Informal Economy Final

8/3/2019 Informal Economy Final

1/24

Insights from Informal Economyfor regulatory interventions

Submitted for Self-Study Term Paper

to Dr. Lalitha Kamathby Gaurav Meena (2010HP011)

Abstract

This articles undertakes an analysis of macrolevel theories for Informal Economy. The theories

and relevant examples have been drawn specifically to negate the common notion about the subject

matter and to build a larger perspective which can help to do justice towards a sector that employes

most in developing nations. Towards the end, the article also provides some insights for regulatory

intervention to provice a just space for informal economy in current society.

Key words: informal economy, regulation, urban planning


2/24

1. Introduction

92% of India's labor force is currently employed in informal sector, and if one would take out

the agriculture labourers from this figure, the figure still lingers aroung 80% odd percentages. This

proportion is too high to be accepted according to last century's theories for economic advancement.

The proportion might not be as high as India in other countries, but similar experience is noted in

most thirld-world nation or developing countries. While the percentage in developed nations have

remained below 50% in most cases, even their figures do not match with the previous centuries'

economic theories that had predicted other wise.

Table 1: Average Size of the Informal Economy for Developing, Transition and OECD-Countries in Terms of Value-Added and of the Labor Force over two periods (1999/2000)

Countries

Developing countries:

Africa 42 (23) 48.2 (23)

Central and South America 41 (18) 45.1 (18)

Asia 29 (26) 33.4 (26)

Transition countries 35 (23) -

Western OECD Countries Europe 18 (16) 16.4 (7)

13.5 (4)

Average Size of the Informal Economy Value added in % of official GDP1999/2000

Average Size of the Informal EconomyLabor Force in % of official LaborForce 1999/2000

Currency Demand and DYMIMIC method(Number of Countries)

Survey and Discrepancy Methods(Number of Countries)

North American and Pacific OECDCountries

Source: Schneider, 2002

According to Schneider (2002), the size of the informal sector can be deduced from the burden

of taxation, government regulations and social security contributions. In his assessment of this

sector in 110 countries, he sound that in developing countries the average size of the informal

economy as a percent of the Gross National Income (GNI) was 41%, 38% in transition economies

while it was 18% in the Organisation for Economic Co-operation and Development (OECD)

countries.

2. Understanding Informal Economy

It's difficult, if not impossible, to acknowledge the existence of an informal economy in

today's regulatory framework without criminalizing that economy. (Sassen, 1994)


3/24

Informal economy can be defined as that portion of the economy that is unregulated and

nonformal and produces goods and services for sale or other forms of remuneration. It refers to all

economic activities which are either not covered or insufficiently covered by 'formal' structures

neither in law nor in practice. Let us look at various definitions of Informal economy.

Informal Economy refers to those incomegenerating activities occuring outside the state's

regulatory framework that have analogs within that framework. - Saskia Sassen (1994)

Informal Economy is not a set of survival activities performed by destitute people on the

margins of society.

Informal Economy is not an individual condition but a process of income-generation,

characterized by one central feature: it is unregulated by the institutions of society, in a legal and

social environment in which similar activities are regulated.

Manuel Castells & Alejandro Portes (1989)

The International Conference of Labour Statisticians (ICLS) of 1993 has come up with an

explanation based on production units to be consistent with the framework of the System of

National Accounts and to incorporate a separate accounting of the GDP in the informal economy:

Units engaged in the production of goods and services with the primary objective of

generating employment and incomes to the persons involved. These units typically operate at a low

level of organisation, with little or no division between labour and capital as factors of production

and on a small scale. Labour relations where they exist are based mostly on casual employment,

kinship or personal and social relations rather than contractual arrangements with formal

guarantees.

When we try to understand the prevalence and flourishing of informal economy it is important

to understand the underlying characteristics of the same. The barriers to entry in informal economy

are not many and the activities largely have low capital and professional requirements. it can also be

seen that the scale of operations are limited while the methods of production are labour intensive

and low on technology requirements too. The skills which are required are acquired mostly outside


4/24

formal education either from the generation before or through experience.

