Home      Discussion      Topics      Dictionary      Almanac
Signup       Login
Informal economy

Informal economy

Ask a question about 'Informal economy'
Start a new discussion about 'Informal economy'
Answer questions from other users
Full Discussion Forum
The informal sector or informal economy as defined by governments, scholars, banks, etc. is the part of an economy that is not tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

ed, monitored by any form of government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...

, or included in any gross national product (GNP), unlike the formal economy.

In developing countries
Developing country
A developing country, also known as a less-developed country, is a nation with a low level of material well-being. Since no single definition of the term developing country is recognized internationally, the levels of development may vary widely within so-called developing countries...

, some 60% of the potential working population earn their living in the informal sector. They would define this economy or sector in other words: not in what it is not, but what it is: the only way to earn a living for people who are self-employed
Self-employment is working for one's self.Self-employed people can also be referred to as a person who works for himself/herself instead of an employer, but drawing income from a trade or business that they operate personally....

 outside the formal economy and not on anyone's payroll. Most of them live and work in this sector not because it is their wish or choice, but because they have no chance to be hired by an employer from the formal sector except for a few hours or days, with no legal right to be hired again.

In developed countries
Developed country
A developed country is a country that has a high level of development according to some criteria. Which criteria, and which countries are classified as being developed, is a contentious issue...

 the informal sector is characterized by unreported employment
Unreported employment
Unreported employment, often referred to colloquially as working or being paid under the table or cash-in-hand, is employment that is not reported as required by law to the appropriate local, state or provincial, or national government agency. This is often done by the employer or the employee in...

. This is hidden from the state for tax, social security or labour law purposes but is legal in all other aspects.

In describing this sector, one should bear in mind that the informal economy is not a deviation of the formal economy, if only because all economic activities started informal and formed the basis from which the formal economy sprang, with firms and annual accounts, taxes, chambers of commerce, etc. Although the informal economy is often associated with developing countries, where up to 60% of the labour force (with as much 40% of GDP) work, 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
The word contraband, reported in English since 1529, from Medieval French contrebande "a smuggling," denotes any item which, relating to its nature, is illegal to be possessed or sold....

 is traded, where contraband may be strictly or informally defined.


Informal economic activity is a dynamic process which includes many aspects of economic and social theory. 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
Keith Hart
Keith William Hart is a Canadian retired firefighter and professional wrestler. He is one of the sons of Stu Hart, CM.-Career:Before becoming a wrestler, Keith Hart earned a degree in teaching....

 was integral in defining the term. To further confound attempts to define this process, informal economic activity is subject to permanent adaptation to changing circumstances. External regulations (and degrees of enforcement) change frequently, sometimes daily. The wish to preserve this source of income requires to adapt 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
Value (economics)
An economic value is the worth of a good or service as determined by the market.The economic value of a good or service has puzzled economists since the beginning of the discipline. First, economists tried to estimate the value of a good to an individual alone, and extend that definition to goods...

 between people outside the scope of 'normal and formal 'business.


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
Sumer was a civilization and historical region in southern Mesopotamia, modern Iraq during the Chalcolithic and Early Bronze Age....

. 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, if not older. The term itself, however, is much more recent. The optimism of the modernization theory
Modernization theory
Modernization theory is a theory used to explain the process of modernization within societies. The theory looks at the internal factors of a country while assuming that, with assistance, "traditional" countries can be brought to development in the same manner more developed countries have...

 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
Keith Hart (anthropologist)
Keith Hart is a Professor Emeritus of Anthropology at Goldsmith's College, University of London. He co-directs the Human Economy Group at the University of Pretoria and is Honorary Professor of Development Studies at the University of Kwazulu-Natal, Durban. His main research has been on Africa...

 in a study on Ghana
Ghana , officially the Republic of Ghana, is a country located in West Africa. It is bordered by Côte d'Ivoire to the west, Burkina Faso to the north, Togo to the east, and the Gulf of Guinea to the south...

 in 1973 but also alluded to by the International Labour Organization
International Labour Organization
The International Labour Organization is a specialized agency of the United Nations that deals with labour issues pertaining to international labour standards. Its headquarters are in Geneva, Switzerland. Its secretariat — the people who are employed by it throughout the world — is known as the...

 in a widely read study on Kenya
Kenya , officially known as the Republic of Kenya, is a country in East Africa that lies on the equator, with the Indian Ocean to its south-east...

 in 1972 MANAN ROHAN.

