1. The “Informal Sector” November 4, 2015 ECON 3508 Carleton University

2. Outline 1. Some Description 2.Past Theorizing 3.Definition of the Informal Sector 4. Origins and Roots of Informal Economy 5.Comparison of “Formal” and “Informal Sectors” 6.Impacts of the Informal Sector on the National Economy and Society 7.Public Policy and the Informal Sector? Sources: 1. Textbook, Chapter 7, pp. 348-355 2. International Labour Organization, "On the Informal Sector", Geneva, 1972, (to be distributed in class.)

3. Otavalo Market Scenes

6. Artisanal Mining, Tanzania

7. 1.Some Description –Presence everywhere –Variation among Countries –Diversity of Informal Enterprise within countries High-end to low-end Sophisticated to “last resort” enterprise –Rural and Urban IS –Men, Women and Children in the Informal Sector

8. Liberia: Structure of Employment CategoryNumberCategoryNumber Total Employment 1,278,477 Open Unemploment 83,323 (5.7%) Formal Sector Agriculture Industry Services Other 231,584 (15.8%) 34,949 9,026 141,639 43,162 Informal Sector Agriculture Industry Services Other 1.146.893 (78.5) 642,260 16.460 114.689 367.006 World Bank, Liberia: Employment and Pro-Poor Growth, November 19, 2010

11. The Informal Sector in Kenya Non-Farm Economic Activities in Rural Households. Kenya, circa 1979 Number of Non-Farm Activities per Sample Household Western Province National 0 1 2 3 4 5 6 or more 44.3 32.8 11.8 4.0 3.1 1.5 2.5 49.6 26.4 13.0 4.7 2.5 1.3 2.4 Total100.0

12. Informal Employment in Non-Agricultural Employment for Africa CountryInformal Labour Force as % of Total Non-Ag. L.F.WomenMen Self -Employment as % of Total Informal Employment Benin 93% 97%87% 95% Chad74956093 Liberia78.5% Guinea74876695 Kenya72835942 S. Africa51584425 Sub-Saharan Africa, 72846370 Source: ILO, Men and Women in the Informal Economy, Geneva, 2002 pp 19-20

14. Past Theorizing regarding the Potential Role of the informal Sector Older Views: Adam Smith: Normal activity; purely competitive Karl Marx: Replace with large scale industry and organization; “lumpen proletariat” Socialist Theorizing: Replace it; Central Planning; Economies of Scale; Collectivization

15. Past Theorizing regarding the Potential Role of the informal Sector, cont’d. Mainstream “Development Economics” 1945-72 Small Enterprise Usually Ignored –Rostow, –Lewis, –Prebisch, –Capital-Centred Theorizing, –Dependency Theorizing … Some Voices in the Wilderness: –Indian Cottage industry, –Community Development Theorizing

16. The Informal Sector gets Discovered! Keith Hart, 1972, focusing on Ghana; ILO, 1970s, Study in Kenya; Parallel interest in Underground Economies of Western countries [“Shadow Economies”] Hernan DeSoto, 1989 re Peru;

17. The Informal Sector gets Discovered! Underground Economies in Centrally Planned Economies get ‘discovered’, 1980s [“Second Economies,” ] Informal Economy and Underground Economy in Transitional Countries (E.Europe and former Soviet Union )

18. Definition of the Informal Sector based on Institutionalization and Legality Area of the EconomyProcess of Production or Distribution Final Product Formal Economy+++ Legal Household Economy (for home use) Informal Economy (sometimes home-based) ++ Legal +/- “Extra-Legal” +++Legal & Vital +++ Legal Underground or Shadow Economy + (Process); - ve (Tax Avoidance) + Usually Legal Criminal Economy --- Illegal --- Totally Illegal

19. Origins and Roots of Informal Economy Why does it exist?

20. Origins and Roots of Informal Economy 1.Traditional and often Pre-Colonial Economy and Society, e.g. Pre-Colonial traditional economic activities …. Mixing with modern types of activities as well 2. Slow Growth of Employment in the Formal Economy (due to excessive capital intensity, economic stagnation ……….)

