Let’s start with the informal economy

Before we move to the role of Logistics both within and between the informal and formal economy, we need to acknowledge and understand the roots of the informal and formal concepts in the first place and use this as a base from which our own view of Transformational Logistics can proceed.


Simply put, the informal economy refers to economic activity that is neither taxed nor monitored by any government and, unlike the formal economy, it is not included in calculations for the Gross National Product (GNP). Use of the term is credited to the British anthropologist Keith Hart in a study on Ghana in the 1970s. However, as early as the 1940s the Dutch anthropologist Boeke (1942) developed a vision of a developing economy as a “dual economy”, comprised of the market economy part of the world and the part that lay outside. In fact, as one study clarifies, the constructed opposites of formality and informality have been a constant of the economic development discourse for more than half a century.[i]


The informal economy is no small constituency. According to Hernando de Soto’s research the informal economy over the past 40 years has generated US$10 trillion of wealth, a value nine times greater than all bilateral foreign aid and forty times larger than the international development loans received by underdeveloped nations, and a value larger than the size of the worlds twenty largest stock markets. [ii]


Statistics on the informal economy are by their nature unreliable.[iii] Broadly defined, the informal economy comprises one half to three quarters of non-agricultural employment in developing countries. Some countries include informal employment in agriculture in their estimates. This makes a significant impact: from 83% of non agricultural employment to 93% total employment in India; from 55% to 62% in Mexico and from 28% to 34% in South Africa. With roughly nine out of ten of India’s working population gaining livelihoods in the informal economy (35% of whom live under the poverty line), it is important to understand the scope and scale.


Estimates for developed countries are 15%. This is subject to wide variation. In the UK the figure is 7% but in the Ukraine and Russia it is more than 50% and Georgia 62%. In South America 75% of new jobs generated come from the informal sector. In Zambia, only 10% of the workforce is legally employed. One thing is for sure, as we do the global sums we are not talking of people at the margins, this is the Majority World. And it is not confined to the underdeveloped or emerging economies.[iv] Self employed, part time and temporary work comprise 30% of overall employment in 15 EU countries, 25% of the total in the USA and “moonlighting” or, formal workers taking informal jobs on the side, is growing. Many countries have only just started to track the informal economy and, because of the discrepancies in methodology, the data can have limited comparability.


The economic pyramid:


Purchasing power in $


Population (millions)


> $20,000

Tier 1

75 – 100 m

+ / – 1%

$1,500 to $20,000

Tier 2 & 3

1,500 to 1,750 m



Tier 4

4,000 m


< $1,500

Tier 5


Source: The economic pyramid, C K Prahalad & Stuart Hart, (2000)


The term informal economy has developed significantly since it emerged in the 1950’s as interchangeable with the “hidden economy”, the “shadow economy”, the “black economy” and invariably the “criminal economy”. In South Africa it is referred to as the second economy and emerged during the Apartheid years when Black owned business was not allowed and the second economy emerged as a solution. Overall, the informal economy highlights economic activity that is hidden from national records and operates outside of any legal framework. [v],[vi] This study carries a Logistics focus but the nature and characteristics of the informal economy have stimulated such a wide debate that it is important to set the context.


Over the years, three schools of thought have emerged: dualism, structuralism and legalism. The dualists see the informal and formal markets as polar opposites with few (if any) linkages. Moving on, Ferman’s sociological studies (1958) identified how informal activity played a crucial role as a means of survival among the urban poor in the USA and this insight opened the way to see how integrally related the informal and formal economies are – the structuralists who, unlike the dualists, see the informal and formal market as intrinsically linked. For example, many formal market companies have outsourced non core activities and these may be provided, either directly or indirectly, by the informal sector. Or, the informal market is seen as an attractive and increasingly viable sales opportunity. This perspective is well covered in C K Prahalad’s, Bottom of the Pyramid. As he puts it: “If we stop thinking of the poor as victims or as a burden and start to recognise them as resilient and creative entrepreneurs and value conscious consumers, a whole new world of opportunity opens up.”[vii]


A variation on the survival theme sees the informal economy as the only part of the Iraq economy to have survived and prospered under Saddam and post 2003 era. [viii]


And finally, the legalists – led by Hernando de Soto – who focus on the relationship between informal players and the formal regulatory environment – not formal firms. This perspective laments the fact that raw entrepreneurial talent within the informal sector can find no legitimate outlet because the “rules of the game” have been set by a slow and often needlessly bureaucratic regime. There is a widespread misconception that the informal market is somehow illegal or is the equivalent of the underground, or even criminal, economy and the legalists argue forcefully that the regulatory environment is actual a contributory cause of the informal market rather than an incentive to be inclusive.