Since then the informal sector has become an increasingly popular subject of investigation, not just in economics, but also in sociology
Sociology is the study of society. It is a social science—a term with which it is sometimes synonymous—which uses various methods of empirical investigation and critical analysis to develop a body of knowledge about human social activity...

 and anthropology
Anthropology is the study of humanity. It has origins in the humanities, the natural sciences, and the social sciences. The term "anthropology" is from the Greek anthrōpos , "man", understood to mean mankind or humanity, and -logia , "discourse" or "study", and was first used in 1501 by German...

. With the turn towards so called post-fordist
Post-Fordism is the name given to the dominant system of economic production, consumption and associated socio-economic phenomena, in most industrialized countries since the late 20th century...

 modes of production in the advanced developing countries, many workers were forced out of their formal sector work and into informal employment. In a seminal collection of articles, The Informal Economy. Studies in Advanced and Less Developed Countries, Alejandro Portes and collaborators emphasized the existence of an informal economy in all countries by including case studies ranging from New York City
New York City
New York is the most populous city in the United States and the center of the New York Metropolitan Area, one of the most populous metropolitan areas in the world. New York exerts a significant impact upon global commerce, finance, media, art, fashion, research, technology, education, and...

 and Madrid
Madrid is the capital and largest city of Spain. The population of the city is roughly 3.3 million and the entire population of the Madrid metropolitan area is calculated to be 6.271 million. It is the third largest city in the European Union, after London and Berlin, and its metropolitan...

 to Uruguay
Uruguay ,officially the Oriental Republic of Uruguay,sometimes the Eastern Republic of Uruguay; ) is a country in the southeastern part of South America. It is home to some 3.5 million people, of whom 1.8 million live in the capital Montevideo and its metropolitan area...

 and Colombia
Colombia, officially the Republic of Colombia , is a unitary constitutional republic comprising thirty-two departments. The country is located in northwestern South America, bordered to the east by Venezuela and Brazil; to the south by Ecuador and Peru; to the north by the Caribbean Sea; to the...


Arguably the most influential book on informal economy is Hernando de Soto
Hernando de Soto (economist)
Hernando de Soto is a Peruvian economist known for his work on the informal economy and on the importance of business and property rights. He is the president of the Institute for Liberty and Democracy , located in Lima, Peru.-Childhood and education:Hernando de Soto was born in 1941 in Arequipa,...

's El otro sendero (1986), which was published in English in 1989 as The Other Path with a preface by Peruvian writer Mario Vargas Llosa
Mario Vargas Llosa
Jorge Mario Pedro Vargas Llosa, 1st Marquis of Vargas Llosa is a Peruvian-Spanish writer, politician, journalist, essayist, and Nobel Prize laureate. Vargas Llosa is one of Latin America's most significant novelists and essayists, and one of the leading authors of his generation...

. De Soto and his team argue that excessive regulation in the Peruvian (and other Latin American) economies force a large part of the economy into informality and thus prevent economic development. While accusing the ruling class of 20th century mercantilism
Mercantilism is the economic doctrine in which government control of foreign trade is of paramount importance for ensuring the prosperity and security of the state. In particular, it demands a positive balance of trade. Mercantilism dominated Western European economic policy and discourse from...

, de Soto admires the entrepreneurial spirit of the informal economy. In a widely cited experiment, his team tried to legally register a small garment factory in Lima. This took more than 100 administrative steps and almost a year of full-time work. Whereas de Soto's work is popular with policymakers and champions of free market policies like The Economist
The Economist
The Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd. and edited in offices in the City of Westminster, London, England. Continuous publication began under founder James Wilson in September 1843...

, many scholars of the informal economy have criticized it both for methodological flaws and normative bias.

In the second half of the 1990s many scholars have started to consciously use the term "informal economy" instead of "informal sector" to refer to a broader concept that includes enterprises as well as employment in developing, transition, and advanced industrialized economies.


The informal economy under any governing system is diverse and includes small-scaled, occasional members (often street vendors and garbage recyclers) as well as larger, regular enterprises (including transit systems such as that of Lima, Peru). Informal economies include garment workers working from their homes, as well as informally employed personnel of formal enterprises. Employees working in the informal sector can be classified as wage workers, non-wage workers, or a combination of both.

The above definition does not include criminal activities, that are irregular by nature. Crime
Crime is the breach of rules or laws for which some governing authority can ultimately prescribe a conviction...

 cannot be included because such acts have no regulated counterpart against which they may be compared. (Of course, by their nature, informal economic activities escape regulation but that does not necessarily imply that they are unlawful or criminal.) Domestic labor, such as childcare
Child care means caring for and supervising child/children usually from 0–13 years of age. In the United States child care is increasingly referred to as early childhood education due to the understanding of the impact of early experiences of the developing child...

 and cooking
Cooking is the process of preparing food by use of heat. Cooking techniques and ingredients vary widely across the world, reflecting unique environmental, economic, and cultural traditions. Cooks themselves also vary widely in skill and training...