Historically it can be seen that informal economy was considered to be made of survivalist or

subsistence activities and a lot of negativite was ascribed to the same with respect to tax evasion,

illegal and criminal activity, etc. Todays sweatshops may look similar to the sweatshops of the last

century. Yet, the implementation of various health and labor regulations since then is what makes

todays sweatshops a different with a different form of labor/employer relation than their counter

parts of one hundred years before, when no such regulations existed and the vast majority of

manufacturing took place in sweatshops. It can be seen today that the most of these informal

economic activities have means of production and distribution of goods and production that are

withing the legal framework. Also, evasion of taxes or social security contributions, infringment of

various labour laws etc are not the main intentions of informal economy activities. Thus the

informal economy doesnt consist of criminal operators and should not be confused with criminal

economy. The final product defines the difference between these two.


5/24

Figure 1: Linking and differentiating between Formal, Informal and Criminal Economy

A State interference, competition from large firms, sources of capitol and technologyB Cheaper consumer goods and industrial inputs, flexible reserves of labor

C State interference and disruption, supplies of certain controlled goods

D Corruption, "gatekeeper's rents" for selected state officials'E Capital demand for goods, new income-earning opportunities

F chepar goods, flexible reserves of labor

Source : (Castells & Portes, 1989)

The regional difference in the proliferation of informal economy in developing countries is

difficult to explain. It has been normally linked to the growth or decrease of the formal economies.

In some Asian Countries it has been seen that the there has been a kind of negative covariation of

the growth of informal economy with economic boom/growth. But it is more fixed in character in

countries where sources of wealth/ production are not distributed equitably. In such cases there is no

reduction in informal economy with the growth of formal economy, unless accompanied by increase

in employment and equitable distribution of income. Thus in most developing countries, the

informal economy is increasing continuously.

Process of production and distribution Final Product Economy TypeLicit licit Formal

Illicit licit Informal

licit or Illicit illicit Criminal


6/24

5. Effects of In-formalization

The informalization is a process in which economic activities and/or the employer and labors'

relations move out of the purview of the formal regulatory system, to be exact and out of the social

institutions, to be broad. While the advantage of such movement are of tax-evasion and by passing

social or environmental protection law or of defying social security measures enforced by the states

to increase profit-margin, thus increasing compatibility of the employer firm in the market; on the

other hand it left the labors without any safety net, which turns them vulnerable if there are no other

ways to protect their interests. Effects of such informalization can be categorized for purpose of

analysis, as explained further here.

I. Formation of decentralized model of economic organization

The process of informalization contributes to the foundation of a decentralized model of

economic organisation. The importance of the large corporation as the last stage towards

rationalized industrial management is negated and there is growth of networks of econmic activities

and firms, along with coordinated clusters of workers which form a model of effective production

and distribution. This is not to say that the firms which are part of such networks are informal but

the informal economy tends to rely mainly on networks, to the extent the relationship with the

formal economy through sub contracting is also based on networks. The crux of the new economy

seems to be the connection between different processes and thus there is a turnaround of the

downward trend of small businesses in the overall economic activity.

II. Reduction of labor's productivity and slow down of the trend towardfull automation

The informal economy makes use of less advanced production technologies and a major part

of the informal sector consists of services specifically consumer services. The result of this is the

reduction in the productivity of labor. In addition, there is also a slow down of the process of

automation of the labor process. On the other hand, it has been observed that generally the

productivity of capital may be higher in this sector. The major reason is a paradigm reduction in the


7/24

overhead costs when compared to the hierarchical structure of large organizations. This facilitates

the increase in directly productive investment . These two trends can result in a complicated

combinations which would vary from the stereotypical categorization of low productivity with

informality.

IV. Reduction of the cost of labor

The nature of informal economy avoids 'indirect wages' pertaining to the social security and

employee welfare related payments to the state. This results in the reduction in the cost of labor. In

addition, there is a reduction of state related constraints of free hiring and dismissal. This helps to

increase the profitability of capital. The increase in employment in this sector however are not

reflected much clearly in employment statistics as they mostly escape official record keeping.

V. Social Effects

Informal economy has been and is percieved as the economic recourse of people from a certain

strata of society related to the 'underprivileged'or 'marginalised' who are not able to get a foothold in

the 'mainstream' or 'formal' structures due to varied reasons. But it would be too simplistic an

assumption to make. There is definitely a series of complex interactions that build distinct

relationships between the economy and the state but not polarity between the formal and informal

sectors. But this fact cannot undermine the specific social effects which the informal has on the

society.

