Informal Economy: Diego Coletto University of Milan-Bicocca, Italy

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Informal Economy peculation and embezzlement, gambling).
The main legitimate informal income oppor-
DIEGO COLETTO tunities came from primary and secondary
University of Milan-Bicocca, Italy
activities (farming, market gardening, con-
struction), small-scale distribution (by petty
THE traders, street hawkers, commission agents,
INFORMAL ECONOMY: DEFINITIONS dealers), and other services (furnished by
musicians, launderers, shoeshiners, barbers).
The concept of the informal economy first The legitimate/illegitimate dualism was thus
appeared on the academic scene in the early based on the social, economic, cultural,
1970s, with the publication of an ethno- legal, and political organization of a society:
graphic study conducted by Keith Hart in that is, on the formal and informal institu-
Nima, a slum district of Accra (Ghana), in tions that govern a society and its economic
the period 1965–1968 (Hart 1973). Hart performances.
explicitly referred to a series of economic Following Hart’s studies, in more than 40
activities that evaded the state’s regulatory years of empirical research, formal economic
systems. In his ethnographic study in Accra activities have been basically differenti-
he pointed out that the urban poor were not ated from informal ones by reference to
unemployed, but they worked, often casually, institutional status. Indeed, formality has
for erratic and generally low returns. He mainly meant being grounded in, structured
defined the informal economy as the antithe- through, and sheltered by the formal insti-
sis of the state-made modern economy; the tutional milieu of a larger social unit like a
latter corresponded to national capitalism,
nation-state, while informal economic activi-
interpreted as an attempt to manage mar-
ties are not declared to the state for tax, social
kets and money, mainly through a central
security, and labor law purposes when they
bureaucracy. The notion of the informal
should be declared (Godfrey 2015). Moreover
economy was thus born, to indicate forms
informality has often referred to economic
of substantial economy that took place out-
human activities developed in urban contexts,
side the confines of the market economy
and, in many cases, the analysis has focused
regulated by the state. Within this large set
of activities, Hart distinguished between on the legitimate/illegitimate use of public
“legitimate” and “illegitimate” informal ones: spaces by informal workers (drawing inspira-
The notion of legitimacy derived essentially tion, also in this case, from Hart’s first study).
from Ghana’s laws, and coincided with the In general, therefore, the majority of studies
morality of “respectable Ghanaians” (Hart on the informal economy have analyzed rela-
1973, 74). Consequently, the most common tions with the formal institutions or the state,
illegitimate informal income opportunities as some of the most frequently cited defini-
came from activities in services (hustling, tions of informality show: (a) the informal
receiving stolen goods, usury, drug push- economy encompasses “those actions of eco-
ing, prostitution, smuggling, and bribery nomic agents that fail to adhere to the estab-
for instance) and transfers (petty theft, lished institutional rules or are denied their
The Wiley Blackwell Encyclopedia of Urban and Regional Studies. Edited by Anthony Orum.
© 2019 John Wiley & Sons Ltd. Published 2019 by John Wiley & Sons Ltd.
DOI: 10.1002/9781118568446.eurs0157
10.1002/9781118568446.eurs0157, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/9781118568446.eurs0157 by Consorci De Serveis Universitaris De Catalunya, Wiley Online Library on [22/12/2022]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
2 I NFORMA L E C ONOM Y
protection” (Feige 1990, 990); or (b) informal- of the official economy; but especially it is an
ity includes “all income-earning activities that area where, in the Global North and South,
are not regulated by the state in social envi- there are many jobs (Neuwirth 2011).
ronments where similar activities are regulat-
ed” (Portes, Castells, and Benton 1989, 12).
THE INFORMAL ECONOMY:
These are only two of the most cited def-
INTERPRETATIONS
initions of the informal economy. Over the
years, the task of finding a universally accu- Different definitions have often meant differ-
rate and accepted definition of informality ent interpretations and theories on informal-
has not been accomplished: Consequently, ity. Over the years, economists, sociologists,
“negative” or “default” definitions of the and political scientists have dealt with the
informal economy (essentially, informal is
informal economy, its role in developing
that which is not formal) have been flanked
processes, and its relations with the formal
by attempts to define different categories
parts of economies and societies. As Godfrey
of informality in terms of basic features
(2015) has well outlined, each discipline has
of units of production, average earnings,
focused on some specific features of the infor-
employment status (self-employment, wage
mal economy, thus showing the complex and
employment), aims (for profit, not for profit),
contradictory nature of the phenomenon.
