Photo By: Alcaldía de Cartagena via Alerta Caribe
The world is a polarized place. For nearly every topic of relevance, there are opposing sides with radically different perspectives, and economics is no different. There are protectionists and people who support globalization, there are capitalists and those who identify with socialist ideologies; regardless of the cohort and its pertaining ideals, the role of economics in society cannot be downplayed. Opposing perspectives often contribute to tense relationships and slants regarding ideas, and this leads to a communal aversion to certain topics. However, despite the range of controversies in the field of economics, it is a concept that deeply affects everyone, points of view notwithstanding. At the end of the day, economics is the study of human behavior, why people make certain decisions, and how those interactions impact the surrounding world. Sometimes, however, economics goes past the complex issues of stocks and bonds and trade regulations, it is made casual—more accessible, even— by the very people who contribute to it. Many are often daunted by the field of economics given its complex equations and jargon, but often, it can be quite simple. People on all four corners of the globe with varying levels of education intuitively make decisions to make the economy play in their favor, and this can be most clearly appreciated in what is called the ‘informal economy.’
Unfortunately, this sector of the economy is largely and unjustly stigmatized. It is often labeled as “illegal” or “under the radar” when in reality, it is the attempt of millions of people to make a living. So vast is the world of the informal economy that around two billion workers—around 60% of the workforce above the ages of 15— take a part in it. In most cases, the informal economy is not a way for big corporations to evade certain taxes and responsibilities, although there have been cases of such illicit dealings, rather, it is normally underprivileged people who take the resources they have around them and use them in order to generate income. People who contribute to the informal economy often curb labor legislations and taxes, resulting in the idea that it is a road for criminals to pursue their interests, or for big corporations to avoid paying certain taxes and social responsibilities. Although participants of the formal economy do not respond to the aforementioned rules, they also receive no social protection or employment benefits which often include annual and consistent pay, sick leave, and severance pay. The informal economy is strongest in developing countries, given that people in poor situations fight for every resource in order to achieve a better living standard. In many cases, Third World countries do not provide quality education or preparation for those living in conditions of poverty, and when it is time to enter the workforce, the would-be laborers have no experience or talent in any particular sector, contributing to unemployment. Nevertheless, in many cases, not working is simply not an option, thus uneducated, unemployed, but determined people work out ways to generate income with the resources they have.
The idea of an informal economy was presented by a British anthropologist called Keith Hart in 1971. His idea came after conducting a study of rural migrants in Accra, Ghana. His research started with the idea that inflation, poor wages, and rising restrictions, starting constraining many workers in the region and causing atypical patterns in the economy which made it difficult to determine the country’s growth. Said atypical patterns were the rise of businesses that took a step away from government regulations. These businesses or endeavors were an economic movement in the country; they generated income, constituted a trade of goods between people, and thus would make a difference in the country’s overall GDP. However, since it did not acquiesce to the standard definition of an economic movement, the numbers, and money generated by these economic movements could not be included in the collective economic data. In Hart’s study, only 77% of Nima’s workforce (a district in Ghana) was listed as economically active. This, however, is a misleading statistic given that out of those who were economically active, half of them were “self-employed”, “non-wage earning”, or “unemployed.” So a question follows: how are they economically active? When questioned further, the subjects of the study informed Hart that most women were sales workers, and the rest were tailors or worked in different manual occupations. Males, on the other side, also worked as artisans and laborers. Those who did partake in the formal economy earned impressively small wages during the time the study was conducted. Feeding a family of three was the equivalent of spending 80% of the day’s wage, considering that the provider of the family was earning minimum wage. Transportation, bathing, and cooking, are not included in this cost, thus it sometimes seemed more productive to leave the formal sector and become ‘self-employed.’ Hart’s 1970s study delves much deeper into the ups and downs of the developing country’s economy, but it reached the conclusion that there were significant portions of a nation’s economy that were not being counted in GDP or other economic measurements because they decided to become independent in an attempt to generate more income. After coming to this conclusion, Hart began looking into what it meant to be an independent worker, and he categorized them into two main groups: legitimate (farmers, gardeners, artisans, petty traders, peddlers, launderers” and illegitimate (drug pushers, smugglers, prostitutes, pawnbrokers). It is important to clarify that not all farmers or artisans are a part of the informal economy, some of them do comply with government guidelines, but in most developing countries it proves to be more beneficial to disassociate from those rules in order to generate a higher income.
