Transcript 10. The Informal Sector (Not in text)

The “Informal Sector” in Africa
June 1 and 3, 2010
ECON 3510
.
This section is not in the
text book. Please take
notes to flesh out this
summary.
Outline
1.
2.
3.
4.
5.
Some Description
Past Theorizing
Definition of the Informal Sector
Origins and Roots of Informal Economy
Comparison of “Formal” and “Informal
Sectors”
6. Impacts of the Informal Sector on the
National Economy and Society
7. Public Policy and the Informal Sector?
Artisanal Mining, Tanzania
Kenya: Rural Market
1.
Some Description
– Presence everywhere
– Variation among Countries
– Diversity or “Heterogeneity” of Informal
Enterprise within countries
• High-end to low-end
• Sophisticated to “last resort” enterprise
– Rural and Urban IS
– Men, Women and Children in the Informal
Sector
The Informal Sector in Kenya
Non-Farm Economic Activities in Rural Households.
Kenya, circa 1979
Number of Non-Farm
Activities per Sample
Household
0
1
2
3
4
5
6 or more
Total
Western
Province
National
44.3
32.8
11.8
4.0
3.1
1.5
2.5
100.0
49.6
26.4
13.0
4.7
2.5
1.3
2.4
100.0
Informal Employment in Non-Agricultural Employment for Africa
Country
Informal Labour
Force as % of Total
Non-Ag. L.F.
Self -Employment
as % of Total
Women Men
Informal
Employment
Benin
Chad
Guinea
Kenya
South
Africa
93%
74
74
72
51
97% 87%
95
60
87
66
83
59
58
44
95%
93
95
42
25
Sub-Saharan
72
84
70
63
Africa,
Source: ILO, Men and W\omen in the Informal Economy, Geneva, 2002 pp 19-20
Past Theorizing regarding the Potential Role of the
informal Sector
Older Views:
Adam Smith: Normal activity; purely competitive
Karl Marx: Replace with large scale industry and organization; “lumpen
proletariat”
Socialist Theorizing:
Replace it; Central Planning; Economies of Scale; Collectivization
Mainstream “Development Economics” 1945-1972
Small Enterprise Usually Ignored
– Rostow,
– Prebisch,
– Dependency Theorizing …
Lewis,
Capital-Centred Theorizing,
Some Voices in the Wilderness:
– Indian Cottage industry,
– Community Development Theorizing
The Informal Sector gets Discovered!
• Keith Hart, 1972, focussing on Ghana;
• ILO, 1970s, Study in Kenya;
• Parallel interest in Underground Economies of
Western countries [“Shadow Economies”]
• Hernan DeSoto, 1989 re Peru;
• Underground Economies in Centrally Planned
Economies get ‘discovered’ , 1980s [“Second
Economies,” ]
• Informal Economy and Underground Economy in
Transitional Countries (E.Europe and former
Soviet Union)
Definition of the Informal Sector based on
Institutionalization and Legality
Area of the Economy
Process of
Production or
Final Product
Distribution
Formal Economy
Household Economy (for
home use)
Informal Economy
(sometimes home-based)
+++ Legal
++ Legal
+++ Legal
+++Legal & Vital
+/- “Extra-Legal” +++ Legal
Underground or Shadow + (Process);
Economy
-ve (Tax
Avoidance)
Criminal Economy
--- Illegal
+ Usually Legal
Totally Illegal
The Range of Economic Activities and their Place in GDP Measures
Legality of Legality of
Inclusion in “GDP”
Product Production
Process
“Formal
Legal products of
Yes
Yes
Yes
Sector” or all varieies
Underground
No for some
Economy
provision for
activities
some
activities
“Informal Many types of
Yes
Often No
Sector” or services, usually
Yes
Yes in LDCs for
Economy small scale
Main IS Activities
HomeChild-care;
Based
Home
Economic maintenance and
Yes
Yes
No
Activities repair, Food
preparation,
Personal Services
Criminal Drugs,
Yes;
Activities Prostitution,
No
Maybe yes
No
Gambling of
Maybe no;
some sorts;
No
Extortion rackets
Product
Reasons for Exclusion
n.a.
Tax Evasion
Excessive costs of
gathering information
Some tax evasion
Value impossible to
determine accurately
Tax collection unrealistic
Activities are illegal;
Relevant Information
impossible to determine
Origins and Roots of Informal Economy
Why does it exist?
Origins and Roots of Informal Economy
1. Traditional and often Pre-Colonial Economy
and Society,
e.g. African traditional economic activities ….
2. Slow Growth of Employment in the Formal
Economy
(due to excessive capital intensity,
economic stagnation ……….)
