The vital role of the informal economy

I’ve just read Robert Neuwirth’s 2011 book

. It’s an enjoyable read about the two years the author spent visiting street market vendors and smugglers in Lagos, Guangzhou, Saõ Paolo and Ciudad del Este. His aim is to make us appreciate the entrepreneurialism of the informal economy, which he labels ‘System D’ (rather than use Keith Hart’s original terminology), in order to distinguish it from the informal economy of organised crime with its dealing in illegal drugs, arms and exploited women.

If you like learning about how different markets work (and what true economist doesn’t?), then you’ll find lots to interest you in the book. There were also some terrific facts – for example that the poet Arthur Rimbaud gave up literature to become a trader of this and that in North Africa (p70); or that Nietzsche had written about the role of trust in the economy (p181):

“The fact of credit, of the whole of world trade, of the means of transport – in all of this a tremendous, mild trust in man finds expression.”

However, the strength of detailed reporting is paired with a weakness of analysis. It doesn’t help that Neuwirth has an odd idea about economics and economists. “Economists hate System D,” he claims (p130). He describes the people working in a Lagos street market and writes: “In economic terms, these multiple jobs are wasteful and redundant.” The language introduces value judgements that economists do not typically make, although politicians might.

An economist might point out that System D is low productivity. Or that reducing frictions (such as high import tariffs, or excessive regulations for registering and running a business, for example) would change the cost-benefit calculation for entrepreneurs and bring more of them into the formal economy. Although they (or their customers or workers) would pay more tax, they would have more scope to grow and their employees would have to formal benefits such as protection in employment legislation. But these observations don’t warrant the description given in the book.

I do agree with Neuwirth that the informal economy should be more widely studied and appreciated. The IMF/Schneider figures on the informal economy do indicate that it has been growing in size relative to GDP over time, and the current economic crisis is bound to be accelerating its growth. As the book points out, those people who do argue for stamping out what they would see as unacceptable intellectual property piracy or tax evasion are wrong to assume that the money that goes into the informal market would all be switched to the formal economy. Shoppers who will buy a £20 ‘Louis Vuitton’ handbag are not lost customers for the real £1600 Louis Vuitton version. (Indeed, there are Chinese factories making both the ‘real’ and the ‘fake versions of some items, in different shifts.) Not everybody who will buy a product will buy it with the extra 20% sales tax.

One other point the book makes, that I’d have liked to see developed further, is the capacity of the informal economy to regulate itself collectively. There’s a brief discussion of a dispute-resolution court set up by a market traders’ association in one of the Lagos markets. This example of collective self-regulation in the absence of an effective state is fascinating.

So overall, there are some frustrating aspects of this book, but it’s a lively read about an important and fascinating subject.

[amazon_image id=”0307279987″ link=”true” target=”_blank” size=”medium” ]Stealth of Nations: The Global Rise of the Informal Economy[/amazon_image]