(“The Dilemma of the Informal Economy”, Employers Federation of Ceylon, Rajagiriya, By Sriyan de Silva) The contribution of the informal economy is much too often underestimated, its nature misunderstood and its role in the economy misinterpreted. Attitudes towards it range from animosity to benevolence. It is in this context that Sriyan de Silva’s “The Dilemma [...]


The Sundaytimes Sri Lanka

Exploring the Complexity of the Informal Economy

Book Review

(“The Dilemma of the Informal Economy”, Employers Federation of Ceylon, Rajagiriya, By Sriyan de Silva)

The contribution of the informal economy is much too often underestimated, its nature misunderstood and its role in the economy misinterpreted. Attitudes towards it range from animosity to benevolence. It is in this context that Sriyan de Silva’s “The Dilemma of the Informal Economy” makes a valuable contribution towards understanding the informal economy.

This book published by the Employers Federation of Ceylon recently and launched on March 7th before a distinguished audience brings to the forefront a whole array of pertinent issues concerning the informal economy. De Silva’s dissertation also traverses into issues in economic development, institutional economics and the importance of the rule of law for economic development. It contributes much towards the understanding of the informal economy as well as issues in economic development.

Defining informal economy

Although the informal economy is difficult to define, it is a widespread phenomenon around the world and present even in developed countries, though to a lesser extent than in developing countries. Informal enterprises are generally small, often self-employed endeavours though not exclusively so. The informal economy consists of a very wide range of activities both in rural areas, in towns and cities. Informal activities include small farmers producing a variety of food and cash crops, the output of craftsmen, small manufacturing units, itinerant traders, street vendors, a multiplicity of services in trade and transport and the financial services provided by informal lenders. The value added by these informal activities is much larger than generally supposed. Their contribution to GDP is significant.

Synthesis of previous studies

One of the important contributions of the book is the synthesis of previous research on informal economies around the world. The book covers the most salient literature on informal economies and underscores the importance of the informal economy by citing several seminal assessments. Hernando De Soto, the World Bank and the ILO, estimate that about 1.9 billion people work in the informal economy world-wide, and that an equal number are dependent on it. He contends that this total of 3.8 billion is perhaps higher today after the global recession and the consequent increase of informal activities even in developed economies.

In 2013 a study estimated that India’s ‘Informal Economy’ was about 90 per cent of the entire economy – a higher figure than was estimated earlier. Therefore about half the world’s population and the majority of the world’s poor are part of the informal economy or dependent on it. The question as to how these people would survive if they did not have the shelter of the informal economy remains unanswered.

Sriyan de Silva cites the example of La Salada, the largest informal market in South America, situated in the suburbs of Buenos Aires in Argentina, as illustrative of this dependency. It consists of about 30,000 small stalls and is open three days a week from late at night to about 5 o’clock the next morning and is visited by about a quarter of a million people each week with some travelling about 15 hours to buy goods for re-sale. This market generates about US$ 22-44 million a week.

Link with formal economy

The informal economy produces goods and services for non-formal markets, and for people employed in the formal economy. There are also many linkages between the two economies, with informal businesses supplying products to the formal economy. There is an inadequate appreciation of the many obstacles faced by ‘informals’ in operating in the formal economy that are also faced by businesses in the formal economy. In other words, de Silva points out that a poor business environment affects those operating in both economies, though businesses in the formal economy have a better capacity to minimise their adverse impacts.

De Silva observes that although some informal enterprises have grown to be large businesses, most continue to be micro-enterprises and informal in nature owing to the nature of their activities, limited markets, constraints in obtaining finance and limited capacities of the informal enterprises to expand. Even though it is widely believed that the informal economy has diminished after the liberalisation of trade and globalisation, he points out that there is overwhelming evidence to the contrary.

While some cottage and small industries in many developing countries were unable to withstand the competition of international trade and folded up, at the same time, there was an impetus to the informal economy from the availability of rejected useable materials from the manufacturing sector, increased demand for goods and services and development of a demand for new services owing to changing life styles, availability of savings from foreign employment and exposure to new technology. There have been backward linkages as well as parallel informal economic activities in tandem with the expansion of the formal economy.

The international experience provide strong support to the hypothesis that informal economic activities gain in importance till a fairly high level of economic development and decline thereafter. De Silva supports this thesis by citing the experiences of Singapore and the Republic of Korea that are illustrative of this. We might add that Sri Lanka is very much at a stage when informal economic activities are growing.

Comprehensive monograph

De Silva’s monograph is a comprehensive exploration of the wide-ranging forms of informal economic activities in both the developing and developed countries. The book is not a description of these activities: it is a synthesis of why they persist and grow, the difficulties they face, the potential for formalisation of these enterprises, the varied official attitudes towards them and a legal and economic analysis of their rationale.