3. State Controls and Bureaucratic Regulations
– Note differences among various types of
societies and economic systems.
• - Hernando De Soto: “The Other Path”
– Registration Blockages
Registration Blockages: Starting a Business
Country
Number of
Procedures
Time Required, Cost as % of Per
Days
Capita Income
Burundi
Kenya
11
12
43
30
215.
40.0
South Africa
Tanzania
Zambia
Zimbabwe
6
12
6
10
22
29
18
96
6.0
41.5
28.6
432.7
Sub-Saharan
Africa
10
46
111.4
Canada
1
5
0.5
World Bank, WDI 2009, pp. 276-278
– Taxation Levels
– Regulations
• Labour Laws ,
• Health & Safety Regulations,
• Minimum Wage Legislation,
• Environmental controls and rules
• Zoning Regulations
– i.e. some IS entrepreneurs may prefer to
remain “informal” to evade regulations and
taxation
4. Informal Sector as a Social Safety Net
Comparison of “Formal” and “Informal Sectors”
Characteristics
“Informal Sector”
“Formal” Sector
Ease of Entry
Low Barriers to Entry
High Barriers to Entry
Resource Use
Ownership
Scale of Operation
Technology
Organization
Income
Local Resources
Family Ownership
Micro to Small
Labour Intensive
Simpler
Variable; from sales
Foreign Resources
Often Foreign
Medium to Large
Capital Intensive
Bureaucratic
Formal Wages
Skill Acquisition
Outside the School System
(Informal
Apprenticeship)
Formal Educational
System
Labour Market
Competitive and
Unregulated
Uncompetitive and
Regulated
Comparison of “Formal” and “Informal Sectors”,
continued
Informal
Economy
Formal Economy
Taxation
Untaxed except
for Licensing
Taxed
Regulation
Mainly
Unregulated
Highly Regulated (Labour
legislation, minimum wage, health
and safety, environmental)
Public
Policies
Unprotected
and unassisted
Protection and Assistance (credits,
trade protection, infrastructure
investment, R&D support….)
Impacts of the Informal Sector on the
National Economy and Society
The Positives: What are they
The Negatives:
On Balance,
What are they
Impacts of the Informal Sector on the
National Economy and Society
The Positives:
1. Production of low-cost goods and services mainly
for low income people
2. Job Creation
3. Income Generation
4. Social Safety net function
5. Development of Entrepreneurship
6. Training: informal apprenticeship systems
7. Domestic Value Added (using domestic inputs
rather than imported inputs)
8. Appropriate Technology?
9. Foreign Exchange generation
10. Generation of Savings and Investment
Impacts of the Informal Sector on the National
Economy and Society (Continued)
The Negatives:
1.
2.
3.
4.
5.
6.
Tax avoidance and evasion
Health & safety standards ignored
Environmental laws & regulations ignored
“Self-exploitation” ? ?
Child labour
Links with criminal economic activities
sometimes
7. Irreverence and non-compliance with some
concerns of the state.
Public Policy and the Informal Sector?
Should governments do anything in support
of micro and small enterprises? Why or
why not?
What types of public policy would be
relevant?
Public Policy and the Informal Sector?
Possible Supportive Policies:
–
–
–
–
–
–
–
Low cost licensing
Security of tenure
Physical security
MICROCREDIT
Basic training e.g. in book-keeping
Technical extension services
Public provision of infrastructure (market stalls, water,
electricity)
Encouragement to “graduate” to “formality”?
– But note aversion to paying taxes and government
regulation
Potential Contribution of the Informal
Economy for Future Development??
Potential Contribution of the Informal
Economy for Future Development??
1. Development of Entrepreneurship:
transferrable to other sectors and up-graded
enterprises
2. Training: gradual up-grading of skills?
3. Steadily increasing productivity leading to
higher incomes, one hopes
4. “Graduation” of enterprises, into the formal
economy, with tax-oaying and acceptance of
regulations
5. Improved environmental standards
Potential Contribution of the Informal
Economy for Future Development??
7. Better jobs and higher incomes
8. Increased generation of Savings and
Investment
9. Foreign Exchange generation and savings
(continued domestic Value Added using
domestic inputs rather than imported input)
10. “Last resort” activities will diminish and
disappear with the expansion of the formal
economy – one hopes
12. Low productivity activities will evolve into
higher productivity activities or else
disappear.
Potential Contribution of the Informal
Sector for Future Development
– Last resort activities that will diminish and
disappear with the expansion of the formal
economy?
– A foundation for future enterprise development
and economic improvement?