, is in general not included when performed in the natural course of daily living'These activities are either formal or informal.

Statistics on the informal economy are unreliable by virtue of the subject, yet they can provide a tentative picture of its relevance: For example, informal employment makes up 48% of non-agricultural employment in North Africa, 51% in Latin America
Latin America
Latin America is a region of the Americas where Romance languages  – particularly Spanish and Portuguese, and variably French – are primarily spoken. Latin America has an area of approximately 21,069,500 km² , almost 3.9% of the Earth's surface or 14.1% of its land surface area...

, 65% in Asia
Asia is the world's largest and most populous continent, located primarily in the eastern and northern hemispheres. It covers 8.7% of the Earth's total surface area and with approximately 3.879 billion people, it hosts 60% of the world's current human population...

, and 72% in sub-Saharan Africa
Sub-Saharan Africa
Sub-Saharan Africa as a geographical term refers to the area of the African continent which lies south of the Sahara. A political definition of Sub-Saharan Africa, instead, covers all African countries which are fully or partially located south of the Sahara...

. If agricultural employment is included, the percentages rises, in some countries like India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...

 and many sub-Saharan African countries beyond 90%. Estimates for developed countries are around 15%.

In developing countries, the largest part of informal work, around 70%, is self-employed, in developed countries, wage employment predominates. The majority of informal economy workers are women. Policies and developments affecting the informal economy have thus a distinctly gendered effect.

A report from World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...

 estimates the informal economies of 162 countries for the years of 1999 to 2007.

Estimated size of countries' informal economy

The table below shows the estimated values of the size of the informal economy in 110 developing, transition and OECD countries.

The average size of the informal economy, as a percent of official GNI
Gross National Income
The GNI consists of: the personal consumption expenditures, the gross private investment, the government consumption expenditures, the net income from assets abroad , and the gross exports of goods and services, after deducting two components: the gross imports of goods and services, and the...

 in the year 2000, in developing countries
Developing country
A developing country, also known as a less-developed country, is a nation with a low level of material well-being. Since no single definition of the term developing country is recognized internationally, the levels of development may vary widely within so-called developing countries...

 is 41%, in transition countries 38% and in OECD countries 18%.
Country Informal economy
(billions of
current USD
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....

Informal economy
in % of GNP
 Georgia (country) 2.1 67.3
 Bolivia 5.4 67.1
 Panama 6.0 64.1
 Azerbaijan 3.0 60.6
 Peru 31.1 59.9
 Zimbabwe 4.2 59.4
 Tanzania 5.2 58.3
 Nigeria 21.3 57.9
 Thailand 63.4 52.6
 Ukraine 16.1 52.2
 Guatemala 9.7 51.5
 Uruguay 9.9 51.1
 Honduras 2.9 49.6
 Zambia 1.4 48.9
 Belarus 14.4 48.1
 Armenia 0.9 46.3
 Russia 114.5 46.1
 Benin 1.0 45.2
 Nicaragua 1.0 45.2
 Moldova 0.6 45.1
 Sri Lanka 7.1 44.6
 Philippines 34.4 43.4
 Senegal 1.9 43.2
 Kazakhstan 7.4 43.2
 Uganda 2.7 43.1
 Niger 0.8 41.9
 Mali 0.9 41.0
 Ethiopia 2.6 40.3
 Malawi 0.7 40.3
 Mozambique 1.4 40.3
 Côte d'Ivoire 3.4 39.9
 Latvia 2.9 39.9
 Brazil 226.8 39.8
 Kyrgyzstan 0.5 39.8
 Madagascar 1.5 39.6
 Colombia 30.8 39.1
 Burkina Faso 0.8 38.4
 Ghana 1.9 38.4
 Tunisia 7.1 38.4
 Nepal 2.2 38.4
 Kingdom of Bulgaria 4.3 36.9
 Pakistan 21.9 36.8
 Morocco 11.8 36.4
 Jamaica 2.6 36.4
 Bangladesh 16.7 35.6
 Egypt 35.0 35.1
 Ecuador 4.3 34.4
 Kingdom of Romania 12.5 34.4
 Kenya 3.5 34.3
 Algeria 17.3 34.1
 Lebanon 5.9 34.1
 Bosnia and Herzegovina 1.6 34.1
 Uzbekistan 2.5 34.1
 Venezuela 40.1 33.6
 Botswana 1.8 33.4
 Albania 1.3 33.4
 Independent State of Croatia 6.3 33.4
 Cameroon 2.7 32.8
 Turkey 64.5 32.1
 Dominican Republic 6.0 32.1
 Malaysia 25.6 31.1
 Lithuania 3.4 30.3
 Mexico 168.5 30.1
 Kingdom of Yugoslavia 2.5 29.1
 Greece 32.9 28.6
 South Africa 34.8 28.4
 Poland 43.3 27.6
 South Korea 125.1 27.5
 Yemen 2.0 27.4
 Slovenia 4.9 27.1
 Italy 288.0 27.0
 United Arab Emirates 0.0 26.4
 Costa Rica 3.8 26.2
 Argentina 70.5 25.4
 Hungary 11.1 25.1
 Belgium 53.1 23.2
 India 104.7 23.1
 Portugal 23.3 22.6
 Spain 124.8 22.6
 Israel 23.2 21.9
 Chile 13.5 19.8
 Republic of China 61.6 19.6
 Indonesia 27.7 19.4
 Jordan 1.6 19.4
 Syria 3.1 19.3
 Czech Republic 9.6 19.1
 Norway 30.6 19.1
 Sweden 42.9 19.1
 Iran 17.7 18.9
 Slovakia 3.6 18.9
 Mongolia 0.2 18.4
 Saudi Arabia 32.0 18.4
 Finland 21.9 18.3
 Denmark 29.1 18.2
 Hong Kong 27.5 16.6
 Canada 110.1 16.4
 Germany 303.1 16.3
 Republic of Ireland 12.7 15.8
 Vietnam 4.9 15.6
 Early Modern France 199.6 15.3
 Australia 58.0 15.3
 Mainland China 139.6 13.1
 Singapore 12.9 13.1
 Netherlands 47.8 13.0
 New Zealand 5.9 12.7
 United Kingdom 178.6 12.6
 Japan 553.8 11.3
 Austria 19.0 10.2
 Switzerland 22.3 8.8
 United States 864.6 8.8


