Relations Between Informal & Formal Sector

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Elwin Poortman
Analyst, Netherlands

Relations Between Informal & Formal Sector

Despite the fact that the definition of the informal economy is debatable, a lot of scholars focus on how an informal sector can be formalised. In particular these scholars research to what extent there are linkages between an informal and formal sector. Proper understanding of the characterstics of possible linkages is vital for organisations and governments that aim to change a specific informal sector, and during the years the debate has seen many different theories towards informal formal sector linkages. These theories can be categorised into three main approaches:
  • DUALISTIC APPROACH: this approach argues that informal sectors supply different markets than formal sectors. Therefore the informal sector acts autonomously and thus has little interaction with formal enterprises or sectors. Moreover, the presence of a large informal economy symbolizes underdevelopment. This approach is characterized by exclusion, inequality and a lack of accessibility.
  • THE LEGALIST APPROACH argues that there are strong linkages between informal and formal sectors; this relation is an incentive of the formal sector. Cost-effective behaviour exploits opportunities that lower production or transactions costs. This approach has an emphasis on the captive and exploitative relation between formal and informal industries, which implies that the linkages are characterized by an unequal power relation in which the formal sector reigns over the informal sector.
  • THE STRUCTURALIST APPROACH also argues that there are linkages between informal and formal industries. This approach reasons that the informal sector is a part of the continuum within the market, meaning that, in principle, there is no exclusion. Therefore this approach underlines a level of interdependency and complementarity, moreover it ranks the informal sector as a feature of the modern capitalist mode of production. This view suggests that the power relation between both sectors is rather equal and flows both ways.
⇒ To what extent do you think that informal markets should be formalised?

Source: Carr & Chen (2001). Globalization and the Informal Economy: How Global Trade and Investment Impact the Working Poor. WIEGO p.129.

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