Informal economy
Based on Wikipedia: Informal economy
The Economy That Doesn't Exist on Paper
In Lima, Peru, during the 1980s, a team of researchers decided to conduct an experiment. They wanted to find out what it actually took to legally register a small garment factory. The answer: more than one hundred administrative steps and nearly a year of full-time work.
This experiment, led by the economist Hernando de Soto, helped explain something that governments around the world had been struggling to understand. Why do billions of people work, trade, build homes, and run businesses entirely outside the official economy? Why does so much of human economic activity remain invisible to tax collectors, regulators, and statisticians?
The answer is simpler than you might think. For countless people, joining the formal economy isn't worth the trouble—or isn't possible at all.
What We Mean by Informal
The informal economy goes by many names. The grey economy. The shadow economy. Working under the table, off the books, or for cash. In French-speaking Africa, they call it System D, from the word "débrouillard"—someone who is resourceful, who gets things done through improvisation.
But what exactly makes economic activity "informal"?
At its simplest, the informal economy consists of all the work and commerce that happens outside government regulation and taxation. The street vendor selling fruit from a cart. The seamstress working from her kitchen. The construction worker paid in cash at the end of each day. The mechanic who fixes cars in his driveway. None of these transactions appear in any government database. None of them contribute to official measurements of a nation's wealth.
This doesn't necessarily mean the activity is illegal. A woman selling homemade tamales on a street corner is doing nothing criminal—she's just operating outside the bureaucratic systems that would classify her as a "registered food vendor" with health permits and tax obligations. Her tamales are perfectly legal. It's her business status that's informal.
This distinction matters. The informal economy is different from the criminal economy, which produces and distributes things that are inherently illegal—drugs, stolen goods, human trafficking. The informal economy produces legal goods and services. It just does so outside official channels.
The Scale of Invisibility
The numbers are staggering, though by definition imprecise.
In sub-Saharan Africa, informal employment accounts for roughly eighty percent of all non-agricultural work. In Asia, it's nearly eighty percent. In Latin America, about sixty-five percent. In the Middle East and North Africa, close to sixty percent. When you include agricultural work—much of which is also informal—the percentages climb even higher. In India and many African nations, informal work represents over ninety percent of all employment.
Even in wealthy industrialized nations, the informal economy persists, typically representing about fifteen percent of economic activity.
For decades, this vast parallel economy was largely ignored by economists and policymakers. The dominant thinking in the 1950s and 1960s, during the optimistic heyday of modernization theory, held that traditional forms of work would naturally disappear as countries developed. Farmers would become factory workers. Street vendors would become shop owners. The informal would become formal, inevitably and automatically.
It didn't happen.
Instead, the informal economy grew. In many developing countries, it expanded dramatically, absorbing workers who couldn't find places in the formal sector. In developed countries undergoing deindustrialization, workers pushed out of formal employment often found themselves working informally. The informal economy wasn't a vestige of the past. It was a permanent feature of how humans organize work.
The Origin of a Term
The concept traces back to 1955, when the economist W. Arthur Lewis developed a model of economic development that distinguished between modern industrial employment and traditional forms of work. But the term "informal sector" itself didn't emerge until the early 1970s.
A British anthropologist named Keith Hart coined the phrase in a 1971 study of Ghana, published in 1973. Around the same time, the International Labour Organization—the United Nations agency devoted to workplace issues—used the term in an influential 1972 report on Kenya.
The timing wasn't coincidental. By the early seventies, it had become clear that economic development wasn't eliminating traditional work patterns. Scholars needed language to describe what they were seeing: not a disappearing remnant, but a thriving parallel system.
Today, most researchers prefer the term "informal economy" over "informal sector." The shift in language reflects a broader understanding. This isn't a separate sector of the economy, neatly walled off from everything else. It's a pervasive feature that cuts across all industries, all regions, and all types of work.
Why People Work Informally
There are essentially three theories about why informal work persists.
The first view sees informal workers as trapped entrepreneurs. These are people who would happily formalize their businesses if they could, but regulatory barriers make it impossible or impractical. Remember that garment factory in Lima that took a year to register? For someone just trying to make a living, that kind of bureaucratic obstacle is insurmountable. According to this view, informal workers are victims of overregulation.
The second view is less sympathetic. It sees many informal businesses as "parasitic"—enterprises that could operate formally but choose not to, because avoiding taxes and regulations gives them a competitive advantage over businesses that play by the rules. Why pay for permits and health inspections and employee benefits when your competitor down the street doesn't?
The third view focuses on skills and productivity. Many informal workers, according to this perspective, simply lack the education or abilities to compete in the formal economy. Informality isn't a choice or a response to regulation. It's a survival strategy for people who have no other options.
A 2018 study of Brazilian informal businesses found evidence for all three views, but in surprising proportions. Only about nine percent of informal firms fit the first category—trapped entrepreneurs blocked by regulation. Nearly forty-two percent fit the second—businesses that could go formal but chose not to. The remainder were survival enterprises run by people with few alternatives.
But these categories can't capture the full human reality. When researchers studied informal workers in Costa Rica, they found motivations that transcended simple economics. Yes, many workers believed they earned more informally than they would in a formal job. But they also valued things that don't show up in economic models: independence, flexible hours, the chance to work outdoors, proximity to friends. The informal economy offers a kind of freedom that formal employment often doesn't.
What Informal Work Looks Like
The informal economy spans an enormous range of activities.
At one end are the most precarious workers: street vendors, shoe shiners, garbage collectors, day laborers. These jobs require little or no capital to start. Anyone can enter. The barriers are low, but so are the rewards and protections.