Women tend to make up the greatest portion of the informal sector, often ending up in the most erratic and corrupt segments of the sector.
Sixty percent of female workers in developing countries are employed by the informal sector. The reasoning behind why women make up majority of the informal sector is two-fold. Firstly, it could be attributed to the fact that employment
Employment is a contract between two parties, one being the employer and the other being the employee. An employee may be defined as:- Employee :...

 in the informal sector is the source of employment that is most readily available to women. Secondly, a vast majority of women are employed from their homes (most likely due to the large number of women who are involved in care work
Care work
Care work is a sub-category of work that includes all tasks that directly involve care processes done in service of others. Oftentimes, it is differentiated from other forms of work because it is intrinsically motivated, meaning that people are motivated to pursue care work for internal reasons,...

) or are street vendors, which both are classified in the informal sector Furthermore, men tend to be overrepresented in the top segment of the sector and women overpopulate the bottom segment.
For example, very few women are employers who hire others and more women are likely to be involved in smaller scale operations. Labor markets, household decisions, and states all propagate this gender inequality
Gender inequality
Gender inequality refers to disparity between individuals due to gender. Gender is constructed both socially through social interactions as well as biologically through chromosomes, brain structure, and hormonal differences. Gender systems are often dichotomous and hierarchical; binary gender...

. The gender gap in terms of wage is even higher in the informal sector than the formal sector

Issues from within

Workers in the informal sector earn less income, have unstable income, and don’t have access to basic protections and services.
Informal businesses also lack the potential for growth, trapping employees in menial jobs indefinitely. On the other hand the informal sector can allow a large proportion of the population to escape extreme poverty
Poverty is the lack of a certain amount of material possessions or money. Absolute poverty or destitution is inability to afford basic human needs, which commonly includes clean and fresh water, nutrition, health care, education, clothing and shelter. About 1.7 billion people are estimated to live...

 and earn an income that is satisfactory for survival.

From the viewpoint of governments, the informal sector can create a vicious cycle. Being unable to collect taxes from the informal sector, the government may be hindered in financing public services
Public services
Public services is a term usually used to mean services provided by government to its citizens, either directly or by financing private provision of services. The term is associated with a social consensus that certain services should be available to all, regardless of income...

, which in turn makes the sector more attractive. Conversely, some governments view informality as a benefit, enabling excess labor to be absorbed, mitigating unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...



