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POTENTIAL EFFECTS OF NATIONAL POLICIES ON THE INFORMAL
ECONOMY
Joanna Shapland (University of Sheffield, UK)
Paul Ponsaers (Ghent University Belgium, Faculty of Law, Department of Criminal
Law and Criminology, Research Unit Social Analysis of Security Research)
1
Introduction
Economies can be divided into two sectors, the formal and the informal. Much of the
unreported income of the informal sector is the result of a deliberate attempt to evade
taxes
2
. The most recent (indirect) studies looking at the size of the informal economy,
such as Schneider (2005), show that the informal sector in developing countries
ranges in size from 20% to 70% of the Gross Domestic Product (GDP) and is still
growing. Today half of the world’s population is living in cities. The informal
employment currently constitutes anywhere from 40 to 60 percent of total urban
employment and will probably form an increasing proportion of urban employment
(Charmes, 2000). Parallel to an increase in home work there has been an increase in
street vending in towns and cities world-wide. Informal trade, most of which is street
trade, constitutes anything from 30 to 50 percent of total urban informal employment
(Chen et al., 2002). Existing estimates remain never the less rather inconclusive, and –
as a consequence of this – evaluation of the effectiveness of national and international
financial, economic and social policies is difficult (Verhage, 2009).
The term ‘the informal sector’ can refer to street vendors in Bogota; rickshaw pullers
in Hanoi and Calcutta; garbage collectors in Cairo; home-based garment workers in
Manila, Madeira, Mexico City, and Toronto; and home-based electronic workers in
Leeds, Istanbul, and Kuala Lumpur. Some observers feel the sector is simply too
varied or heterogeneous to be meaningful as a concept (Peattie, 1987). In this
contribution we try to summarise the policy arguments which arose during the series
of seminars held in relation to the workpackage on ‘The informal economy and
organised crime’, as part of the CRIMPREV Co-ordination Action funded by the EU
3
(Shapland and Ponsaers, 2008). In essence we ask ourselves if the informal economy
functions in the same way everywhere? Do similar factors do affect it? We especially
1
We are very grateful to Thierry Godefroy for a number of suggestions about an earlier version of this
paper, as well as to participants in the CRIMPREV seminars.
2
There are direct and indirect methods of estimating the informal economy. Direct methods involve
undertaking sample surveys (small in-depth samples or large questionnaire-based samples) and
extrapolating to the whole economy. Indirect methods involve analysing the money supply data and
estimating the discrepancy between income and expenditure (Schneider, 2002).
3
See http://www.gern-cnrs.com/gern/fileadmin/documents/CRIMPREV/WP1/Report_WP1/rapportWP1_final_28jan08.pdf for
the original starting position of this series of seminars.
2
concentrate on the question as to how this may interact with countries’ social and
economic policies? Do some policies encourage the informal economy? Do some
countries make (semi-deliberate) choices to have a certain amount of the informal
economy or particular profile for it?
4
It has primarily been nation states’ choices as to which economic activities they have
decided should be criminal (subject to the criminal law) or legal. Similarly, states’
choices as to which activities should be regulated by workplace regulation or quality
standards (trademarks, etc.) started primarily as national choices, driven by national
political needs, though more recently much regulation has taken an international
dimension, through the health and safety etc. work of the EU and the intellectual
property endeavours related to the World Trade Organisation. There are still,
however, substantive differences between the criminalisation and regulation of work
activity in different nation states – which has allowed us to examine in these seminars
the effects of different national social, economic and fiscal policies – and hence the
extent to which countries are ‘choosing’ to have different sectors of the informal
economy dominant in their country.
What kind of informal economy: The opportunities that arise
Western national economies are characterised by a high degree of state intervention.
In other words, the economic structural level, which functions according to the logic
of a free market economy, is to a large degree corrected and tempered by means of
politico-legal measures. This correction is usually indicated with terms such as ‘state
intervention’ or ‘regulation’.
State intervention and regulation have several functions. In the first place, even the
most fervent advocates of the free market model are convinced that political
intervention within economics is a facilitating factor for the continuity of the economy
itself. Western entrepreneurs depend on politico-legal action because the necessary
industrial material infrastructure (e.g. roads, sea and airports, supply of energy, etc.)
has to be provided, at least partly, by public authorities. From a historical point of
view, it is striking that the early industrialisation of most of our Western economies
was only possible because state intervention and regulation facilitated this evolution.
Moreover, continuity of production and trade are guaranteed by social peace, or at
least the absence of major social strife, again ensured by public authorities. In most of
our Western societies, relative social peace has been the result of a long process of
pacification and collective bargaining, between employers and employees, or other
4
One of the most documented examples of links between the formal and informal economies, with
tolerance of the informal by the formal is the position in several Soviet countries during the Cold War.
