Definition of Informal Economy

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Definition of Informal Economy
Elwin Poortman, Analyst, Netherlands

People that belong to the bottom part of the economic pyramid are often unable to generate income from the so-called formal economy, and therefore they aim to sustain themselves via informal economic activities. But over the last 50 years, the definition of the "informal economy", has become rather blurred, vague or even empty.
To show the difficulty of drafting a one-fits all definition, the most diverse definitions on what characterizes the informal economy, as categorized by Godfrey (2011), have been listed below:
  • The informal economy comprises unofficial economic activities that are conducted by unregistered firms or by registered firms but hidden from taxation (LaPorta & Schleifer).
  • The informal economy is unregulated by the institutions of society, in a legal and social environment in which similar activities are regulated (Castells & Portes).
  • The informal economy activities takes place largely in personal and intimate domains; reflecting the nature of the personal ties between the participants, defined by norms and institutions that are in essence non-economic (Gaughan & Ferman).
  • The informal economy comprises entities that are 1) concealed from the state accounting system; 2) small scale; 3) labour intensive, requiring little capital, and 4) locally based trading; face-to-face with friends, relatives or acquaintances in a limited geographical area (Henry).
  • The informal economy comprises transactions where the state neither provides protection nor receives a ‘cut’ therefore, the relationship between the informal economy and the state is, by definition, one of inevitable conflict (Centeno & Portes).
  • The informal economy boundaries are not so clear. Nor, for that matter, is the underground economy inhabited by a single, distinct class of citizens. One cannot truly understand the ‘shady’ economy if one sees it is as a dirty, lawless world of violence and disrepute, one that tarnishes an otherwise pristine sphere where everyone pays their taxes, obeys the laws, and turns to the government to solve disputes and maintain order (Vankatesh).
  • The informal economy's relationships are grounded primarily on social, not legal, contracts and in the developing world, on the other hand, it is simply too costly or complicated for many entrepreneurs to enter the formal economy (London & Hart).
  • The informal economy in emerging economies; firms must rely on informal institutional constraints, such as interpersonal ties, to facilitate their economic exchanges (Li, Zhou & Shao).
  • The informal economy is the set of illegal yet legitimate (to some large groups) activities through which actors recognize and exploit opportunities (Webb, Tihanyi, Ireland, & Sirmon).
All of these aforementioned definitions have their own limitations; some of them are unmeasurable or too complex, whereas others are not inclusive, or only fit in locations were the regulatory framework is accepted as the common norm to live by. All together this article depicts the challenges of defining and/or conceptualizing the characteristics of the informal economy and underlines the importance of creating clear boundaries when addressing issues concerning informality.
⇒ What would you add to the definition of the 'informal economy'?
Source: Paul C. Godfrey, P.C. (2011) Toward a Theory of the Informal Economy. The Academy of Management Annals


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