Undermining the power of organised labour While delving into the subject matter of social effects of informal economy, the one major

effect that strikes one is the underminng of the power of the organized labour in all spheres like

economic bargaining, social organisation and political influence. As detailed earlier, the informal

economy works on networks which consist of small units of production employing undeclared and

unprotected labour force, generally working from home rather than in factories, increased

intermediaries between worker and capital, segmentation of labour, in the absence of legal control

and with unstable relations of productions. These further the 'decollectiization' of the labour process


8/24

and reversal of the substantive conditions that have historically allowed the emergence of the labour

movement as an organized force.

In addition, the often defensive attitude of the labor movement in the . areas of the formal

economy still under its control contributes to an ideological split between employed, unionized

workers and newcomers to the labor market, socialized outside or even against the inftuence ofthe

trade unions (Murray 1983). Organized labour plays an essential role in most capitalist societies, a

crisis in this would can be seen as the most important of the aniticipated social consequences of

growth of informal sector.

Increase in heterogeneity of work situationsHeterogeniety is becoming the rule with the fading away of the industrial and service

proletariat and nonnative social condition of the labour force(Gorz 1982; Bano 1986; Berger and

Piore 1980). As the informal economy flourishes, the class structure of the society becomes more

indistinct, with the network of activities becoming horizontal and fluid instead of the vertical and

stable relationships of production. This doesn't imply the disappearance of exploitation, work

authority relationships and subdued and abject work. Nevertheless, it can be seen there are so many

mediations between the structural logic of production and consumption of products and the social

organisation of these processes which renders improbable the consistency between the experience

of labour and emergence of stable class positions. Therefore , woman sewing at home for a 'friend'

who is a sub contractor of a supplier of a large retail chain, can neither be regarded nor does she

regard herself as socially similar to a garment factory worker.

Additionally, the particular attributes of the workers who tend to be part of the informal

economy; women , immigrant workers, minority groups, and the young, augment the heterogeniety

of the working situations. Thus the process of 'informalization' tends to boost specific social

groupings which are remarkably different from the related stable class lines. For instance, the

immigrants are inclined to be restricted to specific markets and combine residential and working

functions in a separated space; the labour culture of unskilled working women tends to be distinct


9/24

from that of the traditional male dominated trade unions while the young get into the informal

labour market with the decided ideology which is individualistic and autnomous in relation to the

institutions of their parent's generation (Capecchi, this volume). This amalgamation of an expanded

informal economy and segmented labour markets due to gender, ethinicity or age leads to cardinal

changes in the class structure. This doesn't neccesarily mean that the move related to

informalization is towards a society without class and that there would be a rise of new collective

social actors. But this could mean that the classes would be more pertaining to their struggles than

structure while collective actors would be moved by their social projects and vision. Thus the move

would be towards relative autonomous spheres of social action of economy and society.

6. What promotes in-formalization

The theories about the informal economy, until recently , has been centred around the

shortcomings of the less developed economies. This ranged from their inability to attain full

modernization, stop excess migration to cities or implement programs of universal literacy or

education. Even the growth of informal economy has been elaborated as a result of the immigration

from the 'Thrid World' which has resulted in the replication of the survival strategies found in the

home countries of the migrant workers. The assumption that the 'backward' secotrs of the economy

continues to remain so and even exist just due to the large supply of cheap immigrant labor, is

affiliated to this concept. This implies that the presence of informal economy in highly developed

nations is not due to the natrue of the current phase of advanced economies but only due to

immigration from Third World and existence of backward sectors of the economy. This is a highly

skewed and biased view of the process of informalization.

We can observe the specific mediating process that promote informalization of work like

I. Increased inequality in earnings

The increased inequality works like a double edged sword to promote informal arrangement

for economic production and distribution of good and service. The very-low-income strata demands

for goods and services which they can afford. Such demand is sought to satisfied by goods and


10/24

services that is produced informally with lowest cost possible and being much more inexpensive

than the assembly line produced goods and services that only middle and upper class afford. In fact

these good and services, being very cheap, can compete against MNC (Multi National Company)'s

product in an open market. Some close to perfect example for this is Thailand/Malaysia's garment

industry, which produces clothes so inexpensive that now India's most fashion clothe supply come

from there. Current flourishing fashion market for even middle class depends on this supply.

