Type: Definition Essays
Sample donated: Freda Steele
Last updated: September 16, 2019
Several other authors also developed theirown definitions of the concept. Some scholars use the terms firm-centeredeconomy, 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 formalcontracts, no fixed hours, no job security and no potential benefits such aspaid sick leave or pension arrangements. Nyatanga et al., (2000) assert thatthe IS is characterised by activities that are not legally recognised and donot follow recognised official channels.
People tend to associateinformal trade with illegal activities, such as trading in drugs orprostitution, paying bribes or avoiding taxes and as such it is often regardedas something that should be eliminated in pursuit of formal trade. However, itis paramount to note that, attempting to define the informal sector usingcharacteristics opposite of the formal economy is problematic because theformal 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 theinformal sector economy activity is that the entrepreneurs who operate in itdeclare either partial amounts or no amounts of their monetary transactionswhen they should be declared. Although this is technically unlawful, it isstill considered ‘legal trading’. Anything out of the scope of ‘legal trading’,for example drug trafficking, falls outside the informal economy into thecriminal economy (Chen, 2005). From the above discussion, the basic conceptsunderlying the term informal economy are that it is outside the regulation ofthe government and it provides some form of income for those employed in thissector. It comprises of a variety of productive activities that provide alivelihood for a part of the population and it feeds into the formal economy.
The aforementioned views reinforce the notion that the conceptualisation ofinformal sector trade has various meanings and evolved over time, thus it is acontested concept. There are however three importantcompeting schools of thought that have significantly tried to explaininformality concerns and these are the dualistic, structuralist and legalistand are explained below: i. Dualistic views: Informality as negative phenomenonDualist views formal and informal economy as distinct (Hart, 1973) andperceives informality to be a uniformly negative phenomenon (Misati 2010: 222).
This school of thought does not expect the informal sector to contribute toeconomic growth, but rather emphasizes its disadvantages stemming from obsoletetechnology and insufficient human and physical capital. To the dualists, thereis a clear labour market disconnection between the informal and formal sector,and their prediction is that economic development should transform the informalsector or cause its absorption (ILO, 2002b). Quintin and Pratap (2006:18) wentfurther to propose a microeconomic model predicting that self-employment shouldfall and the average scale of operation rise as an economy develops. ii.
Structuralist views: Informality and formalitycomplementary rolesThestructuralists focus on the nature of the relationship between the twoeconomies and propose that there is a strong linkage characterized by dominanceand subordination (Castells & Portes, 1989). According to Schneider(2008:107) each of the two sectors has comparative advantages based on different factorcosts. This complementary relationship allows the informal sector to satisfyunmet demand for urban services and small-scale manufacturing, with positiveeconomic repercussions (Asea 1996: 164). For example, the informal sector canincrease the competitiveness of formal firms by providing them with cheaplabour via subcontracting (Bello 2002:5; Schneider 2008: 107). iii. Legalistic views: Informality as a way out torealising potential away from restrictive regulations ` Thelegalists school of thought present informality as a response not to the coststructure of the production process, but to the presence of government-induceddistortions (De Soto 1989).
They argue that the informal economy has thecapacity to grow but is hampered by a lack of capital and by restrictiveregulations that have to be complied with (De Soto, 1989). A vast group oftheorists now ascribes to the view that in an overly controlled environment,workers voluntarily opt out from the formal labour market to escape the burdenof 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 andPratap 2006). Given the state’s incapacity to satisfy the basic needs of itspeople and to provide secure property rights, informality is seen as a channelthrough which micro-entrepreneurs can liberate their creative potential (Castellsand Main 1989).Boththe structuralist and legalist schools understand informal employment to be anoptimal choice made by rational actors in light of prevailing economic andinstitutional conditions. Both approaches contribute to this researchphilosophy that envisages informality to enhance economic outcomes.