The Rise of the Informal Economy and the Need to Embrace it and engage with it

What is the Informal Economy or the System D ?

We seem them everywhere and we even do business with them without pausing to think whether they belong to the organized economy or the informal economy. The we that are being referred to are the street vendors, the service providers, the waiters and waitresses in restaurants and hotels, the drivers who ferry us around in their taxis and countless other workers who are faceless and nameless in our interactions as part of our daily existence.

While the formal economy consists of salaried employees with defined pension schemes and assured perks and benefits, the workers in the informal economy do not have such luxuries and instead, they have to contend with variable pay and work that sometimes dries up, living on the edge of cities, and generally not being counted as part of the workforce. This rise of the informal economy has been dubbed as the growth of the “System D” that is as crucial and critical to the success of the global economy as the formal economy. The workers in this informal economy have been characterized as the “Precariat” class or those whose lives are forever precarious and liquid. However, the point to note here is that businesses have begun to realize the importance of this System D and have started to engage with it and embrace it.

The Perils of Not Including the Informal Economy in the Mainstream

The informal economy does not pay taxes to the government, does not appear in the official GDP (Gross Domestic Product) figures except in those cases where the government imputes a certain amount to their contributions based on rough calculations. This means that the informal economy does not appear in any of the official policies and programs and is instead operating outside the pale of the formal and the organized sector. However, estimates suggest that the size of the informal economy as a percentage of the total economy could be as high as a third or even half and hence, there has to be a way of estimating and including their contributions as part of the computation of the statistics. Further, the sheer number of jobs created by the informal economy makes it a key component of the overall economy and this is more the reason why businesses and policymakers must step up their efforts to include this component in the mainstream. Already, there are many countries in Asia where the courts and the government are devising ways and means of accommodating the informal economy within the mainstream and regularizing their existence by passing laws and statutes that absorb them into the formal economy.

The Case for Engagement with the Informal Sector

Studies have shown that by 2020, the informal economies in many parts of the world would be more than the formal economies and the rise of the mobile, itinerant, and global workforce that thrives in the parallel realm would be impossible to ignore. In recent months, Saudi Arabia has started the process of integrating the informal workers or the Precariat class into the mainstream and India has already taken steps to engage with the informal sector. Considering the fact that many businesses that operate in the informal economy do not have an incentive to be part of the mainstream, there is a need for a deeper engagement with the informal sector and ensures that it contributes to the mainstream. Further, there is also the aspect of illegal activities and undesirable elements taking advantage of the fungible nature of the informal economy and proving to be a threat to the existence of the states.

Concluding Thoughts

Finally, in as much as globalization has helped the rise of the global worker, it has also contributed to the rise of the Precariat class as the shrinking of the world, and the borderless nature of the process has helped the informal economy more than it has helped the formal economy. Therefore, one can no longer dismiss the informal economy as being peripheral and as the points made in this article show, we would soon reach a situation where the informal economy would overtake the formal one.


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Managerial Economics