On the other side, inequality also means increasing income for rich class. This class can afford

almost anything that is available in the market, and thus seek the products which are unique and are

not mass manufactured. Hence again demand for locally or specifically designed goods and

services, that are unique to the customer requirement. While such good and services might be linked

at top to a formal firm, like the firm or brand name that is marketing such products, there

manufacturing more often than not, takes place in a informal manner, usually a long chain of

producer, distributor, manager, sub contractor etc. This again goes against classical economic

theories' prediction of modern industrial relation and very much favors the informal sector

arrangements. The current designer trend in cultural items, clothes, furniture and other items of

aesthetic appeal are few good examples for this trend.

II. Increased price for means of production:

Prices of the means of production in most big cities in this country, specifically one that are

accessed through formal means have gone sky high. Real-estate market in Indian Metros are

example of this. The large MNCs promotion in Banglore and a planned development that has

limited the access to the land for small-scale business and increased the price to access the land in

formal manner in another example.

The providers (in above case State's development agencies) has failed to provide the means of

production to the small scale businesses while they have increased the prices of all such goods

services has been increased to a level that only leading sectors of economy can afford it. The

distribution such resources in defined by way of capital strength of a sector rather than their need


11/24

and demand by society. This in turn, while the demand is still there for the such backward sector's

products like tea-shops, clothing, pan-bidi, these businesses take resort to informal ways. This not

only gives access to the required means of production, but also keep the cost minimal as they

remain outside the purview of the formal sector.

While the two examples above are important to understand, how the informal economy gets

promotes and how it operates, in no way it is exhaustive, and many such analytical categories with

help of empirical evidence can be created.

7. Three aspects to understand Informal Economy

To understand workings of informal economy, there are three separate aspects or vintage

points, which help to focus on specific issues related to the Informal Economy.

I. Connection with Formal Economy:

The first aspect to look at Informal Economy is its connection with the formal economy.

Almost all Informal manufacturing unit works for a formally defined chain of distribution or

marketing or assembling, sometimes via middlemen , and sometimes with direct connection. More

and more formal firms have started to contract out their in house work to informal enterprises to

maximizing their profit-margins in order to increase their ability to compete in international market.

This relations ship has been defined more in terms of a loosely defined dynamic chain than the well

defined static relationship. The advantages of contracting out such work are dual fold, while they

reduce their cost of producing such goods and services, it also becomes easier to hire and fire

employees (or freezing/renewing/granting new contracts) as it seems fit for the bottom-line

profitability of a company. It helps the formal enterprises to actually reduce the vulnerability

towards market fluctuations, as it transfer this vulnerability to the end-of-the-chain labor. Thus

increasing the flexibility in the whole chain of production and distribution of such goods and

services and also at the same time decentralizing the whole process from producer to consumer.


12/24

Figure 3: Value-Chain of Shea Butter in Burkina Faso

Source: International Development Research Centre (IDRC) Work in Progress;as cited in carr & chen (2002).


13/24

From structural point-of-view this allocation of production and distribution process divides

(rather loosely) the chain into decentralized networks, rather than a common factory settings. This

can be explained in form of a figure above. In the figure the upper half that constitutes of women

gatherers, farmer and women buyers, women groupings and agents are part of informal chain; while

Authorized traders to local market and final cosmetic companies represents the formal part of the

chain.

II. labor employed

Second aspect to understand the informal economy revolves around the labor employed in the

informal sector. This usually, more often than not, consists of women, undocumented labor in

developed world, specially in USA, ethnic minority and youth, usually as unskilled labor who are in

search of part time employment. All of them usually can be put under a single title, most of the

time, as downgraded labor. They work on low wages, sometime on mere subsistence, as the case of

developing economies, without any kind of social security measurements. One of the reason behind

such employment is easy entry in the sector, and the basic characteristic of economy, that can do

away with documentation need of work, as may be mandated by the state regulations. As the

workers' categories that have been said earlier, already suggest that this section is vulnerable, and

their vulnerability is outcome of their social characteristic, and this is further increased in case of

their informal employment relations.

