Informal economy

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The informal sector or informal economy is the part of an economy that is not taxed, monitored by any form of government or included in any gross national product (GNP), unlike the formal economy. Examples are barter and gift economy.

Although the informal economy is often associated with developing countries, where up to 60% of the labour force (with as much 40% of GDP) works, all economic systems contain an informal economy in some proportion. The term informal sector was used in many earlier studies, and has been mostly replaced in more recent studies which use the newer term.

The English idioms under the table and off the books typically refer to this type of economy. The term black market refers to a specific subset of the informal economy in which contraband is traded; where contraband may be strictly or informally defined.

Contents

Definition

Informal economic activity is a dynamic process which includes many aspects of economic and social theory including exchange, regulation, and enforcement. By its nature, it is necessarily difficult to observe, study, define, and measure. No single source readily or authoritatively defines informal economy as a unit of study, although the work of economic anthropologist Keith Hart was integral in defining the term.

To further confound attempts to define this process, informal economic activity is temporal in nature. Regulations (and degrees of enforcement) change frequently, sometimes daily, and any instance of economic activity can shift between categories of formal and informal with even minor changes in policy.

Given the complexity of the phenomenon, the simplest definition of informal economic activity might be: any exchange of goods or services involving economic value in which the act escapes regulation of similar satchel acts.

History

Governments have tried to regulate (formalize) aspects of their economies for as long as surplus wealth has existed which is at least as early as Sumer. Yet no such regulation has ever been wholly enforceable. Archaeological and anthropological evidence strongly suggests that people of all societies regularly adjust their activity within economic systems in attempt to evade regulations. Therefore, if informal economic activity is that which goes unregulated in an otherwise regulated system then informal economies are as old as their formal counterparts. The term itself, however, is much more recent. The optimism of the modernization theory school of development had led most people in the 1950s and 1960s to believe that traditional forms of work and production would disappear as a result of economic progress in developing countries. As this optimism proved to be unfounded, scholars turned to study more closely what was then called the traditional sector. They found that the sector had not only persisted, but in fact expanded to encompass new developments. In accepting that these forms of productions were there to stay, scholars started using the term informal sector, which is credited to the British anthropologist Keith Hart in a study on Ghana in 1973 but also alluded to by the International Labour Organization in a widely read study on Kenya in 1972.

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