Why is the informal economy important

informal sector

1. Term: the informal sector is a consequence of the employment problem in developing countries. It encompasses the economic activities of people outside of formally regulated sectors and is characterized by labor-intensive production, low entry barriers (such as training certificates), use of local resources, adapted and simple technologies, small company sizes (mostly sole proprietorships or family businesses), poor pay and low union levels Degree of organization, low qualification requirements that are acquired outside of the formal school system and unregulated, free competition markets.

2. Significance for development policy: a) As a result of neglect of agriculture, rural exodus led to urbanization. Since industrial jobs were not available in the urban, formal sector, people had to earn their living as "self-employed". For a long time the informal sector was called Backyard economy devalued.

b) The actual significance in terms of development policy is not clear. Some authors see this in informal sectors Surplus labor result: Immigrant and poorly educated people are excluded from the employment opportunities of the modern sector. The informal sector creates temporary employment opportunities. The socio-political goal is to abolish it, which can be achieved through long-term employment opportunities in the industrial sector.

c) On the other hand, the informal sector is Result of government intervention into business. Opportunities for development often arise through deregulation and privatization. Structuralists therefore advocate a decrease in state interventions, which results in far-reaching flexibility; at the same time they emphasize the need for protective provisions in social security systems. Subsistence activities must be transformed into dynamic operations.

d) Employment effects: The informal sector achieves a high employment effect (labor-intensive production) with little capital investment. Promoting it will only create weak incentives to migrate. The informal sector has a heterogeneous structure and dynamic entrepreneurs can develop quickly in it. Informal small businesses de facto train more apprentices and workers than the formal education system. It produces goods and services for the needs of low-income households. Because of the low capacity of the formal sector to absorb surplus labor, it is becoming increasingly important, although the demarcation to the formal sector is fluid (especially in the financial sector).