There is inadequate appreciation of the many obstacles faced by informal activities in operating in the formal economy that are also faced by businesses in the formal economy. De Silva points out that a poor business environment affects those operating in both economies, though businesses in the formal economy have a better capacity to minimize their adverse impacts.

In this 214 page volume in four parts the author covers the extensive literature on the forms of informal enterprises from various perspectives. The comprehensive survey of the literature on the informal economy is a valuable addition to the understanding of this rather misunderstood character of the informal economy and brings out valuable perspectives on the survival, growth and difficulties of informals the world over. The coverage is global rather than the informal economy in Sri Lanka to which there is limited reference.

Format and content of book

The introductory chapter outlines the reasons for undertaking this study and the approaches of the book. It brings out the significance and vast arena of informal enterprises not only in the developing world but in the developed as well. De Silva points out that there are three differing perspectives of informal activities. The romantic or legalistic view looks at these enterprises as productive ventures that have to face numerous obstacles. The parasite or structuralist view looks at these enterprises in a negative manner as an obstacle to the market economy, evading taxes and illegal in its activities (illegal informal activities are not discussed in the book). The third dualistic view sees the informal economy as a less efficient one indulging in low productivity activities co-existing with the formal or market economy.

The two chapters of Part 1 of the book on the institutional theory of development discuss the institutional requirements to reduce poverty and achieve socio economic development and what institutions matter. Chapter 1 based on the book “Why Nations Fail”, by Daron Acemoglu and James Robinson is an analysis of case studies of countries stretching over 500 years or more. Its conclusion is that nations fail primarily when policies and institutions are not geared to achieving inclusive socio-economic development, but are instead directed towards enabling those in power and groups allied or close to them to capture for themselves the fruits and benefits of economic development and activities to the exclusion of the majority of the population. This is indeed a valuable and pertinent insight.
De Silva discusses some of the specific institutions that are crucial to inclusive socio-economic development – institutions which in several countries have been subverted or corrupted to serve the ends of a small minority. The most important prerequisite for development he emphasises is the rule of law that he discusses in some detail in Chapter 2. In as much as it has significance for the informal economy, it is a vital prerequisite to overall economic development. This is an unquestionable precondition for a country’s economic development and social wellbeing and de Silva’s discussion of it merits reflection.

The 10 chapters of Part 2 of the book deals with the core issues of the informal economy, its definition, its facilitation, private property rights, employment and the formalising of the informal economy. Defining the informal economy has always been a thorny issue, often coloured by the perspectives and prejudices about informal enterprises. The author attempts to define the informal economy in Chapter 3 and points out quite rightly that its definition would vary depending on whether its focus is the economic unit, or the worker, or the nature of the activities carried on in the informal economy, or whether it is the compliance or non-compliance with the regulatory framework by those who are engaged in business activities in this economy.

De Silva defines the informal economy as legitimate economic activities in which people work to earn a means of livelihood and income, whether they are employed, self-employed or entrepreneurs operating without the benefit of market-supporting institutions. He points out that in many instances they operate outside the regulatory framework established by governments because they lack the resources and incentives to comply with excessive and burdensome regulations and insurmountable obstacles.

The distinction between formal and informal economies according to de Silva consists of one in which economic activities are bound by formal rules established by the State for the formal economy, while informal activities operate largely on the basis of non-legal rules and arrangements devised by the ‘informals’ themselves and are therefore not externally imposed, but with some varying degrees of compliance with the laws and regulations in the formal economy.

The informal economy, he observes, is a response to poverty; informality being largely a survival strategy, although all ‘informals’ are not poor. Deprived as they are for a livelihood in the formal economy many eke out a living in enterprising ways. One has to only look around to see the diverse informal enterprises from the small vendor to the roaring trishaws and workmen performing essential tasks in households.

The book gives a balanced view of the informal economy as performing useful services: a robust one that serves the economy by providing employment and ameliorating poverty. The richness of Sriyan de Silva’s excursion into the informal economy; its diversity, its contribution, problems and obstacles faced by ‘informals’ cannot be captured in a short review article. It is however hoped that this review has captured the coverage and importance of the informal economy to merit reading the book to grasp an understanding of the other economy.

Concluding reflection

It would be appropriate to conclude this review with two important observations of the author. The informal economy will never vanish entirely whatever the level of development and those advocating the formalisation of the economy should not take the form of extending to it all the laws and regulations applicable in the formal economy. Instead it should take the form of identifying the problems faced by the ‘informals’ and creating an enabling environment by helping to remove the obstacles and problems they face. The choice as to whether they wish to enter the formal economy or not should be left to ‘informals’ themselves in the particular environment they operate.

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