However, there are those who point out that countries like Japan, Singapore, South Korea and Taiwan have insignificant informal sectors and that this is because they have balanced the fiscal equation to make it worthwhile to be part of the formal economy. This is not the case in places like Brasil where the informal economy equals 40% of GDP and 87% of jobs in urban areas are created in the informal sector. Not surprisingly, 98% of street vendors are classified as members of the informal economy but a staggering 60% of employment in food retailing, supermarkets and mini-markets exist outside of the formal sector. 


De Soto, in his work on the informal market in Peru and beyond, stresses that corruption or inefficiencies within the formal economy often force the hand of those perfectly capable entrepreneurs from the “wrong side of the tracks” who prosper at the margins of legalised society.[ix] What is one to do when it takes months to register a company or complete legal documentation to prove ownership of property? In fact, when the work in Peru started it took 300 days to register a company and $1200. No it takes 1 day and costs $175.


This lack of legal rights rules out any recourse to conventional banking and access to funds for business expansion. It is against this backdrop that the staggering success of micro finance and the Grameen Bank of Bangladesh have emerged. [x] Interestingly, Grameen Bank has a presence in the USA and, there are several instances of microfinance success in the EU where those excluded from traditional banking can make legal headway. In fact, it is estimated that there are over 10,000 institutions worldwide offering microfinance to over 90 millions clients. [xi] There is no lack of entrepreneurial potential within the informal marketplace. As de Soto has made clear, “the problem is not so much informality as formality”.[xii]


Then, there is the issue of living space for the informal economy and its impact on considerations for real estate development in the economy as a whole. When we consider the scale of migration from rural to urban areas, the need to accommodate the informal market in the spatial equation of any regional regeneration or development plan becomes clear. Currently, 16% of the world’s population live in informal cities; this will be 25% by 2020 when 85% of employment will be generated form the informal economy. [xiii] Mumbai has a population of 12 million; 60% live in slums on 8% of the available land. Throughout the emerging world there are parallels and the improvised buildings in which people live, work and interact can spill over into the smooth workings of the city. For example, it is estimated that congestion in the ports of Sao Paulo and Santos cost the Brasilian economy $1.2 billion in 2004.[xiv] They are spending a fortune on the ports but, the last kilometre is strewn with potholes and favelhas. This is reality that logistics has to contend with.


The benefits generated by the Informal economy have always been underestimated despite the contribution to the livelihoods of the poor – 88% of the Indian population live in the informal sector, generating 90% of the livelihoods and 60% of GDP. The microfinance revolution has been a major catalyst for changing perceptions and attitudes to the informal economy. We believe that Transformational Logistics can add to this momentum.


[i] Linking the Formal and Informal Economy. Chapter 1. Beyond formality and informality. Ed. Basudeb Guha-Khasnobis, Ravi Kanbur and Elinor Ostrom. (2006)

[ii] Hernando de Soto, The Mystery of Capital, (2000)

[iii] International Labour Organisation (2002), Men & Women in the informal economy.

[iv] The Informal Economy in the UK, Lord Grabiner QC (March 2000)

[v] C. Williams & J. Round, Entrpreneurship and the Informal Economy: A study in Ukraines hidden enterprise culture, Journal of Development Entrepreneurship (2006).

[vi] Stuart Henry & Stephen Sills, Informal economic activity: Early thinking – a Michigan study, Crime Law Society Change (2006)

[vii] C K Prahalad, The Fortune at the Bottom of the Pyramid (2006)

[viii] Robert Looney, Economic consequences of conflict: The rise of Iraqs informal economy. Journal of Economic issues. (2006)

[ix] Hernando de Soto, The Other Path (1989) and The Mystery of Capital (2000).

[x] Muhammad Yunus, Creating a world without poverty (2007) & Banker to the Poor (1998)

[xi] Sylvain Allemand, La microfinance n’est plus une utopie. (2007)

[xii] Hernando de Soto, The Other Path (1989), p 255.

[xiii] McKinsey, Tackling the Informal Economy (May 2006)

[xiv] UN Conference on Trade (2005)

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