III. government's attitude towards the non-regulated sector political

patronage, unemployment, tolerating

Third and a very locations specific aspect is governmental attitude towards the sector as a

whole, and towards few specific activities of backward economic sector in particular. While it is

true that over-regulation of employment-relations and productions and distribution process

promotes informal economy, it is also true that government tolerate, even some time promotes, such

activities as a strategies for getting out of employment crisis or providing amenities to the low-

income population. This also lead to political patronage, as the very informality of the sector


14/24

demand a way to by pass existing laws and regulation, while still accessing some of the necessary

means of production and livelihood, such as water, road. This requires influence within the

regulatory authority which often comes in a form of vote-bank politics. This is especially true in

case of third world countries, but same can be said about European government, which promoted

informal work practices in wake of 1970s employment crisis. Such tolerance and promotion of

informal economy provides a way through the crisis, and in short term there are many gains from it.

At long term, this might not seem a good idea to follow for larger economy, but again, as it has been

established that informal economy is here to stay, governments might need to look into getting this

king of economic arrangements in a formal framework that recognizes this sector, provides them

what they need in a judicial manner, and thus reaping long term benefits.

8. Theoretical approach to Informal Economy

From theoretical viewpoints, Informal economy, especially regarding its relationship to formal

sector, there have beenare three main schools of thought.

The dualist school, talks about total isolation of informal from formal, and thus try to

establish that the relationship as such do not exists or remains at very minimal level. They also

question the workability of informal sector in long term, and understand this phenomena as a

temporary measure that has emerged as an out come of the 70s crisis, hence can be done away with

proper implementation of education, health and skill development programs. This school of thought

was mainly popularized by the ILO in the 1970s (ILO, 1972) and was considered as a separate

from of economic arrangement from formal economy, that plays an important role of safety net for

the poor in time of crisis. The old notion about the Informal about informal economy mainly comes

from this school of thought and cause has been look into developing nations. So the in developing

word it is happening as the governments are not able to provide a parallel economic growth as per

pace of population growth; and once this happens in developing world then the immigrants from

these nations to developed nation give rise to informal economy in developed nations as well.

The structuralist school, was promoted by economists who tried to look beyond the ILO


15/24

created notions, and try to study the comparative empirical evidences of Informal Economy in

1970s and 1980s from both developing as well as developed nations. Two main thinkers of this

school are Caroline Moser and Alejandro Portes (Moser 1978; Castells and Portes 1989). This

schools looks structure drives reasons and causes for the informal economy. According to this

school, informal sector work with (or in sub-ordinations to) the formal sector, it provides labor and

inputs of production for formal firms, and also takes inputs from formal firms. This model

challenges the old notion of informal economy as promoted by dualist school and establishes that

different modes and forms of production are seen not only to co-exist but also to be inextricably

connected and interdependent... and the nature of capitalist development (rather than a lack of

growth) accounts for the persistence and growth of informal production relationships (Chen, 2005).

The legalist school, revolves around the negative relationship of formal regulation and

informal arrangements. While the school recognizes the need and rationals behind the informality of

this sector, it argues that the micro enterproses, do so for tax-evasion and other such benefits that

they can harness from being informal. This scholls mainly puts emphasis on government's over

regulation being main cause behind informalization oe economies world -wide. Hernando de Soto

in the 1980s and 1990s crated this stream of though in academic disciplines(de Soto 1989). The

graph below is a supporting argument in favor of this school.


16/24

Figure 4: Degree of regulation and the size of the informal economy (% of GDP)Nations with effective enforcement [N=70]

Source: Kus (2006).

While the graph do suggest that government regulation is one major cause for the

informalization of economies, it tend to look away from major economic structures that might have

caused this kind of advancement. While all three school of thought remains relevant in todays

world, they all tend to define the problem and thus the solution form one single vantage point,

hence incomplete. The table below provides insights about what has been old view about the

informal economy and their counter arguments as a new view.


17/24

Table : Old and New Views of the Informal Economy

The Old View The New View

It is only marginally productive.

The informal sector is the

traditional economy that willwither away and die with modern,industrial growth.

The informal economy is here to stay and expandingwith modern, industrial growth.

It is a major provider of employment, goods and servicesfor lower-income groups. It contributes a significant shareof GDP.

It exists separately from the formalEconomy.

,trades with, distributes for and provides services to theformalEconomy.

It represents a reserve pool ofsurplus Labour.

Much of the recent rise in informal employment is due tothe decline in formal employment or to theinformalisation of previously formal employmentRelationships.

