Informal economy

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The informal sector is that part of an economy whose economic activities are not recorded in official statistics. In industrialized countries, the informal sector is often spoken of as a legal part of the shadow economy in contrast to the illegal shadow economy ( undeclared work and black market ).

In developing countries, this includes the manufacture and sale of products in local markets and simple services. The informal sector only increases a country's GDP indirectly, as the value added in this area can result in increased sales in the formal sector .

Institutional economic origin of the term

From an institutional economic point of view, the economy is seen as a construct of various rules. A distinction must be made between formal rules that are codified in some way - that is, this is a matter of the law that can be viewed and enforced by everyone. Informal rules, on the other hand, are not codified - such as verbal agreements , taboos or rites. When the “informal sector” is spoken of, it is first and foremost an economic area that is not covered by generally applicable law - which sometimes even violates it. Naturally, informal workers do not pay any direct taxes or other charges (income tax, etc.); however, they can very well pay indirect taxes (such as sales tax).

legality

While all activities that follow the formal rules of an economy are also always legal , not all informal activities need to be "illegal". Wherever general law does not provide for any regulation or a (general) rule may not make sense, there is a regulatory gap that is filled by informal institutions (rules). Employment relationships generally consist of both formal and informal regulations (e.g. the formal, legally regulated minimum vacation and the informal additional vacation days voluntarily granted by the employer). If formal rules are sensibly supplemented by informal rules, we speak of institutional balance .

Since illegal actions violate applicable (formal) law, they are always informal. However, the informal economy is characterized by legal activity.

working conditions

A precise recording is hardly possible here, as those who are employed in the informal sector give false information about their employment in surveys and research in order to avoid the consequences and further inconveniences. A large number of heterogeneous occupations are grouped together in the informal sector. This includes the simplest services such as shoe shine, ice cream vendors or window cleaners at traffic lights and urban survivors, but also large parts of domestic workers, home workers and micro-entrepreneurs with fewer than five employees. Therefore, the majority of employees must be assigned to the lower class, but middle-class members also work in the informal sector.

Labor relations in the informal sector are therefore fundamentally different from those in the formal sector:

  • Little or no separation of the production factors labor and capital : self-employment and cuenta propia (work for one's own account) are widespread.
  • no legal personality of the company; Owners are private households or individuals
  • No formalization of the employment relationship: employment contracts are usually concluded orally and only for an extremely short period.
  • Withdrawal of state control: health and safety laws, sick pay , protection against dismissal or minimum wages do not apply due to the lack of employment contracts.
  • There is hardly any social security such as pension, health, unemployment or accident insurance.
  • Statistically, informal employment relationships can hardly be recorded, both in terms of their number and their income.
  • low organizational level and small production units, employment of family members

A precise assignment to informality is also not possible because there are various overlaps between the formal and informal economy. It should also be noted that illegal work is not always involved wherever informal work is done. In practice, family household help, honorary positions (etc.) also belong to the informal sector. However, these activities cannot always be quantified and generally follow other “laws” - from a sociopolitical and ethical point of view, it is questionable whether such activities should always be assessed in purely economic terms.

Effects

Consequences for those affected

A large part of the population working in the informal sector is part of the lower class. Informal work exacerbates this trend through uncertain income prospects, non-membership in social insurance systems and low wages. Often, precarious living situations and an unaffordable health and education system perpetuate (solidify) the situation for those affected themselves and for the next generation.

Particularly economically relevant is the uncertainty with which those affected are confronted because their actions are not “secured” by formal law. Among other things, this leads to less willingness to invest - especially in relation to one's own human capital .

Effects on the national economy

Informal businesses and subsistence businesses are characterized by

As a result, the informal sector is mostly very unproductive . For this reason it is also called the low productivity sector. This has drastic consequences not only for those affected, but also for the entire economy :

  • The lack of capital accumulation significantly weakens long-term productivity development. This will reduce future growth, prosperity and consumption possibilities of the economy.
  • This is reinforced by the concentration on the service sector and thus the local or domestic market. Neither can technological impulses come from the world market in this way, nor can capital goods imports be financed with export earnings .
  • By being absent as a contributor to social security and as a taxpayer , they reduce the state's income opportunities

In contrast, positive aspects can also be seen.