After coining the term ‘informal economy’ a significant debate ensued. Some stated that the informal economy deviated and distracted modern capitalist development and that it would not be sustainable, while others claimed that those involved in the informal economy not only contributed to the nation’s wealth but expanded upon it, even if the numbers and data were difficult to measure. By the 1980s, a shift from formal to informal began, mainly in developing countries. People started realizing that they could better provide for their families working atypical hours, with inconsistent but higher wages. In Latin America and Asia, those who lost their jobs generally turned to the informal economy. The debate regarding the informal economy continues, but most recently, those involved in the heated argument are agreeing that said portion of economic movement does contribute to the formal economy and to the overall wealth (or lack of wealth) of a nation. Overall wealth notwithstanding, in most cases participating in the informal economy is not a person’s first option, it is usually their last and only option. As previously mentioned, most of those participating in the informal economy lack education, do not have resources to access financial services, nor do they have the resources to look for and successfully complete formal jobs. It is indisputable that the informal economy is a symptom of a country’s inability to provide education, health care, and opportunities for a portion of its population. The IMF states that the informal economy is a direct result of inequality given that “workers with similar skills tend to earn less in the informal sector than their formal sector peers, and the wage gap between formal and informal workers is higher at lower skill levels.” This means that although some workers may have similar skill sets, their lack of access to funds and resources prevents them from entering the formal sector, thus exacerbating the wealth gap. Those participating in debates regarding the informal economy normally label it as ‘good’ or ‘bad’, when in reality, there is a higher degree of complexity to the issue. The informal economy reflects a lack of opportunities for people in both developing and developed nations—informal economies are also present and relevant in developed nations—thus pushing it to have a more negative connotation. However, at the same time, the informal economy gives people with lower resources the ability to generate income and feed their families, pushing the concept to the other side of the balance, given that it seems to help people in vulnerable situations. This leads to one conclusion, the informal economy is a solution to inequality and poverty, but instead of debating on the legitimacy of the informal economy, inequality and poverty should be addressed first. It is safe to say that reducing the size of the informal economy would be beneficial, not only because it would generate more jobs and help the economy, but also because it would represent stability for many people who live in uncertainty, unsure of the source of their next meal. However, to reduce the informal economy, steps need to be taken to address the causes of this complex dilemma. The International Monetary Fund proposes four steps in order to reduce the size of the informal economy while not taking away sources of income for those who depend upon it. The first point is increasing access to quality education. Those who are educated have a better chance of entering the workforce and building a sustainable career. The second point is designing a tax system that disincentives the informal sector by enacting lower tax rates and low payroll taxes. This, in turn, helps address the wealth gap and makes the distribution of funds more efficient. Furthermore, the IMF proposes to generate policies that make accessing financial services easier, so that those who need work but need financial support as well, have this safety net. Lastly, they believe that creating structural policies that lower the cost of formalization and increase incentives will also decrease the power of the informal economy. They specifically state that reducing monopolies, overpowering regulations, and cultivating digital platforms that address information asymmetry, will help people have an easier transition to the formal economy. To conclude their proposal, Corinne Delechat, the division chief in the African Department at IMF wrote “Sustainable development requires a reduction in informality over time, but this process will inevitably be gradual because the informal sector is currently the only viable income source for billions of people.”
Taking this into account, it is important to highlight how evident the role of the informal economy is, especially in Latin America. Wait at a stoplight in most Latin American cities, and you will most likely see a street performer yielding knives or juggling bowling pins. Go to Cartagena, Colombia, and in the city center, you will observe hundreds of mats on the ground displaying bags, bracelets, necklaces, and souvenirs. Stroll a bit further into town and people on the road are ready to clean your car’s windows or sell you diabolines, a traditional Colombian snack. Early in the morning, you will also hear the faint yell of a street peddler selling his avocados. He goes from building to building announcing his fresh and tasty produce in hopes that someone will listen to his calls. There are also people selling bollos de mazorca, yet another traditional Colombian food. They will come up to you and convincingly sell the delicious bollos. However, sometimes they have little success in selling their products and will shyly approach you, asking if you will buy one, if not for your own consumption, for his. This is an example of why the informal economy is so important: it is a source of livelihood. The person selling the bollo is not doing so to avoid taxes, they are doing it in order to make money for their lunch, and when you buy that bollo and immediately give it back to him, it is easy to see that the problem is not the fact that the vendor is not following government regulations, it is the fact that they cannot afford to do so. Waste pickers or recyclers are also part of the informal economy. In Brazil, before the sun rises, dedicated workers take to the streets and pick up discarded trash. They also rummage through trash bins and pick out recyclable products, later to sell them and make a profit. Interestingly, in some cases, domestic workers are considered parts of the informal economy. People go to other people’s homes to help clean, cook, and care for children without responding to official taxes and regulations.
It is important to note that the informal economy is not constrained to developing countries. First-world countries also have poverty and homelessness indexes that result in informal activity. For example, the Canadian Observatory on Homelessness has reached the conclusion that “the circumstances of homelessness shut people out of the regular labor market and force them to find alternatives to generate income.” The main jobs in Canada’s informal economy are said to be sex trade, panhandling, home renovations, car repairs, and squeegeeing (a method of cleaning, especially pertaining to windows.) which are often paid for in cash. The Canadian Observatory on Homelessness has also admitted that the informal economy, although reflecting a degree of inequality and lack of access to resources does have its upsides, “An advantage of informal economic activity for people experiencing homelessness is that it allows them to have cash in hand on a daily basis in order to meet immediate needs such as the purchase of food.”
There are very few topics that are black and white. Humans are nuanced beings, and any action taken will yield complex consequences. Because of this, it is important to delve deep into said complexities and examine them in order to understand whether they are causes or symptoms of a more significant overlying problem—as is the case with the informal economy. This will result in the effective treatment and problem-solving of issues that affect the well-being of people all around the world. It is only with this type of reflection that measures will be taken not to destroy the informal economy, but to systematically dismantle and reduce inequality, poor education, and lack of access to basic necessities.
Written By: Carolina Mejia Rodriguez
Comentários