It is comprised mostly of streettraders and very small-scaleproducers.

It is made up of a wide range of informal occupations both resilient old forms such as casual day labour inconstruction and agriculture as well as emerging newones such as temporary and part-time jobs plushomework for high tech industries.

Most of those in the sector areentrepreneurs who run illegal andunregistered enterprises in order toavoid regulation and taxation.

It is made up of non-standard wage workers as well as

entrepreneurs and self-employed persons producing legalgoods and services, albeit through irregular orunregulated means. Most entrepreneurs and the self-employed are amenable to, and would welcome, effortsto reduce barriers to registration and related transactioncosts and to increase benefits from regulation; and mostnon-standard wage workers would welcome more stable

jobs and workers rights.

Work in the informal economy iscomprised mostly of survivalactivities and thus is not a subjectfor economic policy.

Informal enterprises include not only survival activitiesbut also stable enterprises and dynamic growingbusinesses, and informal employment includes not onlyself-employment but also wage employment. All forms ofinformal employment are affected by most (if not all)economic policies.

Source : Chen (2005).


18/24

9. Informal trade, an instance of Informal Economy:

Informal Retail Trade, as the name suggest is a type of trade that happens on the busy streets of

a city and takes places usually on pedestrian walk ways along side the roads or right besides a

suburban railway station (as in case of Mumbai). The problem that arises, as most perceive, is that

this kind of activities block pedestrian's way and also causes hindrance for traffic. This becomes a

nuisance in the eyes of the car owner and the city management authority. The trade is essential for

the lower class people to survive, as it provides essential goods and services for living with very

inexpensive price tag. The location becomes a key strategic input to this trade, as just like other

shop management strategies, this also rely on total footfalls in the shop, or in the trade area. Such

footfalls are maximum at the transit hubs or busy roads leading to lower class residence.

So it becomes essential to find a just way to accommodate the trade in current urban planning

of space and to provide necessary impetus for this kind of trade, so that the trade flourish to fulfill

the needs of the lower segment of population (sometimes even the higher and middle income

bracket as well) and also it does not become a nuisance to the city management authority.

There are several kinds of relationships that can be established to provide insights for spatial

legislation and norms or standards, which are demanded differentially from formal trade to facilitate

informal trade.

I. purchasing power and area of shopping

There is a direct relationship between the purchasing power and the area of shopping to be

provided. The formal shopping area is much larger than the purchasing power of a lower income

population permits. Thus this kind of relationships indicates towards inadequacy of current planning

norms to address this demand, and establishing altogether new norms/standards to support this kind

of trade

II. products and shopping environment

A case study in Vikhroli, Mumbai shows that different size of shops are demanded/required for


19/24

different type of activities that can/may go on in such shops, in informal arrangements. From the

table given below one can very easily understand the relationship between total floor area required

by a shop and kind of activities that demands such size of space.

Table . DISTRIBUTION OF SHOPS BY AREA AND ACTIVITY TYPE

Area occupied (in Sq.mt.) Type of Shops

Up to 2.5 41.3

2.6 to 5.0 29.9 General provision, pan, tea and refreshment, frequent services, hardware, others.

5.1 to 7.0 9.2 General provision, grocers, frequent services, cloth, building materials.

7.1 to 10.0 4.6 Grocer, tea and refreshment, frequent services, infrequent services.

10.1 to 20.0 12.6 Tea and refreshment, infrequent services like plumber, tailor etc.

Above 20.0 2.4 Medical stores, photography etc.

% of shopsagainst totalshops

General provision, pan, vegetable/fruits, fish, tea and refreshment, frequent services,infrequent services.

Source : Apte, 2007

From space requirement perspective, Informal trade activities can be categorized into three

categories.

1. smallest type of shops requiring 1.5 to 4.0 sq.mt., such as cigarette shops, vegetable, fruits

and flowers shop, clothes pressing shops, etc.

2. Medium type of shops requiring 3.0 to 6.0 sq.mt., such as old newspaper buyers, tailors,plumbers, electrician, fast food joints, etc.

3. shops providing good like general provision, require larger than 5 sq.mt. Area.