  • The informal economy grants at least some kind of basic supply in various areas, that is, there is (minimal) social compensation; Strictly speaking, the informal sector enables a kind of subsistence economy and thus independence. In times of economic crisis, the informal sector can partly take over some of the functions of the formal "normal" economy and thus contribute to the resilience and survivability of the socio-political order (example: collapse of the Soviet Union and the Soviet central administration economy at the end of 1991 , without this leading to greater mass misery).
  • Current regulatory (= formal ) rules and structures are being questioned; an institutional change can be initiated in this way.
  • A greater variety of products for people with lower incomes can be the result, if not a basic supply at all.
  • Due to the limited resources, economic actors may find creative alternative solutions, for example to obtain funds for the financing of certain projects - this applies, among other things, to so-called informal banking systems in which money is lent from private sources. Here, in turn, certain resources are used very specifically and effectively, which can be understood from an economic point of view as promoting prosperity.

Consequences for the political system

Along with the detachment from state influence (tax, social security systems) is also a decoupling from political intermediary organizations. Parties and trade unions hardly play a role in the informal sector. As a result, those affected cannot gain the political influence necessary to persuade the state to improve the situation.

Nonetheless, informality also creates forces that are able to question the state as such. In this respect, there is on the one hand the danger of “parallel societies”, but on the other hand there is also “social pressure” for (political) change. The latter is shown, among other things, in efforts to legalize certain goods (e.g. drugs) or in the reduction of bureaucracy.

Neopopulism as a concept of political rule is closely linked to the mass spread of informality in Latin America since the early 1980s and the associated decline of the mediating actors. Presidents such as Alberto Fujimori , Hugo Chávez and Evo Morales strongly emphasize their roots in the people and their direct contact with the masses. To be interpreted as a charismatic ruler in the sense of Max Weber , they differ from "classic" populists like Juan Perón (who mainly relies on union workers) through their support in the informal sector.

meaning

distribution

Developing countries in particular are often characterized by an informal sector that feeds a large part of the population. In Latin America and North Africa , it employs around half of the working population. In some Asian countries and almost all of Sub-Saharan Africa , more than two thirds of the population work in the informal sector. But even in OECD countries, the degree of informality is up to 15 percent.

It should be noted that informality does not only have negative effects - it feeds people and circumvents bureaucratic hurdles. Because of the latter, illegal informality is often associated with corruption , which, strictly speaking, can also be classified as informal activity.

Importance for developing countries

Most businesses in the informal sector are family businesses, as is still a tradition for developing countries . Because of the bad professional training and lack of money, the simplest technology is used. Activities in the informal sector include garbage collectors, sorters and recyclers, merchants, porters and village blacksmiths; the women sell what their children have collected to middlemen. The women work as domestic servants (concealed by hand) or sell fresh fruit, vegetables and flowers at regional markets for offerings. The money you generate contributes to the family income. However, the work of the former rural women does not appear in the official statistics, as their activities are regarded as domestic work. The wages in these professions are very low, and production is very labor-intensive. The poor working conditions are accepted because there are no alternatives and the people need the money to survive. In the past there was always a discussion about how one could support people in the informal sector through (vocational) education (cf. Overwien / Lindemann 2003).

Web links

See also

further reading

  • Hans-Heinrich Bass, Markus Wauschkuhn: Informal Sector. In: JE Mabe (Ed.): Das kleine Afrika-Lexikon. Federal Agency for Civic Education, Bonn 2004, pp. 78–81.
  • Andrea Komlosy , C. Parnreiter, I. Stacher, S. Zimmermann (eds.): Unregulated and underpaid. The informal sector in the world economy. Brandes & Apsel, Frankfurt 1997, ISBN 3-86099-171-X .
  • R. Durth, H. Körner, K. Michaelowa: New development economics. Lucius & Lucius, Stuttgart 2002, ISBN 3-8252-2306-X .
  • B. Overwien, H.-J. Lindemann: Learning for (surviving) life. Vocational training for workers in the informal sector requires new concepts. In: The overview (journal for ecumenical encounters and international cooperation). Volume 39, No. 1, March 2003, pp. 48–51. See also: Vocational training for the informal sector. ( Memento from February 1, 2012 in the Internet Archive )
  • Reinhold Sellien (Ed.): Gablers Wirtschafts-Lexikon. 16th edition. Gabler, Wiesbaden 2004.
  • Iris Wellesen: Institutional Innovation and Political Process. The explanation of rule changes on the political market. S + W, Hamburg 1994, ISBN 3-89161-818-2 .