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1.2.1. Theories and concepts

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Alessio Lupi10 May 2018

2. A brief history of 40 years of conceptualisation and data collection on the informal economy

2.1. Theories and concepts

It has been more than 40 years sincethe first attempts of definition and data collection on informal sector and informal employment on a large scale were launched in the early 1970s. Long before, however, works by Boekeon Indonesia (1953), Arthur Lewis on ‘Economic Development with Unlimited Supplies of Labour’ (1954) and Clifford Geertz on ‘Peddlers and Princes in Indonesia: Social development and Economic Change in Two Indonesian Towns’ (1963) – who later invented the concept of bazaar economy (1978),paved the way for dualistic approaches which, before being disputed, offered an extraordinary space for expansion to the new theories of economic development. It must also be noted that closely following these precursors, it was the national accountants who were the first to propose procedures for overall estimates of the traditional sector, agricultural and non-agricultural, monetary and non-monetary in their attempts to measure GDP (OECD, 1965; Blades, 1975; Charmes, 1989; OECD, 2002) within the central framework of the System of National accounts (SNA, first established in 1953 and further revised in 1960, 1964, 1968, 1993 and 2008).

It was in 1971 that the concept of “informality” was born,quasi-simultaneously, at the two extremes of the African continent: in Ghana with the notion of “informal income opportunities” by Keith Hart(1971) and in Kenya with the multi-criteria definition of the informal sector by the ILO report of the World Employment Programme (1972, with Richard Jolly and Hans Singer as main editors).

Tentative typology by Keith Hart (1971)

The tentative typology of Keith Hart (1971), based on his fieldwork in Nima (a low-income neighbourhood inAccra) for a PhD in Anthropology at Cambridge, was presented in a paper delivered at the Conference on Urban Unemployment in Africa, at the Institute of Development Studies of the University of Sussex, 12-16 September 1971:

1) Formal income opportunities

a) public sector wages

b)private sector wages

 c)transfer payments – pensions, unemployment benefits (if any), etc.

2) Informal income opportunities (legitimate)

a)primary and secondary activities – farming, market-gardening, building contractors and associated activities, self-employed artisans, shoe-makers, tailors, etc., manufacturers of beers and spirits,

b) tertiary enterprises with relatively large capital inputs – housing, transport, utilities,commodity speculation, rentier activities, etc.,

c) small scale distribution – market operatives, petty trade, streethawkers, caterers in foodand drink, bars, carriers (kayakaya), commission agents and dealers,

d) other services – musicians, launderers, shoe shiners, barbers, night soil removers, photographers, etc.; brokerage and middlemanship (the maigada system in markets, law courts, etc.); ritual services, magic and medicine,

e) private transfers payments – gifts and similar flows of money and goods between persons; borrowing, begging

3) Informal income opportunities (illegitimate)”

a) services – ‘spivvery’ in general; receiving stolen goods, usury and pawn-broking (at illegal interest rates), drug-pushing, prostitution, poncing (‘pilot boy’), smuggling, bribery, political corruption Tammany Hallstyle, protection rackets,

b) transfers – petty theft (pickpockets, etc.), larceny (burglary and armedrobbery), peculation and embezzlement, confidence tricksters (money doubling, etc.), gambling.”


The multi-criteria definition of the ILO Report for Kenya (1972)

The ILO report on Kenya is one of the several reports of the World Employment Programme conducted by the ILO in the 1970s. The Kenya mission was headed, among the most well-known, by Hans Singer, with Richard Jolly, DharamGaï and John Weeks (from IDS), AjitBhalla and Louis Emmerij (from ILO).The authors note that their thinking in these matters has been “greatly influenced and helped by a number of sociologists, economists and other social scientists in the Institute of Development Studies at the university of Nairobi” and they add: “One begins to sense that a new school of analysis may be emerging, drawing on work in East and West Africa and using the formal-informal distinction to gain insights into a wide variety of situations”(p.6, footnote 1).

The definition lies in the introduction of the report (p.6):

“Informal activities are the ways of doing things, characterised by:

a) ease of entry

b) reliance on indigenous resources,

c) family ownership of enterprises,

d) small scale of operation,

e) labour-intensive and adapted technology,

f) skills acquired outside the formal school system, and

g) unregulated and competitive markets.


The characteristics of formal sector activities are the obverse of these, namely:

a) difficult entry,

b) frequent reliance on overseas resources,

c) corporate ownership,

d) large scale of operation,

e) capital-intensive and often imported technology,

f) formally acquired skills, often expatriate, and

g) protected markets (through tariffs quotas and trade licenses).”


The first notion, introduced by Hart, was individual-based and inspired many sociological and anthropological studies in Africa and elsewhere (Bromley & Gerry, 1979).In Latin America, for example, it sparked regular labour force surveys, thus initiating the measurement of the marginalisation of workers based on their level of earnings under the minimum wage, and in connection with poverty.

Both approaches (individual-based and enterprise-based) considerthe State the central cause of emergence of these petty activities. This was done so either by the intrinsic nature of an emerging capitalism that wassupported by the new independent States and need for such labour reserve/surplus (Lebrun & Gerry, 1975, Gerry, 1979) or by the barriers that prevent private initiative to blossom out.

The first approach was inspired by the Marxist theory of labour reserve/surplus (Hart mentions “the reserve army of underemployed and unemployed,” as do Lebrun and Gerry) and focuses on the lower tier of the working poor.The second approach focuses on the higher tier, “the modern informal sector,” as Georges Nihan put it – not afraid of a contradiction in terms – and surveys the most visible part of the informal sector. This includes fixed establishments and those most likely to develop, grow and modernise - a concept and theory that culminates with Hernando de Soto (1986), who quotes that it can take several years in Peru for a start-up to be in compliance with the laws, whereas a few days, if not less, are sufficient in the US.

The two-tier concept of the informal sector wasforged by Gary Fields (1990),identifying “the voluntary participation in upper-tier informal activities but not easy entry ones” echoing the survivalist ‘involutive’ sub-sector and the evolving micro-enterprise sub-sector of Philippe Hugon (1980), not to mention the intermediate or “missing middle” sectorcoined by John Page et William Steel (1978). These conceptions haveremained deeply rooted in World Bank research on the sector until the recent book by Perry, Maloney and al. (2007), revisiting Albert Hirschman’s “Exit, Voice and Loyalty” (1970) and applying it to the informal sector operators by distinguishing informality driven by exclusion from informality driven by voluntary exit. Such conceptions of a dichotomy within the informal sector, which itself is the result of a dichotomy or a dualistic approach, prelude the vision of the informal sector as a continuumas expressed by Guha-Khasnobis, Kanbur and Ostrom (2006) in the introduction “Beyond Formality and informality” to their book[1].

Non-compliance with official regulations far from signifiesthat these activities are illegal. Charmes (1990) notes that the inability of the State to make operators comply with the mandated laws is rather a matter of inadequacy, powerlessness and even unwillingness with regard to those jobs which are spontaneously created in a context of high unemployment and underemployment. The 1993 ICLS resolution (ILO, 1993b) also remarks, as previouslynoted, that the informal activities “are not necessarily performedwith the deliberate intention of evading the payment of taxes or social security contributions, or infringinglabour or other legislations or administrative provisions.”A basic criterion for the definition of the concept of informality, as implicated by the definition and related methods of data collection, is that neither the individual (in the labour or social security registers) nor the enterprise (in the fiscal or commercial registers) may be registered.


[1] Titled: Linking the Formal and Informal Economy: Concepts and Policies.

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