Foreign Policy Blogs

The shadows of the informal economy

Vendor at a street market in Vietnam, courtesy Chris Goldberg/Flickr (CC BY-NC 2.0)

In which sector of the economy are women disproportionately (over)represented? And even though they are in the majority, still get paid less than their male counterparts? There may of course be more than one answer to these questions, however for the purposes of this blog post, the one I’m going with is “the informal economy,” also known as the black or shadow economy.

In what would, in colloquial terms, be called ‘stating the obvious’, Schneider and Williams note that the “shadow economy is notoriously difficult to measure.” As the shadow, informal economy (i.e., those businesses not registered with local authorities and not paying taxes or other social security contributions) sometimes — but not always — overlaps with illegal economic activity, this is not surprising. This has not deterred researchers from trying, however. Way back in 2002, Professor Martha Alter Chen wrote that the informal sector accounted for as much as 80 percent of employment in Africa and parts of Asia, and over 50 percent in Latin America and the Caribbean. With the economic crisis that has swept the globe over the past 5 years, it is not hard to imagine that these percentages have increased. Developed countries are also not exempt, with Israel’s shadow economy estimated to be equivalent to 19 percent of GDP; Greece’s and Italy’s 24 percent and 22 percent respectively.

Furthermore, as the OECD highlights, those in the informal economy are highly vulnerable to changes in the economic climate: In times of crisis, “informal workers are exposed to a likely depression of wages due to the inflow of laid-off workers from the formal sector and return migrants. They are also the first to lose their jobs.” And, operating outside of government legislation and regulation means a lack of formal social protection and no labor rights, which “puts many informal workers at a higher risk of poverty tha[n] they would otherwise be and might substantially increase poverty levels.” But discussions about correlation or causation linking poverty to the shadow economy falls into a grey area: “There is no simple relationship between working in the informal economy and being poor or working in the formal economy and escaping poverty.” (ILO 2002)

This situation is rather the norm than the exception in many parts of the world, and women are disproportionately affected. Looking at the links between poverty and the informal economy, one could perhaps be swayed into thinking that an informal, shadow economy is not particularly good for society, nor for women. However, women’s high levels of participation in the shadow economy could also be taken as a sign of creativity, entrepreneurship and gumption. With no social security net to fall back on, women are taking the initiative to generate income outside of more formal channels. Indeed, a recent UNU working paper noted that, “Western donor agencies also voice the opinion that the informal economy is useful and therefore must not be hurt.” This is not to say that women gravitate toward the shadow economy out of choice; lower levels of education, discrimination and societal expectations may mean that for many women, engaging in economic activity outside of formal structures may be their only option.

How could their activities be supported? The OECD merrily suggests that government policies should “try to unlock these people from their low-productivity activities,” with formal job creation the name of the game. Easier said than done. A completely different approach is taken by a group of UNU-MERIT researchers who instead argue that a “continuum of spaces for useful conversations” as learning and knowledge development are the key to success for women entrepreneurs, especially considering the restrictions male-oriented societies can impose on women (and women choose to/have to accept). Having space to grow in confidence, access resources and meet female role models is key, it would seem.

Suggested reading:
- “The Economics of Coping: The Plight of Women in Iraq’s Informal Economy” (Looney, 2005)
- “The Shadow Economy” (Schneider & Williams, 2013)
- “Women and Men in the Informal Economy: A Statistical Picture” (ILO, 2002)