Shadows and Light

What’s the informal economy?

The informal economy is the cash economy. It’s the economy of under-the-table transactions. It’s the economy of currency and favors. Sometimes it’s unsavory, sometimes not.

If you get a book you like for Christmas and loan it to a friend, that’s informal activity. No money changes hands. This is perfectly legitimate. But sometimes informal activity is sleazy: cash payments for goods or services so sellers can avoid reporting what they do—to avoid taxes, or because the activities are criminal.

The more advanced an economy is, the smaller its informal sector. In the US the informal economy is less than 9% of total GDP; in Zimbabwe it’s over 60%. This is a problem for developing economies, because jobs in the black market can trap people in cycles of poverty and exploitation. There’s little capital available for successful enterprises to expand.

The simplest way to move people from the economic shadows into the light is to ease regulatory and tax burdens and make it simpler for small businesses to compete. People work for cash because the formal alternative costs too much. If governments make formal work more attractive, they’ll get more of it.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2014-01-10T11:22:51+00:00 January 10th, 2014|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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