Several to note that the only unlawful characteristic

Several other authors also developed their
own definitions of the concept. Some scholars use the terms firm-centered
economy, underground economy, subterranean, shadow, informal, hidden, parallel,
black, clandestine, second and household market to explain the IS, (Geertz,
1963; Smithies, 1984; Feige, 1989). (Tamukamoyo, (2009)  suggest that the IS is untaxed, has no formal
contracts, no fixed hours, no job security and no potential benefits such as
paid sick leave or pension arrangements. Nyatanga et al., (2000) assert that
the IS is characterised by activities that are not legally recognised and do
not follow recognised official channels. People tend to associate
informal trade with illegal activities, such as trading in drugs or
prostitution, paying bribes or avoiding taxes and as such it is often regarded
as something that should be eliminated in pursuit of formal trade. However, it
is paramount to note that, attempting to define the informal sector using
characteristics opposite of the formal economy is problematic because the
formal sector on its own does not have a straight forward definition, (Potts, 2007).
It is also pertinent to note that the only unlawful characteristic of the
informal sector economy activity is that the entrepreneurs who operate in it
declare either partial amounts or no amounts of their monetary transactions
when they should be declared. Although this is technically unlawful, it is
still considered ‘legal trading’. Anything out of the scope of ‘legal trading’,
for example drug trafficking, falls outside the informal economy into the
criminal economy (Chen, 2005). 

From the above discussion, the basic concepts
underlying the term informal economy are that it is outside the regulation of
the government and it provides some form of income for those employed in this
sector. It comprises of a variety of productive activities that provide a
livelihood for a part of the population and it feeds into the formal economy.
The aforementioned views reinforce the notion that the conceptualisation of
informal sector trade has various meanings and evolved over time, thus it is a
contested concept. There are however three important
competing schools of thought that have significantly tried to explain
informality concerns and these are the dualistic, structuralist and legalist
and are explained below:

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Dualistic views: Informality as negative phenomenon

Dualist views formal and informal economy as distinct (Hart, 1973) and
perceives informality to be a uniformly negative phenomenon (Misati 2010: 222).
This school of thought does not expect the informal sector to contribute to
economic growth, but rather emphasizes its disadvantages stemming from obsolete
technology and insufficient human and physical capital. To the dualists, there
is a clear labour market disconnection between the informal and formal sector,
and their prediction is that economic development should transform the informal
sector or cause its absorption (ILO, 2002b). Quintin and Pratap (2006:18) went
further to propose a microeconomic model predicting that self-employment should
fall and the average scale of operation rise as an economy develops.

Structuralist views: Informality and formality
complementary roles

structuralists focus on the nature of the relationship between the two
economies and propose that there is a strong linkage characterized by dominance
and subordination (Castells & Portes, 1989). According to Schneider
(2008:107) each of the two sectors has comparative advantages based on different factor
costs. This complementary relationship allows the informal sector to satisfy
unmet demand for urban services and small-scale manufacturing, with positive
economic repercussions (Asea 1996: 164). For example, the informal sector can
increase the competitiveness of formal firms by providing them with cheap
labour via subcontracting (Bello 2002:5; Schneider 2008: 107).

Legalistic views: Informality as a way out to
realising potential away from restrictive regulations `           

legalists school of thought present informality as a response not to the cost
structure of the production process, but to the presence of government-induced
distortions (De Soto 1989). They argue that the informal economy has the
capacity to grow but is hampered by a lack of capital and by restrictive
regulations that have to be complied with (De Soto, 1989). A vast group of
theorists now ascribes to the view that in an overly controlled environment,
workers voluntarily opt out from the formal labour market to escape the burden
of government regulations, cumbersome bureaucracy, and high transaction costs
(Loayza 1997; Johnson, Kauffman and Shleifer 1997; Enste and Schneider 2000;
Klinglmair and Schneider 2004; Loayza, Oviedo and Servén 2005; Quintin and
Pratap 2006). Given the state’s incapacity to satisfy the basic needs of its
people and to provide secure property rights, informality is seen as a channel
through which micro-entrepreneurs can liberate their creative potential (Castells
and Main 1989).

the structuralist and legalist schools understand informal employment to be an
optimal choice made by rational actors in light of prevailing economic and
institutional conditions. Both approaches contribute to this research
philosophy that envisages informality to enhance economic outcomes. 


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