The informal sector has been expanding as more economies have started to liberalize.
This pattern of expansion began in the 1960s when a lot of developing countries didn’t create enough formal jobs in their economic development plans, which lead to the formation of an informal sector that didn’t solely include marginal work and actually contained profitable opportunities. In the 1980s, the sector grew alongside formal industrial sectors. In the 1990s, an increase in global communication and competition lead to a restructuring of production and distribution, often relying more heavily on the informal sector.
Over the past decade, the informal economy is said to account for more than half of the newly created jobs in Latin America. In Africa it accounts for around eighty percent. Many explanations exist as to why the informal sector has been expanding in the developing world throughout the past few decades. It is possible that the kind of development that has been occurring has failed to support the increased labor force
Labor force
In economics, a labor force or labour force is a region's combined civilian workforce, including both the employed and unemployed.Normally, the labor force of a country consists of everyone of working age In economics, a labor force or labour force is a region's combined civilian workforce,...

 in a formal manner. Expansion can also be explained by the increased subcontracting due to globalization
Globalization refers to the increasingly global relationships of culture, people and economic activity. Most often, it refers to economics: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import...

 and economic liberalization
Economic liberalization
Economic liberalization is a very broad term that usually refers to fewer government regulations and restrictions in the economy in exchange for greater participation of private entities; the doctrine is associated with classical liberalism...

. Finally, employers could be turning toward the informal sector to lower costs and cope with increased competition.


The relationship between the informal sectozr and poverty certainly isn’t simple nor does a clear, causal relationship exist. An inverse relationship between an increased informal sector and slower economic growth
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...

 has been observed though.
Average incomes are substantially lower in the informal economy and there is a higher preponderance of impoverished employees working in the informal sector.

Possible improvements

Ways to improve the informal sector include formalizing informal jobs through regulation by the state. The issue with this policy is that so many different types of informality exist. It would be extremely difficult to create solutions to meet so many diverse circumstances. Another possible improvement would be to provide better protections and benefits in the informal sector, but creating protection programs could lead to a disconnect between the labor market and protections, which may not actually improve informal employment. It might also be possible to create other methods of generating income through microloans or land rights
Land rights
Land law is the form of law that deals with the rights to use, alienate, or exclude others from land. In many jurisdictions, these species of property are referred to as real estate or real property, as distinct from personal property. Land use agreements, including renting, are an important...

 when access to the formal sector is limited. This is not a satisfactory solution to effectively combat the issues underlying the informal sector though.

See also

  • Agorism
    Agorism is a political philosophy founded by Samuel Edward Konkin III and developed with contributions by J. Neil Schulman that holds as its ultimate goal bringing about a society in which all "relations between people are voluntary exchanges – a free market." The term comes from the Greek...

  • Casual employment
    Casual employment
    Casual employment is an Australian employment classification under Australian workplace law whereby an employee is paid at a higher hourly rate in lieu of having their employment guaranteed, and lacking other usual employment conditions such as sick leave...

  • Doing business as
    Doing business as
    The phrase "doing business as" is a legal term used in the United States, meaning that the trade name, or fictitious business name, under which the business or operation is conducted and presented to the world is not the legal name of the legal person who actually own it and are responsible for it...

  • Hernando de Soto
    Hernando de Soto (economist)
    Hernando de Soto is a Peruvian economist known for his work on the informal economy and on the importance of business and property rights. He is the president of the Institute for Liberty and Democracy , located in Lima, Peru.-Childhood and education:Hernando de Soto was born in 1941 in Arequipa,...

  • International Labour Organization
    International Labour Organization
    The International Labour Organization is a specialized agency of the United Nations that deals with labour issues pertaining to international labour standards. Its headquarters are in Geneva, Switzerland. Its secretariat — the people who are employed by it throughout the world — is known as the...

  • Keith Hart
    Keith Hart
    Keith William Hart is a Canadian retired firefighter and professional wrestler. He is one of the sons of Stu Hart, CM.-Career:Before becoming a wrestler, Keith Hart earned a degree in teaching....

  • Rotating Savings and Credit Association
    Rotating Savings and Credit Association
    A Rotating Savings and Credit Association or ROSCA is a group of individuals who agree to meet for a defined period of time in order to save and borrow together...

  • Substantivism
    Substantivism is a position, first proposed by Karl Polanyi in his work The Great Transformation, which argues that the term 'economics' has two meanings...

External links

An article by a collaborator of de Soto. Co-chaired by de Soto and former secretary of state Madeleine Albright
Madeleine Albright
Madeleine Korbelová Albright is the first woman to become a United States Secretary of State. She was appointed by U.S. President Bill Clinton on December 5, 1996, and was unanimously confirmed by a U.S. Senate vote of 99–0...

. A working paper describing attempts to formalize street vending in Mexico.