Informal Economy

The term ‘informal economy’ became current in the 1970s as a label for economic activities that take place outside the framework of bureaucratic public and private sector establishments. It arose in response to the proliferation of self-employment and casual labour in Third World cities; but later the expression came to be used with reference to societies like Britain, where it competed with epithets of deindustrialization – the ‘hidden’, ‘underground’, ‘black’ economy, and so on.

The social phenomenon is real enough and of some antiquity. London’s East End in the mid-19th century is a stark example of informal economic organization which rivals in scale any of today’s tropical slum areas (Davis, 2006). Nevertheless, the empirical referents of the ‘informal economy’ remain elusive, ranging as they do between the extremes of corrupt public finance in Congo and do-it-yourself in a London suburb. The intellectual history of the concept is clearer. It was provoked by the failure of prevalent economic models to address a large part of the world that they claimed to offer prescriptions for. Sociologists, anthropologists, geographers and historians have grasped the opportunity to embarrass economists by pointing out this deficiency. More remarkably, many economists, including employees of bureaucracies such as the World Bank and the International Labour Organization (ILO), have identified the ‘informal sector’ as something they must deal with. Whereas once the effects of ‘informality’ were thought to be palliative, they are now often seen as a threat to legitimate businesses.

Some notable attempts have been made to document the economy of the streets. Henry Mayhew’s investigations for the Morning Chronicle in the 1850s, published as London Labour and the London Poor (1861–2), are a classic source, as are Oscar Lewis’s several accounts of the ‘culture of poverty’ (for example, La Vida, 1964). Very little of all this impinged on the world of development economists. The dualistic models of economic development that prevailed in the 1960s took their lead from W. Arthur Lewis’s (1954) theory of development with unlimited supplies of labour, whereby underemployed rural workers migrated to find wage employment in a higher productivity urban economy.

In Peddlers and Princes (1963), Clifford Geertz identified two economic ideal types in a Javanese town. The majority were occupied in a street economy that he labelled ‘bazaar-type’. Opposed to this was the ‘firm-type’ economy consisting largely of Western corporations that benefited from the protection of state law. These had form in Weber’s (1981) sense of ‘rational enterprise’ based on calculation and the avoidance of risk. National bureaucracy lent these firms a measure of protection from competition, thereby allowing the systematic accumulation of capital. The ‘bazaar’, on the other hand, was individualistic and competitive, so that accumulation was well-nigh impossible. Geertz considered what it would take for a group of reform Muslim entrepreneurs to join the modern ‘firm’ economy. They were rational and calculating enough; but they were denied the institutional protection of state bureaucracy, which was the preserve of the existing corporations.

A decade later and in the context of growing unease over Third World urban unemployment, Keith Hart (1973, based on a conference paper of 1971) argued that the masses who were surplus to the requirements for wage labour in African cities were not ‘unemployed’ but rather were positively employed, even if often for erratic and low returns. He proposed that these activities be contrasted with the ‘formal’ economy of government and organized capitalism as ‘informal income opportunities’. Moreover, he suggested that the aggregate inter-sectoral relationship between the two sources of employment might be of some significance for models of economic development in the long run. In particular, the informal economy might be a passive adjunct of growth originating elsewhere or its dynamism might be a crucial ingredient of economic transformation in some cases.

The dualism (formal–informal) and some of the thinking behind it received immediate publicity through its adoption in an influential ILO (1972) report on incomes and employment in Kenya, which elevated the ‘informal sector’ to the status of a major source for national development by the bootstraps, as it were. This was enough to encourage legions of researchers to adopt the term. Before long a substantial critique of the ‘informal sector’ concept had emerged. Marxists claimed that its proponents mystified the essentially regressive and exploitative nature of this economic zone, which they preferred to call ‘petty commodity production’. The study of Third World urban poverty rapidly became a new segment of the academic division of labour; as a key term in its discourse, the informal economy attracted an unusual volume of debate (Bromley, 1978). Later, sociologists applied the term to industrial societies (Pahl, 1984).

Hernando De Soto argued that Peru was a mercantilist state whose over-regulated and impenetrable national bureaucracy excluded the vast majority from effective participation in development. The latter were an entrepreneurial peasantry flocking in ever-larger numbers to the main cities. They were forced to operate informally, that is, outside the law, in sectors such as housing, trade and transport. Later, he portrayed poor countries like Peru as being trapped in a world economy dominated by the first industrial nations (De Soto, 2000). Red tape is mainly an effect of a global regime that forces marginal states to adopt inappropriate institutional practices. The result is the same: migrants pile up in the cities and are forced to work outside the law. Countries like the USA, which dominates this global financial bureaucracy, made the transition to modern capitalism by giving informal practices and decentralized violence full rein in their own development. Similar flexibility has to be shown today if the poor urban masses are to have a chance of joining global development on less unequal terms.