At the other end are substantial businesses—small manufacturing operations, service companies, even transit systems. La Paz, Bolivia, has a largely informal public transportation network. These enterprises require real investment to establish. They may have employees, regular customers, established routines. They differ from formal businesses mainly in their relationship to government regulation.
In between lies everything else. Home-based workers producing garments or crafts. Unlicensed mechanics and electricians. Tutors and caretakers paid in cash. Street food vendors with regular customers and prime locations they've staked out over years.
The two most common types of informal work are home-based labor and street vending. Home-based workers are more numerous, but street vendors are more visible—literally the public face of the informal economy in most cities. Together, these categories account for ten to fifteen percent of the non-agricultural workforce in developing countries and over five percent in developed ones.
Most informal workers—about seventy percent in developing countries—are self-employed. They don't have bosses. They also don't have the protections that come with employment: no guaranteed wages, no benefits, no job security, no recourse if things go wrong.
And the majority of informal workers worldwide are women.
The Government's Dilemma
Governments have been trying to regulate economic activity for as long as there have been governments. The practice goes back at least to ancient Sumer, roughly five thousand years ago. And for just as long, people have been finding ways around those controls.
The informal economy represents a fundamental challenge to state authority. How can a government tax income it can't measure? How can it enforce labor laws for workers it doesn't know exist? How can it ensure product safety, workplace conditions, or environmental standards when so much commerce happens off the books?
The economist Edgar L. Feige, who has studied informal economies for decades, emphasizes this point. When economic activity shifts from the observed to the unobserved sector, governments lose not just tax revenue but information. Their economic statistics become unreliable. Policy decisions based on those statistics may be completely misguided.
This is why some countries have tried to estimate informal activity and include it in their official statistics. Italy has been doing this since 1987, which boosted their reported Gross Domestic Product by about eighteen percent. In 2014, several European countries began including estimates of prostitution and illegal drug sales in their GDP figures—not because they approved of these activities, but because international accounting standards required a more complete picture of economic activity. The change added three to seven percent to their reported GDP.
But estimating the size of invisible activity is inherently difficult. Feige has been particularly critical of methods that treat the informal economy as a "latent variable"—something that can't be directly observed but can supposedly be inferred from other data. The results of such estimates, he argues, are often unreliable.
The View from Above and Below
How you feel about the informal economy often depends on where you sit.
From a government's perspective, informality looks like a problem. It means lost tax revenue, unprotected workers, unregulated businesses, and unreliable statistics. Policymakers tend to view "formalizing the informal sector" as an important goal.
From a business perspective—at least from the perspective of formal businesses—informality can look like unfair competition. Why should a licensed restaurant with proper permits and health inspections compete against a food cart that pays no taxes and follows no rules?
But from the perspective of informal workers themselves, the picture looks different. For billions of people, the informal economy is the only economy. It's where they earn their living, support their families, and exercise whatever entrepreneurial spirit they possess. Hernando de Soto, the Peruvian economist who documented the Lima garment factory experiment, admired the creativity and drive of informal entrepreneurs. He saw them not as problems to be solved but as evidence of what overregulation costs a society.
The Dutch sociologist Saskia Sassen has offered yet another perspective. Writing in 2009, she argued that the new informal economy in wealthy countries is actually a product of advanced capitalism—and the site of its most creative energy. Artists, architects, designers, software developers: many of the most entrepreneurial people in modern cities work informally, at least some of the time. The informal economy isn't just a refuge for the desperate. It's where innovation happens, freed from bureaucratic constraint.
An Ancient Adaptation
Here's something worth pondering: the informal economy isn't new. It's older than its formal counterpart.
Archaeological and anthropological evidence suggests that people in all societies have always adjusted their behavior to evade regulations. The moment governments started trying to tax and control commerce, people started finding ways around those controls. The informal economy isn't a failure of development or a vestige of tradition. It's a permanent human adaptation to state power.
This doesn't mean informality is good or bad. It simply is. And any honest assessment of economic policy has to grapple with this reality.
The informal economy provides critical opportunities for the poor. In countries with high unemployment and limited formal job creation, it often represents the only path to earning a living. But it also leaves workers vulnerable—without benefits, protections, or security. It deprives governments of revenue they might use for public services. It can create unfair competition for businesses that do follow the rules.
Integrating the informal economy into the formal sector remains, as the economists say, "an important policy challenge." Which is another way of saying: after thousands of years, we still haven't figured out how to solve it.
Perhaps that's because it's not entirely a problem. Perhaps it's simply what economies look like when you remove the tidy abstractions of economic models and look at how actual humans actually work. Messy. Adaptive. Informal.
The Numbers Don't Tell the Whole Story
There are reasons for cautious optimism. In many regions, the informal economy has been declining over the past two decades. In Africa, estimates suggest the informal share of the economy has dropped to around forty percent. Economic development, improved regulation, and expanded formal employment have all contributed.
But percentages can be misleading. Even as the informal share shrinks, population growth may mean the absolute number of informal workers keeps rising. And global economic disruptions—recessions, pandemics, structural changes in labor markets—can push workers back into informality even in countries that had been making progress.
The informal economy resists simple narratives. It's neither purely a problem nor purely a solution. It's where billions of people live their economic lives, invisible to the systems that claim to measure and manage human prosperity.
That invisibility is itself a kind of statement. These workers exist. Their labor creates value. Their enterprises serve real needs. Whether or not they appear in official statistics, they are the economy—not a shadow of it, but often its most essential substance.