informal enterprise networks. - afraf.oxfordjournals.org/ cgi/content/abstract/105/421/553

Inequality at work in the informal economy: Key issues and illustrations 
Author: Harriss-White, Barbara
Source: International Labour Review, Volume 142, Number 4, 2003, pp. 459-469(11)
Abstract: In many countries, laws forbidding discrimination at work reach a tiny minority of the workforce, using crudely essentialized categories like colour or sex. In practice, however, discrimination is a complex expression of social regulation and, ultimately, identity, which determines the ideologies and norms that both employers and employees default to in the absence of state regulation (e. g. caste, race, religion). The forms of authority through which identities are created and evolve originate outside the economy and operate both outside it and inside it. Against this background, HarrissWhite looks at how institutional actors and market forces can address discrimination at work. - ingentaconnect.com

Heterogeneity among barterers and vendors in the informal economy 
Authors: McCrohan K.F.; Sugrue T.F.
Source: Journal of Economic Studies, Volume 28, Number 6, 2001, pp. 422-433(12)
Abstract: This research explored the nature of suppliers who participate in informal markets. The study was based on a national probability sample of 1,600 households. Those that had engaged in both barterer and vendor behaviors were found to have the most distinct profile. The barterer/vendor group demonstrated the highest level of expenditures with informal suppliers (suppliers operating in an off-the-books fashion). They were also found to be the youngest and to have the highest level of income and education. The strong relationship between acting as an informal supplier, as both a vendor and a barterer, and the propensity to consume in informal markets is the most striking conclusion of the study. - ingentaconnect.com

Working "Off the Books": Patterns of Informal Market Participation within New York's East Village
Karrie Ann Snyder, New York University, New York University
Abstract: Most research on the informal economy concentrates on how the informal economy operates at the international and regional levels along with the formal economy and the state. This article departs from current research on the informal economy by looking at how the informal economy operates within the lives of its participants. It considers how informal workers use informal work as both an economic and an identity resource. Informal workers create informal careers and informal work environments in accordance with financial and identity goals and needs. The intersection of informal work as an identity resource and as an economic resource creates a typology of informal market participation types. Among a group of self-employed workers in New York City's East Village neighborhood, four patterns of informal market participation emerge: Entrepreneur, Occupier, Avocationalist, and Allowance Seeker. - blackwell-synergy.com

Tackling the Informal Economy: Towards a Co-ordinated Public Policy Approach? 
Colin C. Williams, University of Leicester, Public Policy and Administration, Vol. 20, No. 2, 38-53 (2005) © 2005 SAGE Publications and PAC
Throughout the western world, the informal economy is now a priority for action in public policy circles. This paper analyses how the UK government has sought to tackle this issue by attempting to join-up the myriad of actions being taken across government with regard to this realm, and evaluates the effectiveness of this coordinating approach. Analysing the range of departments involved in this policy realm, the finding is that although there have been numerous attempts to facilitate greater co-ordination across departments in relation to data sharing, strategy and operations, responsibility remains heavily compartmentalised and fragmented in departmental ‘silos’. It thus reveals how the development of a more comprehensive ‘data bank’, allocating overarching responsibility for strategy to one department and Minister, and the formation of an employment-place compliance unit/agency could all encourage a more fully joined up approach towards this issue. Before taking these actions, however, this paper calls for comprehensive pilot studies to be conducted in order to evaluate the marginal net benefits of such initiatives in terms of improved tax recovery and/or reduced benefit fraud since the existing joined-up actions by no means conclusively display that greater coordination between departments necessarily leads to a more effective approach. - ppa.sagepub.com/cgi/content/abstract/20/2/38

Budgets and the Informal Economy - Informal Economy Resource Database
Many countries have studied the impact of government budgets on women and men with a view to promoting gender equality in budget making. However, few analyses have addressed the issue of budgets and the informal economy, even though the informal sector in developing countries employs large numbers of people, especially women. In an attempt to fill this research gap, this project will analyze the impact of the South African budget on women and men in the informal economy as compared to its impact on workers in the formal economy. Based on the results, the researchers will recommend measures to make budgets more sensitive to the informal sector in South Africa. - idrc.ca/ en/ev-83066-201_102272-1-IDRC_ADM_INFO.html

Measuring the Non-Observed Economy - A Handbook.
Published by OECD, IMF, ILO and the Interstate Statistical Committee of the Commonwealth of Independent States (CIS STAT).
Abstract: The long abstract above includes the scope and objectives as well as a user guide for the handbook, it is 10 pages long.
The main focus of the Handbook is to provide guidance on how to produce exhaustive estimates of GDP. This means ensuring that as many productive activities as possible are observed, i.e., directly measured in the basic data on production, incomes, and expenditures from which the national accounts are compiled. It also means ensuring that non-observed activities are nevertheless accounted for, i.e., indirectly measured during compilation of the national accounts. 
The groups of activities most likely to be non-observed are those that are underground, illegal, informal sector, or undertaken by households for their own final use. Activities may also be missed because of deficiencies in the basic statistical data collection programme. These groups of activities are referred to in this Handbook as the problem areas. Activities not included in the basic data because they are in one or more of these problem areas are collectively said to comprise the non-observed economy (NOE). 
Thus, measurement of the non-observed economy involves action on two fronts:
- improvements in direct measurement by the data collection programme, resulting in fewer non-observed activities and hence fewer non-measured activities; and
- improvements in indirect measurement during compilation of the national accounts, resulting in fewer non-measured activities. 