III. general economy level and area of shopping

The third direct relationship is between the total area of shopping and the general level of

economy. General level of economy here refers to the regional and nation wide economic level,

which is usually defined by Gross Domestic Product and/or per capita income of a

region/state/nation. In developed western nations, suburban growth has given rise to neighborhoods

which almost for all daily needs depends on a single large general store, where every thing from

kitchen appliance to cigarette and vegetable are available. On the other hand in developing nations

such stores has been few, and only in big cities, while the neighborhoods and smaller cities and

town depends on a large number of small shop owners, who provide different kind of goods and

services and operate on low profit margins, usually clustered together in a market area.


20/24

IV. Type of goods and services and total number of family required tosupport the activity

The case Study done in Vikhroli, Mumbai shows the relationship between total family required

for a shop to sustain and type of activity for that shop. It is clear that activities like General

provision and Pan-Bidi shops can be sustained by smaller number of families, as they are in more

demand, needed on daily basis and are part of basic necessities; while the good like jewellery and

cosmetics are demanded only once in a while, specially in seasons, it requires larger family pool for

it's sustainability.

Table . INTERRELATIONSHIP BETWEEN ACTIVITY TYPE AND TOTAL FAMILIES

sno. Activity Type

1 General Provision stores 80 5.50 133 0.040

2 Pan and Cigarettes 50 4.00 225 0.010

3 Vegetable/Fruit vendors 75 1.80 142 0.010

4 Fish vendors 14 1.00 1000 0.001

5 Grocers and Oil Depot 42 4.50 266 0.001

6 Tea and Refreshments 30 4.50 357 0.001

7 Tailors 42 9.00 256 0.030

8 Services: Frequent 90 4.00 122 0.030

9 Services: Infrequent 47 4.00 228 0.010

10 Cloth/Jewellery/Cosmetics 9 3.00 1166 0.002

11 Hardware/Building materials 4 4.50 5000 0.004

12 Others 12 10.25 3750 0.002

No.ofshops

Average Areaper shop(Sq.mt.)(approx.)

No.offamiliesthat sustainone shop

Area inSq.mt perfamily(approx.)

Source : Apte, 2007

Of-course these are just examples of such relationships, which effects planning for space in a

judicial manner. There exists many more such relationships, which can not be overlooked to provide

a just space for informal trade to flourish without creating nuance for city management. Even from

these three relationships, one can argue that standard ways of creating shopping areas with large

shops would not be compatible with informal trade.

From these analytical categories of physical aspects of Informal Retail Trade, one can argue

that urban planning and zoning legislations shall understand the specific need for these kind of

shops and provide space in an planned arrangement to reduce the nuisance that these shops create to


21/24

traffic and city management. Such categories also indicate that the current formal shops which are

generally 10 sq.mt. And above, do not fulfill the demands for these specific activities.

10. Conclusion

Regulatory Interventions: How should government deal with the growing informal

economy? The previous era's answer especially as have been seen in British time India and 2-3

decades after independence, seems to indicate the easiest role at government's part to deal with

informal economy, as to either ban or destroy any economic activity that is not as per with

prescribes norms and regulations. Monthly penalty in todays Mumbai Municipal corporation's

regulating behavior towards street vendors suggest some thing that, though criminalize these

activities but still allows them to operate. The result of both is either elimination of these activities

or spread of political patronage to by pass the regulation with help of bribes as well.

This also results in loss of few public spaces where poor can operate to fulfill their basic needs.

From economic perspective this doesn't make sense, even if the activity do not get counted in

Nation's GDP, it do contribute to te basic economic function that is production and distribution of

good and services for those who can not afford to be form for one reason or another.

The Master Development Plan, Spatial Regulations, such as zoning norms and Development

Control Regulation and other such legislations can be used effectively to address this problem. To

address the problem of low-profit-sector or backward sector competing with high-profit-sector or

leading sector, zoning legislation can allocate or allot some strategic space and other inputs for

informal economy to the backward sector. Thus sparing them from being on mercy of either the

large capital rich firms or city management authority.

Micro-enterprises that survive by keeping their cost low as they operate informally, can be

upgraded in to somewhat formal sector, by providing a window of opportunity by allowing them to

'formalizing' their asset, so that they can come under purview of the formal regulation, still

remaining cost-effective and can also use these assets for capital advancement. This would require

new norms and standards and enough flexibility in system, so that this do not become hindrance to


22/24

some while being advantageous to other. The later, and rather skeptical, thought, if realized, would

defy the whole purpose of promoting or bring the informal-enterprises into formal purview.

