Recent thinking looks beyond polarised notions of completely divorced Formal and Informal sectors. Many studies explore in greater detail those instances when the informal and formal economy, combine and complement each other.
For example, the informal economy makes a positive contribution:
1. Contributes to GDP.
2. Produces a large share of goods used by middle and low income groups.
3. Operates as a training ground for entrepreneurs.
4. Absorbs more unemployed workers than less labour intensive jobs in the formal sector.
5. Offers new markets to formal sector based companies
In fact, few informal enterprises, except some survival activities, operate in total isolation from formal firms. For example, many companies now outsource non core activity to partners who in turn may move sub assemblies to second and third tier sub contractors – often in the informal economy. This approach is designed to create greater flexibility for the lead company and can feature seasonal fluctuations as workers are engaged in the production process only when required; to be laid off during slack periods. This would not be possible with unionised or otherwise organised staff. Far too often the High Streets of the formal economy remain competitive only by sourcing product from places that do not comply with any reasonable standards of working conditions. This double standard does not help efforts to build mutually beneficial bridges.
Sen and Dreze (2002) highlight how informal workers have gained little from solidarity based movements, as trade unions and related organisations have focussed their activities on the “formal sector”. For example, employees of the Public Sector – whose wage demands have taken several Indian States to dire economic consequences – and major firms.[i] As a result the voice of the informal sector has tended to be comprehensively muted in Indian politics. Pressure politics, and insider dealing, has even contributed to the erosion of public sector accountability.
And yet, moves to shift the informal market into regulated conditions will not happen overnight and may even be counter productive. For example, most bureaucracies would not be able to handle the processing of any large scale move from informal to formal economy; others would highlight the fact that formal firms could not afford to extend the benefits package of their regulated employees to the informal sector. In fact, there is ample evidence that many companies are more inclined to convert formal jobs into informal ones rather than the other way round. And finally, not all countries offer the necessary high standards of governance or responsiveness. Corruption at all levels of society can make it all but impossible for businesses to make the move without losing their business entirely.
What is clear is that ignoring the informal economy or leading witch hunts will lead us nowhere. In fact, for emerging economies such as Brasil, Russia, India and China the informal economy is operating as an effective incubator of fresh ideas and an accelerator of growth.[ii] There can be an impact upon the formal economy too. In the 1990s the Spanish Finance Minister Carlos Solchaga offered a favourable amnesty for firms to “regularise” and many did. The resulting upsurge in the economy, “statistical growth”, was due less to formal initiative than the incorporation of existing activity into the formal economy. Conversely, how much of “statistical decline” in a developed economy is actually business “informalising” when faced with a combination from global outsourcing? These issues have not been covered adequately.
In Logistics terms, as we examine the process from field to fork or any number of such processes from raw material to end user, we rarely encounter a pure play of either the formal or the informal economy. Increasingly, we witness hybrid variations that demand greater understanding, investigation and recognition. Transformational Logistics sets a fresh agenda in the same way that the definitions and characteristics of the informal economy are being revised and updated to meet the needs to contemporary society.
[i] Jean Dreze & Amartya Sen, India: Development & Participation. (2002) p 31.
[ii] Understanding Emerging Markets, Stefano Pelle (2007).