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Informal economies around the world: measures, determinants and consequences

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• Published: 12 May 2018
• Volume 9 , pages 221–237, ( 2019 )

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• Ceyhun Elgin 1 &
• Ferda Erturk 2  

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This paper aims to present a comprehensive survey of the literature on the economics of informality. First, we focus on studies that aim to provide measures of informality using different methodologies. Next, we review empirical and theoretical studies focusing on the determinants as well as effects of informality. Finally, we conclude by summarizing the main findings of the literature, evaluate several policy recommendations based on our review as well as suggest some future research directions. Even though the literature on informality is growing at an increasing rate, future research efforts are very much needed, both on the theoretical and empirical side. Efforts have to be made to improve measurement of informal sector size as well as developing theoretical mechanisms for determinants and effects of informality that can be supported by empirical analysis.

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Informal Sector

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Elgin, C., Erturk, F. Informal economies around the world: measures, determinants and consequences. Eurasian Econ Rev 9 , 221–237 (2019). https://doi.org/10.1007/s40822-018-0105-5

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Received : 27 December 2017

Revised : 24 April 2018

Accepted : 27 April 2018

Published : 12 May 2018

Issue Date : 01 June 2019

DOI : https://doi.org/10.1007/s40822-018-0105-5

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                          The Characteristics of Informal Sector.              The concept of "informal sector" was firstly introduced by the International Labor Organization (ILO) in 1973, in its official report of its comprehensive employment mission in Kenya. However, the concept itself, until now, is still in debate. The most difficult thing in the debate is to make an agreement in setting definite boundaries between the informal sector and the formal sector (Dijk, 1998, 179; Whyte, 1991, 34). There are many different perceptions and definitions in determine the scope and, even, the characteristics of the informal sector. This discussion does not focus on the debate, but it rather aims to accomplish a general overview of the informal sector as a basis of this project analysis.              However, it is interested to refer the characteristics of the informal sector given by Michelle Hansenne, the Director-General of ILO in his speech-report (ILO, 1991, 4), as follows:.              1. It is a very small-scale unit producing and distributing goods and services. The measurement limit of a small-scale is different from one's opinion to others. It can be the small scale on its place, capital, number of labor, or others. .              2. It consists largely of independent, self-employed producing in mostly urban areas in developing countries. Some, such as Dijk (1998, 179), call this characteristic as an unorganized small business. .              3. Many of them employ family labor and/or a few hired workers or apprentices. Some state, such as in Hansenne (1991, 7), Bozzoli (1991, 15) and Whyte (1991, 35), that women of the family has an important role in the their informal sector activities. .              4. It operates with very little capital or none at all. However, the limit of the capital is not clear, as a country to others has its own economic condition.              5. It utilizes a low and irregular incomes and highly unstable employment. .              The sector could be called as "informal" as it is, of course, out of the formal sector characteristics.

• Page 1 of 4

Essays Related to The Informal Sector

1. reason for the growth of informal economies.

Firstly, I will provide a brief definition of informal and formal economies. ... The formal sector is our capitalistic principles that regulates our market. ... industrial expansion would result in increased wage sector employment on the basis that there was inevitably a positive relationship between the growth of output, employment and labour productivity, while the "filter down" effect would lead ultimately to the redistribution of resources and income throughout society ( p. 1042). ... The informal economy gives multinational corporations the opportunity to subcontract assignm...

• Word Count: 1658
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2. Establishing A Sustainable Economy In Kosova

People engaged in informal economy i.e. doing illegal business and evading taxes have been operating in Kosova with almost complete impunity in the last four years. In this way, they are doing a huge damage to the Kosova Consolidated Budget (KCB) and especially to the public sector. ... More protests and social unrests can be expected in the future if the budget share for the public sector is not increased. ...

• Word Count: 359
• Approx Pages: 1
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3. Feminism and Globalization

The feminization of the proletariat in the informal economy results in the devalorization of women's labor in the "strategic nexus of the global economy (86). ... The female characters of Devi's short story, exposes the invisible sector of labor among subaltern women. ... The Chinese ethnic minority control the informal labor in the Philippines via the exploitation of the ethnic Filipino population. Sassen's feminist critique on the gendered and racialized informal economy makes invisible a "whole range of workers, firms, and sectors that do not fit the prevalent images of globa...

• Word Count: 2299
• Approx Pages: 9

4. Mayo And Roth.

As managers played a bigger role, informal norms were created where social factors such as cooperation, Mgt. supervision, working conditions and informal groups became important. ... Roethlisberger and Mayo also mention the importance of informal groups within an organization, yet they fail to see how it can hurt an organization. When informal groups are created there is always a good possibility of subcultures or countercultures to form within these informal groups. This causes a lack of communication within the organization and may even escalate into unfriendly competition between sectors th...

• Word Count: 657
• Approx Pages: 3

5. Communication Systems in Large Organisations

Informal communication systems But as well as the formal methods of communication all businesses have informal communication networks that are not controlled by senior management. ... All of this leads to informal passing of information. ... It is important to point out that informal channels can both help and hinder formal communication, but one definite advantage of informal communication is that, when used it can bypass layers of hierarchy. ... These networks need to complement the traditional hierarchical organisational structures which are still found as the sole communication network ...