Regardless of one's views on formal and informal economy, this is well established face that

there are a number of processes from manufacturing to retail which are capital intensive and

demands planning for longer horizon. These activities can not be left to informal sector, as the very

characteristics of informal sector are inadequate for both long term planning and capital intensity.

So the idea of advanced capitalism and absolute informal economy does not sound like something

that is possible in medium terms today. More importantly, the nature and basic characteristics of

informal sector is such that bringing it the formal realm also do not sound like something that is

possible in medium terms. So the difference of formal and informal is here to stay.

Role of state here becomes important as a check to the ruthless capitalism that has pushed so

many in to the informality, and sub-standard life-style. As it have been argued earlier in this article

that the very existence of informality depends on the state action, the sectors' dynamics depends

very much on the state's attitude towards the sector. More importantly the dynamics of informal

economy, its relation with formal economy, and relationship between employer and labor in the

informal sector it self is a process of social, political and economic negotiations, which in turn is

realm of state control, especially of a welfare state.

Policymakers must not consider the Informal Economy as a deviant or temporary phase, which

can be corrected by development. Rather they shall treat is as a new form of advanced capitalism

that has emerged in response to the structural crisis of the 70s and provided a safety net to poor in

phase of massive unemployment, from where going backwards is not an option. Though this is not

to say that no new form other than informal economy would emerge in future, but to say that

informal economy is here to stay in at least medium terms and going back to assembly line working

in vertical hierarchy is not a possibility. Policymakers and urban planners should accepts that a new

form of economic organization has emerged and rather than fitting old regulations to the this new

trend, they shall create new norms/standards according to the demands of informal economy.


23/24

References

1. International Labor Organization (1972). Employment, Incomes and Inequality: A Strategy

for Increasing Productive Employment in Kenya. Geneva: ILO.

2. International Labour Conference. (2002). Conclusions Concerning Decent Work and the

Informal Economy. Geneva: International Labour Office. Available online at:

http://www.ilo.org/public/english/standards/relm/ilc/ilc90/pdf/pr-25res.pdf

3. de Soto, Hernando. (1989). The Other Path: The Economic Answer to Terrorism. NewYork:

Harper Collins.

4. de Soto, Hernando (2000). The Mystery of Capital: Why Capitalism Triumphs in the West

and Fails Everywhere Else. New York: Basic Books.

5. Castells, M. and Portes, A. (1989). World Underneath: The Origins, Dye namics, and

Effects of the Informal Economy, in L. Benton et al (eds) The Informal Economy, pp. 11

40. Baltimore, MD: Johns Hopkins University Press.

6. Roy, Ananya (2009). Strangely familiar: Why India cannnot plan its cities: informality,

insurgance and the idiom of urbanization. Planning Theory, 8:1, 76-87. SAGE publication.

7. Sassen, Saskia (1994). The Informal economy : between new development and old

regulations. The Yale Law Journal vol. 103, pp-2289:2304.

8. Apte, Prakash M. (2007). Urban Renewal : Informal Retail Trade.

9. Schneider, Friedrich (2002). Size and Measurement of the Informal Economy in 110

Countries around the World. World Bank Working Paper.

10. Moser, Caroline. (1978). Informal Sector or Petty Commodity Production: Dualism or

Dependence in Urban Development. Pp. 1041-1064 in World Development, Volume 6.

11. Carr, Marilyn and Chen, Martha A. (2002). Globalization and the Informal Economy: How

Global Trade and Investment Impact on the Working Poor. Working Paper on the Informal

Economy. EMPLOYMENT SECTOR 2002/1. Background paper commissioned by the ILO

Task Force on the Informal Economy. Geneva, Switzerland: International Labour Office.


24/24

12. Chen, Martha A. (2005). Rethinking the Informal Economy: Linkages with the Formal

Economy and the Formal Regulatory Environment. Research Paper 2005/10. United

Nations UniversityWorld Institute for Development Economics Research, Helsinki.

13. Kus, B. (2006). State and economic informality in a comparative perspective. CCOP

Working Papers Series No. 11, University of California Berkeley.

14. Becker, Kristina Flodman (2004). The Informal Economy. A fact finding study prepared

for the Swedish International Development Agency, Stockholm.

Documents

Informal Economy Final