Informal Economy

Bipasha Baruah

in Geography

ISBN: 9780199874002
Published online February 2013 | | DOI:
Informal Economy

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The terms “informal economy” and “informal sector” first appeared in academic literature and in policy circles in the 1970s. Keith Hart, an anthropologist working in Ghana, is most often credited with research on the informal sector during this time. Hart defined the informal sector as employment beyond government service, factories, and large-scale commercial ventures. He went on to classify informal employment in “legitimate” and “illegitimate” activities. He defined legitimate activities as those that made a contribution to economic growth at a small scale, for example, through home-based production, manual labor, or personal services. Hart conceptualized illegitimate informal activities as those that were not necessarily criminal in nature but were of questionable value to national development, such as begging, pickpocketing, scavenging, and streetwalking. Perhaps because there was so little research on the informal sector at that time, Hart’s work received a significant amount of attention within academic circles, labor organizations, and research institutions. The International Labour Organization (ILO), for example, used Hart’s work to distinguish between formal and informal employment based on criteria such as relative ease of entry, size, nature of enterprise ownership, type of production, and levels of skill, capital, and technology. Research on the nature, characteristics, size, and composition of the informal economy has grown dramatically in the past four decades, and many of Hart’s generalizations have long been challenged, if not outright rejected. Hart’s most enduring contribution to the most commonly used contemporary definition of the informal economy is that it lacks regulation by the political and economic institutions of a society. Other researchers have further fleshed out this defining criterion by pointing out that although regulation typically implies legality, it is important to recognize that the concept of legality itself has three dimensions that speak most directly to the difference between the formal and informal economic activities: legal recognition as a business activity, which involves registration, and possible subjection to health and security inspections; legality concerning payment of formal taxes and tariffs; and legality vis-à-vis labor matters, such as compliance with official guidelines on working hours, social security contributions, and fringe benefits. Many enterprises may only comply with one or two of these dimensions, so some researchers argue that the concepts of formality and informality may be better understood as a continuum rather than as a binary of watertight and mutually exclusive categories. As an example, a legally registered small business may not pay any social security benefits to its employees while a large corporation may use unrecorded cash payments on a regular basis as a way of avoiding or reducing taxation.

Article.  6504 words. 

Subjects: Earth Sciences and Geography ; Human Geography

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