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