The Pros and Cons of Informal Markets

There's a really interesting article in the Wall Street Journal on the role that informal markets (i.e. not formally registered, non-tax paying, non-regulated) are playing during the economic downturn. You can find it here.

As the article points out, economists typically view the informal sector of an economy as a problem child. If people are working in the informal sector, it's because the formal sector (the registered, oftentimes larger) businesses are not creating enough jobs. The size and scope of an informal sector is an indication of real problems elsewhere in the economy. True enough, but the problems that lead the informal sector to expand are often things like corruption and regulation that make it extremely costly for individuals, especially poorer individuals, to start and run a business. The informal sector is the outlet that many poor people turn to to make a living when the institutional environment limits opportunity.
As the WSJ points out, we shouldn't necessarily see this as a bad thing. First, the informal sector gives the poor and unemployed some place to go to find work -- some choice is better than no choice for most. Second, the informal sector IS meeting consumers' needs -- poor consumers shop as well as sell, and they may be better able to find what they need, at prices they can afford, in the informal sector. Finally, as the article argues, the informal sector may be less subject to the kind of volatility that the formal sector is currently experiencing, precisely because it's not as tied to that formal sector. In an economic downturn, the informal sector will continue to operate when formal sector factories close. As I.P. Gautam, a municipal commissioner in Ahmedebad, India points out in the story, per capita income may be less for these workers, growth may be slow, "but you get your bread and butter."

- Karol