21. 3. State Controls and Bureaucratic Regulations –Note differences among various types of societies and economic systems. - Hernando De Soto: “The Other Path” –Registration Blockages

22. Registration Blockages: Starting a Business CountryNumber of Procedures Time Required, Days Cost as % of Per Capita Income Burundi1143215.% Kenya123040.0 South Africa6226.0 Tanzania122941.5 Zambia61828.6 Zimbabwe1096432.7 Sub-Saharan Africa 1046111.4 Canada150.5% World Bank, WDI 2009, pp. 276-278

23. 3. State Controls and Bureaucratic Regulations, continued: –Regulations Labour Laws, Health & Safety Regulations, Minimum Wage Legislation, Environmental controls and rules Zoning Regulations –i.e. some IS entrepreneurs may prefer to remain “informal” to evade regulations and taxation

25. The Positives: What are they The Negatives:What are they On Balance, Impacts of the Informal Sector on the National Economy and Society

26. The Positives: 1. Production of low-cost goods and services mainly for low income people 2. Job Creation 3. Income Generation 4. Social Safety net function 5. Development of Entrepreneurship Impacts of the Informal Sector on the National Economy and Society

27. The Positives, continued: 6. Training: informal apprenticeship systems 7. Domestic Value Added (using domestic inputs rather than imported inputs) 8. Appropriate Technology 9. Foreign Exchange generation 10. Generation of Savings and Investment Impacts of the Informal Sector on the National Economy and Society

28. Impacts of the Informal Sector on the National Economy and Society (Continued) The Negatives: 1.Tax avoidance and evasion 2.Low productivity and low incomes in “Last Resort” activities 3.Minimal prospects for improvement in some low level “Last Resort” activities 4.Health & safety standards ignored 5.Environmental laws & regulations ignored

29. Impacts of the Informal Sector on the National Economy and Society (Continued) The Negatives, continued: 6. “Self-exploitation” ? ? 7. Child labour; low levels of learning 8. Links with criminal economic activities sometimes 9. Irreverence, avoidance and non-compliance with concerns of the state : a “culture of illegality”

30. Public Policy and the Informal Sector? Should governments do anything in support of micro and small enterprises? Why or why not? What types of public policy would be relevant?

31. Public Policy and the Informal Sector? Possible Supportive Policies: 1.Low cost licensing 2.Security of tenure 3.Physical security 4.MICROCREDIT 5.Basic training e.g. in book-keeping

32. Public Policy and the Informal Sector? Possible Supportive Policies, continued: 6. Technical extension services 7. Public provision of infrastructure (market stalls, water, electricity) 8. Encouragement to “graduate” to “formality”? But note aversion to paying taxes and government regulation

33. Potential Contribution of the Informal Economy for Future Development?? Replace it? OR A Foundation for Future Development?

34. 1.Development of Entrepreneurship: transferrable to other sectors and up- graded enterprises 2.Training: gradual up-grading of skills? 3.Steadily increasing productivity leading to higher incomes, one hopes 4.“Graduation” of enterprises, into the formal economy, with tax-paying and acceptance of regulations 5.Improved environmental standards Potential Contribution of the Informal Economy for Future Development??

35. 7. Better jobs and higher incomes in future 8. Increased generation of Savings and Investment 9. Foreign Exchange generation and savings (continued domestic Value Added using domestic inputs rather than imported input) 10. “Last resort” activities will diminish and disappear with the expansion of the formal economy – one hopes 12. Low productivity activities will evolve into higher productivity activities or else disappear. Potential Contribution of the Informal Economy for Future Development, continued ??

36. The Informal Sector and Future Development: Two concurrent future scenarios: 1. Some “Last resort” and “dead end” activities will diminish and disappear with the expansion of the formal economy? And –A foundation for future enterprise development and economic improvement?