• Word Count: 1737

6. Structural Adjustment Policies In Urban Turkey

Namely, stabilization and structural adjustment policies have led to falling real wages, increased prices for some wage goods and loss of public sector jobs, with knock-on effects on the rest of the economy. ... Moreover, beside using methods external to the household relations like, ethnic or illegal networks, sometimes under the pressures of structural adjustment households may pushed to work under the insecure and harsh environments of informal sectors of their own society. For example, Alan4 argues, that the increasing pressure of structural adjustment policies the depressed urban workers ...

• Word Count: 2575
• Approx Pages: 10

7. Dumping And Tariffs

As long as Free Trade is around restricted trade will exist. 2) Dumping is an informal name for the practice of selling a product in a foreign country for less than either; a) the price in the domestic country or b) the cost of making the product. ... By promoting the reduction of tariffs in the sectors of the economy that are important to the US, industries will be able to expand and grow. ...

• Word Count: 366

8. Academic Research of Economic Journal

Stress testing has become an essential and very prominent tool in the analysis of financial sector stability and development of financial sector policy. ... Informal organizations do not want to act in a fashion complementing state-driven social protection. They reject the state and charity activities of the business sector, they want to treat the beneficiaries of their activities as participants in the collective production and distribution of social assistance, and view social solidarity in the context of the economic crisis as part of a wider political movement to construct alternative form...

• Word Count: 1048

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The Importance of the Informal Sector in South Africa

South Africa, a country of immense economic potential, has a diverse and thriving informal sector that plays a significant role in the nation’s socioeconomic fabric. The informal sector, often overlooked, encompasses a range of economic activities that are not formally regulated, taxed, or recorded. This sector includes street vendors, home-based businesses, small-scale entrepreneurs, and many other economic activities that are essential to South Africa’s development. In this article, we explore the importance of the informal sector in South Africa and its contribution to the country’s economy, employment, and social development.

Understanding more about the Informal Sector

In South Africa, the informal sector refers to economic activities that are not regulated or registered with the government. This includes:

• self-employed individuals,
• small business owners, and
• street vendors who operate without formal licenses or permits.

The informal sector is characterized by its flexibility , low barriers to entry, and reliance on cash transactions.

In contrast, the formal sector in South Africa refers to the regulated economy that is governed by laws and regulations. This includes businesses that are registered with the government, pay taxes, and comply with labor laws. The formal sector is typically associated with higher-paying jobs, greater job security, and access to benefits such as pensions and health insurance.

The informal sector in South Africa has a long historical evolution. During the apartheid era, non-white South Africans were excluded from the formal economy and forced to create their own economic opportunities through the informal sector. This trend continued after the end of apartheid as many individuals struggled to find employment in the formal economy due to high levels of unemployment and a lack of skills and education.

Today, the informal sector in South Africa is estimated to employ over 2.5 million people and accounts for a significant portion of the country’s GDP. However, informal workers often face challenges such as low pay, lack of job security , and limited access to social protections such as healthcare and retirement benefits.

Economic Contribution

• GDP Boost: The informal sector contributes an estimated 10-15% of South Africa’s Gross Domestic Product (GDP), which is a substantial percentage considering its informal nature. This sector is an important driver of economic growth and can be seen as a pillar of resilience during times of economic downturn.
• Small Business Incubator: The informal sector provides an environment for entrepreneurs to test their ideas and build a foundation for their businesses. Many formal businesses in South Africa have their roots in the informal sector, having transitioned as they grew and became more established.
• Foreign Direct Investment: The informal sector is also a source of Foreign Direct Investment (FDI), as it attracts investors looking for untapped markets and opportunities. FDI in the informal sector helps stimulate economic growth and job creation.

Employment Opportunities

• Job Creation: The informal sector is a significant employer in South Africa, accounting for around 30% of total employment. For many people, particularly those with limited formal education or skills, the informal sector is often the only viable employment option.
• Inclusive Growth: The informal sector is a major source of income for marginalized communities, such as women, youth, and migrants. By providing these groups with opportunities to earn a livelihood, the informal sector supports inclusive growth and poverty reduction.

Social Development

• Poverty Alleviation: The informal sector plays a critical role in poverty alleviation by providing an essential safety net for many low-income households. In South Africa, a substantial number of households rely on income from informal work to supplement their earnings and meet basic needs.
• Skill Development: Informal sector activities often involve acquiring valuable skills that can be transferred to formal employment opportunities. By offering the chance to develop a range of practical skills, the informal sector helps equip individuals for success in the labor market.
• Community Building: The informal sector fosters social cohesion and community development by encouraging local production, consumption, and trade. Informal markets can bring people together, stimulate cultural exchange, and promote a sense of belonging among community members.

The informal sector in South Africa holds significant importance in the country’s economic, employment, and social development. This often-overlooked sector has the potential to drive inclusive growth, reduce poverty, and contribute to a more equitable and sustainable society. To fully harness the potential of the informal sector, the South African government and stakeholders should adopt policies and programs that facilitate its growth, formalization, and integration into the broader economy, ultimately benefiting the nation as a whole.

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