or social welfare coverage (Chen 2006; ILO
Besides the different nuances linked to
2002). However, within this set of multiple
the specific disciplines that deal with the
definitions some basic distinctions have been
informal economy, from the interpretative
drawn; for instance, the distinction between
point of view three approaches – the dualist,
informal and criminal economy, according to
which the former comprise production units structuralist, and legalist ones – prevailed
that, though operating partly or entirely in from the 1970s to the 1990s in the debate
breach of business, tax, and labor law and on both the causes of informality and the
externally to social security systems, produce possible policy responses. Essentially, each
goods and services considered legal in those of the three approaches was based on a
settings. The criminal economy instead con- specific theoretical background concerning
sists of production units that produce and economic development: the dualist approach
sell goods and services considered illegal in a on some of the best-known economic “du-
particular institutional context. alistic” development theories elaborated
The use of catch-all definitions or, alterna- in the 1950s and 1960s; the structuralist
tively, of narrower definitions, which include approach on neo-Marxist theories; and the
only some forms of informal economy, have legalist approach on neoliberal theories. They
helped make both the borders and the con- were thus influenced by theories on devel-
tents of the informal economy blurred and opment that, in many cases, were strongly
poorly defined, thereby casting doubt on its characterized by a historical and ideological
validity as a concept. However, these difficul- point of view (in addition to being obviously
ties have not reduced the substantial meaning restricted to the analysis of specific territorial
of the informal economy: that is, the daily areas, namely the less developed countries).
economy of survival and of despair, and also But, notwithstanding this strong character-
economic activities that represent the ability ization, they have maintained an important
to improvise, the creativity and the resilience role also in recent debates on informality, as
of people who live and work on the margins will be shown later.
I NFORM AL EC ONOM Y 3
According to the dualist approach, the economy. On observing many of the informal
informal economy had to be seen as a activities pervading the cities of Latin Amer-
by-product of poverty. Formal and informal ica (i.e., the territorial area where, over
firms were fundamentally different in terms the years, there have been many case stud-
of organization, aims, and reference market, ies on the informal economy), de Soto
and their relations were scant or nonexistent. (1989) depicted a reality in which the poor
Informal economic activities were basically spontaneously created free, unlawful markets
considered archaisms that were typical fea- in the streets and squares of those cities.
tures of a stereotyped traditional society. This Specifically, the group of researchers headed
representation of the informal economy was by de Soto analyzed the costs of legality
closely connected to the thesis that, when first in Lima (Peru) and then in Tampa
the modernization and urbanization process (United States), following in both cities the
had been completed, the entire population bureaucratic procedures necessary to open
would be integrated into the wage-earning a shoe factory. In the Peruvian capital, the
labor force, which was considered the typical results were striking in terms of the resources
form of work of the modern age. According and time employed: 298 days to deal with
to this approach, informal activities were the paperwork, the almost inevitable use
therefore destined to disappear or to strongly of bribery, and a consequent exponential
diminish in importance, especially in terms growth in the costs of starting up the busi-
of employment. ness. According to the scholars, this “legal
Also, most scholars who adopted the struc- discrimination” derived from mercantilism,
turalist approach focused on institutions that which was the prevalent form of capitalism
regulate and shape the economic system. In in Latin America. In general, this perspective
this case the informal economy was seen has tended to emphasize the great vitality of
as economic activities, and especially the so-called informal entrepreneurs, the costs
labor force, that were functional to capitalism structure of informality, and the even greater
and to its more recent changes. Processes costs of the formal or regular economy,
of “informalization” thus reacted to new which force these entrepreneurs to opt for
needs of the formal productive system. In informality as the arena where they can best
particular, informality responded to the exi- express their professional abilities. Hence,
gencies of formal firms with regard to greater this theoretical approach has considered the
flexibility in functions and employment. In informal economy to be a consequence of the
this case, the focus was mainly on informal excessive costs of legality.