Urban poverty and the informal economy in South Africa's economic heartland 
Christian M. Rogerson, Department of Geography and Environmental Studies, University of Witwatersrand, Private Bag 3, PO WITS 2050, Johannesburg, South Africa.
Environment and Urbanization, Vol. 8, No. 1, 167-179 © 1996 Environment and Urbanization
The paper describes urban poverty and the informal economy in the economic hub of South Africa, the Pretoria-Witwatersrand-Vereeniging region (which includes Johannesburg). Its findings show the limited possibilities for using the informal economy as a means of resolving pressing issues of poverty in South Africa's cities. After an introduction about the post-apartheid government's Reconstruction and Development Programme, the paper describes the scale and nature of urban poverty and the causes of its growth and the growth and changing complexion of the informal economy, including the rapid growth of "survivalist" enterprises and the links between the formal and informal economy. This includes a consideration of what constrains the informal economy and the links between supporting the informal economy and addressing poverty. - eau.sagepub.com/cgi/content/abstract/8/1/167

Estimates of the Informal Economy of Cameroon and the Impact on Tax Yield for the Period of 1975 – 2004 (Abstract) - By: Mbeaoh Alexander
Cameroon has undergone a lot of economic, social and political changes since independence. These changes have forced individuals and companies to also adopt strategies to meet up with the challenge of adjusting to a new economic, political, legal and social environment. An alternative for those not capable or not willing to abide by imposed regulations is to function in the informal economy. But what then is the informal economy? 
This no doubt is the question that comes to mind at present. There is no precise answer as there are as many definitions as authors. However, one of the most popular defimitions of the informal economy is Schneider's. According to Schneider (1986), the informal economy is ail economic activities that contribute to value added and should be included in national income in terms of national accounting conventions but are presently not registered by national measurement agencies (Schneider, 1986).
With the growth of the informal economy, many attempts have been made by researchers to measure the phenomenon. This however has remained very challenging; the reason being that informal economy activities are always performed in a way as to avoid being identified. The governments have done or are doing much to dissuade people from these activities through measures like punishment, prosecution or education. Gathering statistics about who is engaged in such activities, the frequencies with which these activities are occurring and their magnitude is crucial for making effective and efficient decisions regarding the allocations and modification of a country's resources. 
Unfortunately, it is very difficult to get accurate information about these informal economy activities on the goods and labour market, because ail individuals engaged in these activities do not want to be identified. It is the hidden nature of their activities that made Roberto and Schneider (2003), say that "the estimation of the informal economy activities can be considered as a scientific passion for knowing the unknown".
The informal economy is an integral part of ail economies be it developed, transitional under developed; indeed it's a universal reality. It is clear that this phenomenon is very complex and difficult to measure because of its multiple definitions and contexts. In this study we have attempted a definition of the informal economy and use the indirect approach to estimate it in Cameroon from 1975-2004. Specifically we used two different monetary techniques developed by Guttman (Guttman, 1977) and Tanzi (Tanzi, 1983). From the estimated information economy, we have attempted to get its impact on tax yield specifically on tax evasion and avoidance for the saine period.
In spite of the short comings linked with the various methods used and the fact that these estimates are not precisely capturing all hidden economic activities, this study provide useful information about the development of this economy, which can be used for making relevant adjustments and changes in economic and social policies. The findings globally show that the sector is quite huge in Cameroon and has an upward trend. Also the growth of the sector is a response to the economic and political reality of the country. These huge figures suggest that for a country like Cameroon were the level of poverty is high, the government does not fully and effectively carrying out its important functions of essential public services' delivery and creation of fair rules for economic completion. 
A detailed analysis of our findings show that on average the informal economy has increased by 10 percent by the Guttman approach or 14 percent if we consider the Tanzi approach while the official GDP actually increased by 10 percent from 1977-2004. Within thep same period evaded taxes increased on average by 7 percent by the Guttman method or 14 percent by the Tanzi Method while total taxes only rose by 10 percent.
Though the figures from both methods do not tie, they more or less have similar trends and consequently tell the same story. However like Maliyamkono and Bagachwa (1990), Osoro (1992) and many others, we believe that the results should be interpreted with caution because of a number of weaknesses of the approaches used. For instance, specifying the model or choosing a different base year might yield completely different results. It would therefore be risky to want to think that one of the methods is better than the other or commonly accepted. This is because each method has its specific strengths and weaknesses as well as specific insights and results. However, comparing our findings to that of other studies done on Cameroon (Kinge, 2004, DSCN, 2005), the Tanzi method seem to yield results that tie closely to previous studies.
Though the lost in government revenue and its associated consequences can partly be attributed to the growth and magnitude of the informal economy, it should also be realised that this sector has somehow contributed positively to the society at least at the micro level. Thanks to activities of this sector, a certain fraction of the population has been able to raise income necessary for their survival especially during the period of economic crisis; also the informal economy remains a safe start-off ground for micro and other petit enterprises that need a trial period before becoming fully formal Irrespective of the causes of this huge size of the informal economy in Cameroon, this study (specifically the Tanzi method) shows that the tax system (tax laws and procedures) and other administrative complications contribute greatly to the growth of the informal economy of Cameroon. 
As a result further simplifying the tax procedures and tax rates and reducing the bureaucracy and procedures of establishing business in Cameroon would reduce the informal economy to a tolerable level. - unpan1.un.org/ intradoc/ groups/public/documents/IDEP/UNPAN023353.pdf

Understanding Informal Economy

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