Despite its comfortable sounding character, the Informal Economy is not related to Casual Friday, which is the global phenomenon where office workers dress in leisure wear on Fridays and take longer lunches.
No, the Informal Economy is defined at Wikipedia as “that part of an economy that is not taxed, monitored by any form of government, or included in any gross national product (GNP)”. Which makes it a bit of a slippery character.
While this lawless element of the economy may be known as “informal”, the recent level of effort in understanding it, is far from informal. The World Bank and others have launched numerous investigations into the Informal Economy and the report entitled “The Informal Sector: What Is It, Why Do We Care, and How Do We Measure It?” would perhaps give us a clue. So why do we care?
This particular report kicks off with an introduction … “The term informality means different things to different people, but almost always bad things: unprotected workers, excessive regulation, low productivity, unfair competition, evasion of the rule of law, underpayment or nonpayment of taxes, and work 'underground' or in the shadows". This clearly implies exploitation and misdemeanor.
In his book The Other Path: The Economic Answer to Terrorism about the informal economy in Peru, acclaimed author Hernando De Soto, observes that the government defeated the disruptive Maoist Terrorist group, Shining Path, by building a system of laws that allowed residents to buy, sell and value property rights; and by reducing the complexities and banalities of starting a business thus bringing the majority of the population back into the formal economy.
Others claim that the informal economy exists because of bureaucracy, inference and regulation and others that the informal economy is vital to the formal economy. While there are significant benefits of the informal economy like higher employment, the overall consensus is that it must be roped in and taxed.
The truth is that the informal economy has been the modus operandi since snakes turned their hands at trading bad apples.
The activities of the informal economy can range from simple bartering (a cashless exchange of products/services) to large scale “cash-in-hand” wages paid to freelance, temporary or transient workers. An example of bartering occurred in 1989 when my buddy, who worked at Telecom, installed an extra telephone in our house in exchange for a case of beer. To this day, in New Zealand, there isn’t much that cannot be achieved in exchange for a case of beer with the bonus being that the receiver of the beer usually shares the beer with the receiver of the service. This is often referred to as a "win-win situation", and a deepening of relationship.
Of course, the proliferation of online, cross-border transactions and payment methods adds a modern spin to the Informal Economy. Exchange platforms like PayPal, eBay, Poker.com and CouchSurfing.org make it difficult for governments to recognize the income of individuals unless they volunteer it. A PayPal user never needs to transfer cash to their bank or credit card - they can simply continue using the balance online to buy other online products and services.
By its very nature, the size and value of the informal economy is tricky to estimate but figures amongst 110 countries in 1999/2000 estimate it to be worth about five trillion current US dollars! (US$5,000,000,000,000.00)
The average size of the informal economy, as a percent of official Gross National Product (GNP) in the year 2000, in developing countries was 41%, in transition countries 38% and in OECD countries 18%. There is a nice summary of this information at http://en.wikipedia.org/wiki/Informal_sector
Georgia as the highest estimated informal economy by % of GNP (67%) while the United States’ has the lowest (8.8%) but this still amounts to a whopping US$864,000,000,000!
The below chart shows the informal (shadow) economy figures for Asia in terms of percentage of GNP.
My objective was not to draw any conclusions here - much has been researched and written already - but only to highlight the magnitude of the global informal economy. Perhaps in another blog I may look at the opportunities lurking in the shadows of the Shadow Economy.
Perhaps, in the meantime, I can conclude by expressing deep regret for that case of beer in 1989.