wage employment and its relations with sub- The recent approaches to the informal
contracting and outsourcing arrangements economy have lost the ideological features
emerging under global capitalism (Portes, that characterized, at least partially, the
Castells, and Benton 1989). dualist, the structuralist, and the legalist
The legalist approach – founded by the approaches in the past. However, some of
economist Hernando de Soto – showed them have taken over some aspects of the
the excessive (and ineffective) regulation of three schools of thought, trying to update
the economy by the state in many develop- them. For instance, notwithstanding its
ing countries. According to this approach, limits (especially linked to the idea that
these regulations created barriers to work- informality is a feature characterizing only
ing formally. Moreover, the over regulation the early stages of development), the dual
raised costs in both the formal and informal view of informality continues to be useful
for determining why informal employment contract” under which the state does not
persists, as the various studies on the relations comply with its designated roles, and indi-
between economic growth and informality viduals therefore see little point in playing by
have recently shown. In particular, La Porta its rules (Perry et al. 2008, 216). In particular,
and Shleifer (2014) pointed out that the the social contract refers to the structure
medium-to-large percentages of informality of taxation and social expenditures, the
in the economies and labor markets of most performance of the state using citizens’ taxes
of the less developed countries are mainly to deliver public goods, and the structure and
due to a lack of human capital: according effectiveness of social protection systems.
to the two scholars, informal firms remain
Finally, the structuralist approach also is
permanently informal; they hire informal
still used in order to explain informality in
workers for cash, buy their inputs for cash,
many less developed countries. On one hand,
and sell their products for cash; they are
various scholars have analyzed the role of
unproductive; and they are unlikely to benefit
much from becoming formal. La Porta and the informal economy in the globalization
Shleifer have thus emphasized the effective- process, and especially the changes in the
ness of the dual view of informality, affirming labor market, in terms of new forms of labor
that the formal and informal economies force exploitation and the increasing use of
are substantially separate (some economic “atypical” and “flexible” labor contracts. In
forces – on both the demand and the supply particular, the recent restructuring of the
side – keep the two spheres separate), and urban economy seems to have created new
informal economies are so large in less devel- segments of informality, which, more than
oped countries because their entrepreneurs in the past, interweave in a complex manner
are so unproductive. with the formal part of the economy. These
If La Porta and Shleifer consider taxes changes have affected also the urban labor
and regulations to be only part of the story, market, with an alteration in the gender
for other scholars these two factors are its hierarchy and the role of the family in the
crucial part, reiterating the effectiveness of urban population formed of low-paid labor
the legalist approach. For instance, in a recent (Sassen 2007). On the other hand, but always
World Bank report, the authors analyzed how within the new wave of the structuralist
the agents who work in the informal econ- approach, an alternative view of informality
omy – individually or collectively – perceive
has been recently developed. There are stud-
relations with the state (Perry et al. 2008).
ies that propose the informal economy as the
In this case, the informal economy mainly
context in which practices of resistance can
represented an exit option that individuals
be developed by marginal workers, and in
choose by applying an economic rationality.
The analysis was again specifically focused which alternative forms of development are
on Latin American countries and pointed created from below. In this case, the attention
out that informality is a manifestation of dis- is focused more on economic transactions
connects between the state and citizens (with regulated by “reciprocity” institutions within
their social norms). According to the authors, circuits where economic factors are totally
Latin America’s low level of trust in the state, embedded in social relations. As is evident,
its culture of informality (founded on specific the latter approach is based on some of the
shared social norms), its regulation, and most important concepts developed by Karl
its policies reflect “a dysfunctional social Polanyi (1977).
THE FORMAL/INFORMAL ECONOMY: In this new model, the theme of the infor-
BETWEEN THE TWO POLES mal economy is closely connected with the
theme of “decent work.” Along the infor-
Besides bringing the dualist, the struc- mal/formal continuum, the informal part
turalist, and the legalist approaches up to of the economy comprises the majority of
date, many recent studies have tried to ana- decent work deficits: poor quality, unproduc-
lyze and explain the informal economy by tive and unremunerated jobs not recognized
moving beyond the formal/informal, reg- or protected by law, the absence of rights at
ular/irregular, and licit/illicit dichotomies. work, inadequate social protection, and the
Indeed, the debate, over more than 40 years, lack of representation and voice.
has demonstrated that neither the highly The new approach advocated by the ILO
parsimonious paradigm of the isolated indi- is part of a quite widespread tendency to
vidual driven solely by self-interest, nor a pay particular attention to the segmentation
structural view of the informal economy of the informal economy, and therefore to
interpreted first as an “intermediate stage” the various features and needs that define
between a traditional society and a modern its different segments. Moreover, more
capitalist one, and then as a segment detached recent studies have focused not only on the
from, but functional to, the reproduction of less developed countries, but also on the
the capitalist model of society, has been able more economically advanced ones. Indeed,
to furnish an entirely convincing explana- recent estimates of the informal economy
have confirmed its importance in terms of
tion of the informal economy. Analytical
employment and gross domestic product
tools such as the mere antitheses between
(GDP) both in the Global South and in the
formal/informal, legal/illegal, and tradi-
Global North (OECD 2009).
tional/modern have thus not yielded a full
Chen (2006), for instance, emphasized
understanding of these complex phenomena
how the occupational status of workers
and their interweaving with the formal part
in the informal economy is fragmented.
of the economy.