The idea of an ‘informal economy’ is entailed by the institutional effort to organize society along formal lines (Hart, 2006). ‘Form’ is the rule, an idea of what ought to be universal in social life; and for most of the 20th century the dominant forms have been those of bureaucracy, particularly of national bureaucracy, since society has become identified to a large extent with nation states. This identity may now be weakening in the face of the neoliberal world economy and a digital revolution in communications. Popularity as a jargon word has not helped the informal economy acquire a measure of analytical precision. For many it is a convenient name for an unambiguous empirical phenomenon – what you find in the slums of Manila. Others refer to size (large-scale–small-scale), productivity (high–low), visibility (enumerated–unenumerated), pattern of rewards (wages–self-employment), market conditions (monopoly–competitive) and much else. Hart (1973), like Geertz, explicitly derived his analysis from Weber’s theory of rationalization. Much that goes on in developing countries today is only marginally the product of state regulation: it is thus ‘informal’ relative to the forms of publicly organized economic life. This is a qualitative distinction.

‘Form’ is the rule, the invariant in the variable. Idealist philosophers from Plato onwards thought the general
idea of something was more real than the thing itself. The ‘formal sector’ is likewise an idea, a collection of people, things and activities that share an idea; but we should not mistake the idea for the reality that it partially identifies. What makes something ‘formal’ is its conformity with such an idea or rule. Thus formal dress in some societies means that the men will come dressed like penguins, but the women are free to wear something extravagant that suits them personally – they come as variegated butterflies. Formality endows a class of people with universal qualities, with being the same and equal. What makes dress ‘informal’ is therefore the absence of such a shared code. But informality is relative to the eye of the beholder. Any observer of an informally dressed crowd will notice that the clothing styles are not random. We might ask what these informal forms are and how to account for them. The world’s ruling elite can be identified as ‘the men in suits’, because they choose to wear a style invented in the 1920s as an informal alternative to formal evening dress.

What the public and private sectors share is conformity to the rule of law at the national and increasingly international levels. How then might non-conformist economic activities, ‘the informal economy’, relate to this formal order? They may be related in any of four ways: as division, as content, as negation and as residue. The first two imply a positive relationship of interdependence, the third is antagonistic and the last relatively autonomous. The moral economy of capitalist societies is based on an attempt to keep separate impersonal and personal spheres of social life. The establishment of a formal public sphere entailed another based on domestic privacy. Most people, traditionally men more than women, divide themselves every day between production and consumption, paid and unpaid work, submission to impersonal rules in the office and the free play of personality at home. Money is the means whereby the two sides are brought together, so that their interaction is an endless process of separation and integration that I call division.

For any rule to be translated into human action, something else must be brought into play, such as personal judgement. So informality is built into bureaucratic forms as unspecified content. Take a chain of commodities from their production by a transnational corporation to their final consumption in a Third World city. At several points invisible actors appear filling the gaps that the bureaucracy cannot handle directly, from the factories to the docks to the supermarkets and street traders who supply the cigarettes to smokers. Informal processes are indispensable to the trade, as variable content to the universal form. Of course, some of these activities may break the law, through a breach of health and safety regulations, tax evasion, smuggling, the use of child labor, selling without a licence, and so on. The third way that informal activities relate to formal organization is thus as its negation. Rule breaking takes place both within bureaucracy and outside it; and so the informal is often illegal. The informalization of the world economy is to a large extent criminal and this includes white-collar crime.

The fourth category is not so obviously related to the formal order as the rest. Some ‘informal’ activities exist parallel to it, as residue. They are just separate from the bureaucracy. It would be stretching the logic of the formal–informal pair to include peasant economy, traditional institutions and much else besides within the rubric of the ‘informal’. Yet the social forms endemic to these often shape informal economic practices.

It is inconsistent to claim that the urban poor have an informal economy but their rich masters do not; or that the Third World has an informal sector but not the industrialized West. As long as there is formal economic analysis and the partial institutionalization of economies around the globe along capitalist lines, there will be a need for some such remedial concept as the informal economy. Its application to concrete conditions is stimulated by palpable discrepancies between prevalent models and observed realities. Such a discrepancy provoked the emergence of the concept in the 1970s, when Third World economies bore the brunt of the depression that marked the end of the West’s post-war miracle. Later the accelerating decline of the British economy encouraged some social scientists to adopt the term there. The common strand is the growing inability of modern states to control the wider economic environment that sustains them. Hence the need for a dualistic model, such as that offered by the ‘informal economy’ concept.


Bromley, R., ed. 1978. The urban informal sector: critical perspectives. World Development 6(9–10)

Davis, M. 2006. Planet of Slums. New York: Verso.

De Soto, H. 2000. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. London: Bantam.

Geertz, C. 1963. Peddlers and Princes. Chicago: University of Chicago Press.

Hart, K. 1973. Informal income opportunities and urban employment in Ghana. Journal of Modern African Studies 11, 61–89.

Hart, K. 2006. Bureaucratic form and the informal economy. In Linking the Formal and Informal Economy: Concepts and Policies, ed. B. Guha-Khasnobis, R. Kanbur and E. Ostrom. Oxford: Oxford University Press.

ILO (International Labour Organization). 1972. Incomes, Employment and Equality in Kenya. Geneva: ILO.

Lewis, O. 1964. La Vida: A Puerto Rican Family in the Culture of Poverty – San Juan and New York. New York: Random House.

Lewis, W.A. 1954. Economic development with unlimited supplies of labour. Manchester School of Economics and Social Studies 22(2), 139–91.

Mayhew, H. 1861–2. London Labour and the London Poor, 4 vols. London.

Pahl, R. 1984. Divisions of Labour. Oxford: Basil Blackwell.

Weber, M. 1981. General Economic History. New Brunswick NJ: Transaction Publishers.

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