NCPA - National Center for Policy Analysis

How The Other Half Lives

August 19, 2002

The concept of an informal economy emerged 25 years ago when researchers began to notice that there was no economic explanation for how the majority of the population in countries around the world survived, given such low per capita gross domestic product and high unemployment rates in many countries.

Researchers found that the modern formal economy needs only about a quarter of the global workforce. As for the others, researchers found:

  • The other three-quarters are engaged in survival through the informal economy.
  • It happens in urban as well as rural areas, especially squatter settlements, because the core of the informal economy is not peasant farming, but family and neighborhood relationships of mutual support.
  • Families held a range of occupations from farming and selling in the market to doing odd jobs or handicrafts.
  • Their aim was survival rather than the maximization of profit, and rather than earn wages, labor was used within family enterprises, or shared within the community.

Researchers discovered the same way of life in Latin America, in South Asia -- even in Italy. When sociologist Teodor Shanin went to Italy in the 1980s, Italy and Britain both had very high rates of unemployment:

  • While there were unemployed workers everywhere in northern cities in England, in Italy he could not find them.
  • Everyone was employed doing something, in hundreds of very informal ways -- much of it escaping the taxing authorities.
  • In Russia, the peasants survived not through socialism, but through the informal economy, and about 50 percent of their economic activity was unofficial.

Another lesson learned about helping people in an informal economy is: don't give them food if it is available on the informal market. You might just end up undermining the local markets. Rather than give them food, people might really need help improving transport infrastructure or food processing technology.

Source: "How the Other Half Live,", Exclusive Interview, August 2002.


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