She divided informal employment between
For these reasons, the focus has recently self-employment and wage employment and,
shifted from analysis of the two poles (for- within these broad categories, into more
mal/informal) to study of the continuum homogeneous subcategories, analyzing the
between the same two poles. The Interna- links among different forms of informality,
tional Labor Organization (ILO) – which poverty, and gender. Similarly, Williams
is the body that, since the 1970s, has been (2014) has recently shown the proportion
most concerned with the phenomenon and of employment relations infused with infor-
the dilemmas connected with the informal mality and the nature and the permeation
economy – has expressly stated that there of informality into them in many countries,
is no dichotomy between the formal and identifying a spectrum from purely formal
informal parts of the economy: to purely informal employment relations. He
outlined different varieties of “quasi formal
formal and informal enterprises and workers
employment” as well as “informal employ-
coexist along a continuum, with decent work
deficits most serious at the bottom end, but also ment,” highlighting many combinations and
existing in some formal jobs as well, and with overlaps between these types.
increasingly decent conditions of work moving In general, the more recent studies sug-
up the formal end. (ILO 2002, 4) gest that focusing on the different nature
of informality can be useful in order to use of knowledge about (and interpretations

understand in what the informal economy, of) the informal economy can improve the
which characterizes a specific local area or a analysis and the assessment of both the rel-
country, consists. But, notwithstanding the ative size and the features of the different
improvement in knowledge about informal- segments of informality, and the factors that
ity’s segmentation, it is still not clear what influence them.
the specific causes of the informal economy
are. Various studies have identified some
THE INFORMAL ECONOMY IN A
factors that seem to lead to a higher level of
GLOBALIZED WORLD
informality (Kanbur 2014): a high proportion
of low-productivity enterprises; a high level After over 40 years of studies at macro and
of micro and small enterprises; high costs of
at micro level, the use of the notion of infor-
regulation; a low intensity of enforcement
mality is still topical. To date, in fact, no
of regulation. But the size of the informal
alternative idea has been found that can,
economy does not seem to be just a linear
more efficaciously and thoroughly, represent
outcome of one or two specific factors. For
the extremely heterogeneous set of economic
this reason, some studies have tried to investi-
activities and types of work that come under
gate the relationship between informality and
the heading of informality. As emphasized by
(formal and informal) institutions more thor-
various authors, this resistance is a valid indi-
oughly. For instance, Williams, Horodnic,
cator of the usefulness of the notion, although
and Windebank (2015) divided institutions
its conceptual ambiguity and weaknesses still
between formal institutions (i.e., codified
persist. As shown above, difficulties have
laws and regulations) and informal ones (i.e.,
socially shared unwritten rules that express alternated with steps forward in attempts
wider norms, values, and beliefs of the pop- to conceptualize, measure, understand, and
ulation). Formal and informal institutions explain the informal economy. New estimates
can be either “complementary,” if informal of informality are more accurate than in the
institutions strengthen the formal ones, or past, but the comparison worldwide remains
“substitutive,” if there is incompatibility very difficult; attempts to formulate a defini-
between informal and formal institutions. tion of the informal economy with universal
Specifically, the authors showed that the validity have not achieved fully satisfactory
greater the asymmetry between formal and results. Indeed the complexity and the het-
informal institutions – and thus the gap erogeneity distinctive of the phenomenon
between the state morality and the individ- have induced, especially in recent years,
ual morality – the higher the propensity to many scholars and experts to rely on “default”
engage in the informal economy. definitions – which primarily indicate what
This study emphasized that it is important informality is not, rather than what it is – in
to explore the relations among the informal order to establish a basic distinction, which
economy, social norms, and formal institu- has then been used as the framework for more
tions in order to prevent a rigid interpretation detailed analyses of the topic in question. At
of the informal economy: Indeed, institutions the same time, the increased awareness of the
seem to matter in changing the size and the complexity inherent in the informal economy
nature of the informal economy, but it is still (and its relations with the formal part) has
unclear how and to what extent they matter. fostered a more prudent stance in attempts
Consequently, attempts to make integrated at abstraction, with closer attention being
paid to the composite nature of informality. associated with it seem to acquire new life:
Knowledge about informality’s segmentation Must we consider informality as a factor
is thus improved, as well as the awareness that able to cushion (if not solve) some social
in the informal economy the traditional is problems (primarily unemployment) or as a
sometimes intertwined with the modern, the setting only devoted to tax evasion? Is infor-
legal with the illegal, the local with the global, mality a trap for marginalized workers or a
the licit with the illicit, so that explanations setting where actors can develop their skills
based solely on rigid dichotomies lose much and capabilities? Is the informal economy a
of their efficacy. setting of “unorganizable” workers or one in
Moreover, in its substantial meaning, the which new forms of collective actions arise?
