Answer to Question #199019 in Economics for ibo

Question

What are the implications of a large informal sector for the implementation of social safety nets in developing countries

Answer 1

One of the most common mistakes is to consider the terms “informal sector” and “informal economy” as synonyms for those employed in the informal sector and informally employed. Indeed, the history of the study of the informal order in the economy began with the problematization of the informal sector.

The informal sector phenomenon has been studied and terminologically legitimized in research on developing countries. The introduction of the term was associated with the presence in these countries of significant groups of people who are not involved in the organized labor market, but at the same time creating their own employment system, subordinated to the idea of ​​survival. This has manifested itself in a variety of activities in the form of self-employment or small family businesses. The concept of the “informal sector” united various forms of employment, based on informal, personalized relationships with consumers, employees and creditors. At this stage, the informal sector was synonymous with the informal economy.

Briefly, the history of the study of the informal sector is as follows. True, initially different terms were used to designate what would later be called the informal sector.

Back in the 1940s, the Danish anthropologist J. Boeke expressed the idea of ​​the “duality” of the economies of developing countries, with only one “part” of it being likened to a “normal” market economy. In the 1950s, A. Lewis developed a two-sectoral development model, highlighting the sector of modern capitalist firms with a focus on maximizing profits and the peasant sector, where the methods of economic motivation and distribution principles are extremely ambiguous and diverse. An attempt to use this scheme in econometrics is associated with the works of J. Harris and M. Todaro, who in the 1970s brought the idea of ​​a dual economy to the level of a two-sector system of equations of economic equilibrium.

In 1963, K. Geertz, who studied entrepreneurship in Indonesia, introduced the concept of the bazaar-type economy as opposed to the firm-type economy as the economy of large Western corporations that provide workers with the protection of the law (bazaar- economy "and" firm-centered economy "). The national bureaucracy saw these firms as a defense against market failures, creating opportunities for monopoly market domination in these countries. In contrast, the bazaar economy was individualistic and competitive. The economy organized in the form of firms was described as more efficient, capital intensive, with higher labor productivity. The “bazaar” economy, on the contrary, is labor-intensive, low-productive, small-scale, and low-income. Later, in his works on Morocco, Geertz emphasized that modern economics uses the “bazaar model” when studying decision-making in competitive markets, while in practice the bureaucracy of developing countries actively defends monopolies. But economists did not accept Geertz's analytical terminology.

Usually, the introduction of the term “informal sector” into scientific circulation is associated with the name of K. Hart, who noted that “rejected by the structure of formal opportunities, people from the lower ranks of the urban proletariat are looking for informal ways to increase their income. The beginning of Hart's fame and the triumphant march of the concept of the "informal sector" was his report "Urban unemployment in Africa", made in 1971 and devoted to the study of the structure of employment in Ghana [Hart, 1973]. The basic message of work: the poor in Accra, Ghana are not unemployed. This was news as large companies provided very limited jobs, and consequently, economists estimated unemployment in Africa at 50% or more. Imagination painted a picture of America during the Great Depression with dull beggars on the streets, but the streets of Accra were full of life. Crowds of street vendors, porters, taxi drivers were busy. The informal economy was the self-organization of people excluded from participation in the enjoyment of benefits guaranteed by the state, and who created their own means of survival.

In the sphere of economics, the most significant processes were: the development of the world capital system; expansion of capital in developed Western countries; the spread of the network method of organizing production and space; the transition of a number of countries to the post-industrial stage of development and, as a consequence, the individualization of needs and a qualitative separation from the regions that solve the problems of industrialization. These processes provoked socio-cultural and economic conflicts of economic structures, comprehended in opposition to formal and informal economies.