informal economy seems to be very resilient These are only some of the still unresolved
and in constant motion. Features by now questions concerning the informal economy,
considered typical of informality mingle with which exemplify the need for new empirical
new ones, generating processes whose inter- research analyzing the segmentations that
pretation is anything but straightforward. make up informality, the critical issues and
These changes have mainly affected urban the specific needs of each segment, and the
informality, confirming its urban charac- porosity of the borders between the informal
terization. For instance, many services and and formal parts of the economy. Today more
goods that are crucial for the livelihoods of than ever it is important to understand how
an increasingly significant portion of urban millions of people live and work totally or
dwellers are partially or completely created partially outside the formal economy: They
and produced in the informal economy. are more than one half of the workforce in
Some of these services are labor intensive many less developed countries, between 30
(as traditionally informal economic activities percent and 60 percent in many emerging
are), but others are tech-intensive: indeed, economies, and a large part in the more
some forms of the so-called sharing economy advanced economies. These numbers mean
seem to have many of the typical features of that the traditional interpretative models of
the informal economy. societies, built on the majority of the work-
For these reasons, more knowledge is force employed in the formal economy, need
needed on how the informal economy works to be revised, because the current fundamen-
in everyday life, what are the exact social tal question when addressing the informal
representations of the informal economy economy seems to be not so much how to
made by informal workers, what are their “formalize” informality, but rather how to
motivations, what are the working practices ensure decent living and working conditions
that enable them to “make do,” and what are also for those who work in the informal
their reactions to the policies introduced by economy.
national or local governments in order to
SEE ALSO: Informal Housing; Informal Land
curb the informal economy or to promote its
Markets; Informal Settlements; Informal
shift to the formal part of the economy. Settlers; Informality; New Urban Poverty; New
The resilience of the informal economy Urban Sociology; Urban Economy
has contributed over time to creating new
dilemmas for those who study the phe- REFERENCES
nomenon and for policy-makers. Especially Chen, Martha A. 2006. “Rethinking the Infor-
in times of economic crisis, the issue of mal Economy: Linkages with the Formal Econ-
the informal economy and the dilemmas omy and the Formal Regulatory Environment.”
In Linking the Formal and Informal Economy, Perry, Guillermo E., William F. Maloney, Omar S.
edited by Basudeb Guha-Khasnobis, Ravi Kan- Arias, Pablo Fajnzylber, Andrew D. Mason, and
bur, and Elinor Ostrom, 75–93. New York, NY: Jaime Saavedra-Chanduvi, eds. 2008. Informal-
Oxford University Press. ity: Exit and Exclusion. Washington, DC: World
de Soto, Hernando. 1989. The Other Path. New Bank.
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Feige, Edgar. 1990. “Defining and Estimating don: Academic Press.
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Development, 18(7): 989–1002. ies in Advanced and Less Developed Countries.
Godfrey, Philip B. 2015. Management, Society, and Baltimore, MD: Johns Hopkins University Press.
the Informal Economy. London: Routledge. Sassen, Saskia. 2007. A Sociology of Globalization.
Hart, Keith. 1973. “Informal Income Opportuni- New York, NY: Norton.
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ILO. 2002. Decent Work and the Informal Economy. Character of Their Informal Sector.” Work,
Geneva: ILO. Employment and Society, 28(5): 735–753.
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Global Rise of the Informal Economy. New York, itics and Dignified Discontent in India. Cam-
NY: Pantheon. bridge: Cambridge University Press.
OECD. 2009. Is Informal Normal? Towards More Coletto, Diego. 2010. The Informal Economy and
and Better Jobs in Developing Countries. Paris: Employment in Brazil. New York, NY: Palgrave
OECD. Macmillan.

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10.1002/9781118568446.eurs0157, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/9781118568446.eurs0157 by Consorci De Serveis Universitaris De Catalunya, Wiley Online Library on [22/12/2022].

of informality can be useful in order to use of knowledge about (and interpretations

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