Many of these practices seem still to exist (Rodgers, Williams and Round, 2008).
3
interest groups and lobbies. Most outcomes of this social struggle and industrial
bargaining have resulted in social legislation and policy. In other words, a balanced
industrial relation pattern and social conventions seem to be the best conditions for
social peace and thus a preliminary condition for continuity of production and trade.
These balances and compromises have contributed to increases in formal regulation,
with attendant public controls and inspection, and often public sanctioning
5
.
Social policy in Western economies has thus often been a compromise between an
unbridled free market, where all competitive means could be mobilised and used, and
a mixed regulated economy, where certain of these means (those claimed to be
inhumane, or defined as situations of exploitation) were excluded, or at least
tempered. One example is working conditions and circumstances. The most striking
historical examples in this respect are of course the abolition of child labour and the
restriction of working time in Western economies.
In short, social pacification is about the exclusion of certain means of competition, or
rather, is about the introduction of formal social norms and limits which should no
longer be transgressed. Competition within the free market is hence limited to certain
types, for example, through adjusting prices, through the introduction of advanced
technology, or through marketing. An impressive amount of social policy is from this
point of view focussed on labour - the human factor in production and trade. Labour is
to a large extend excluded as a competitive means and is regulated, in other words
equalised or ‘normalised’ between competing firms. It is precisely this last point that
must be supervised by public regulation and government; otherwise we speak of
unfair competition. The consequence of this evolution has been the formalisation of
labour conditions and circumstances, in short within formal employment and the
formal economy. As a consequence of this evolution, many researchers have
subscribed to the view that the informal economy is becoming marginal or peripheral
and not linked to the formal economy.
Of course the process described above is not unilateral or one dimensional. In times of
economic growth, the maintenance (or even acquisition) of ‘social achievements’ is
under less pressure than in periods of economic stagnation or crisis. Implosion of the
5
The historical situation is different in post socialist Eastern countries. Most of these countries have an
economic system in which social claims and collective bargaining are still relatively absent. Employers
can easily pay low wages, dismiss staff with impunity and/or pay salaries in blank envelopes, whilst
employees have little legal support. It is therefore not surprisingly that employees have turned to
informal practices in order to secure the future of their families (Rodgers, et al., 2008). Economic
liberalisation and political decentralisation in countries in emerging democracies have had
disappointing results. Economic liberalisation is only effective if accompanied by a strong state
(Dobovšek, 2008). Moreover, it is clear that working conditions in developing countries are still only
rarely the subject of collective bargaining.
4
economy brings to a certain degree again forms of informal, flexible and deregulated
industrial relations – though normally without putting social peace completely at risk.
In any case, a national, regional or city economy is never purely formal or informal.
Certain segments are formal, others are informal; some are becoming more formal,
whilst others are becoming more informal. The study of the informal economy is from
this perspective the study of an object in evolution. Today this probably means
studying a phenomenon which is becoming increasingly informal, and the
corresponding retreat of the political, rather than analysing processes of formalisation
(Lippens and Ponsaers, 2006). Characterising an economy will therefore always be in
terms of dominance and today most segments of Western economies have (still)
dominant formal contours
6
. These general processes tend to displace workers in
informal economies within Western societies towards a marginal and often isolated
labour position.
In short, we may argue that the informal economy is, to a greater extent than a
regulated economy, the subject of (or determined by) market mechanisms, driven by
supply and demand. First, it is to a great extent characterised by non-regulation, and
from that point of view the difference between legality and illegality has no meaning,
nor makes sense. Therefore, it is logical to infer that in the informal economy the
notion of ‘economic criminality’ is almost non-existent. Secondly, the informal
economy is accompanied by the absence or non-functioning of formal public control
agencies, including the police, law-enforcement agencies, regulatory bodies and
inspectorates, though regulations (and/or even criminal sanctions) of course still do
exist (but are not applied).
The informal economy is in this sense a simple consequence of the absence of or the
withdrawal of the state. Though what is characterised as formal and what is
characterised as informal is a deliberate choice of nation states as to what activities
are designated criminal or to be regulated, the informal economy is in essence not
driven by formal state or local political choices about social struggles, compromise or
workplace bargaining. We might propose that the informal economy is driven by
simple and harsh economic mechanisms and by rather blind logics of supply and
demand, no longer steered by social policy.
Because of the absence of public intervention in the informal economy, we are
dealing with economic activities or labour conditions and circumstances (trade,
production, services, trafficking, etc.) that are not (no longer) labelled as ‘illegal’. The
occurrence of informal market mechanisms is seldom a subject of collective action or
6
While informal segments dominate in the survival economies of developing countries (Harriss-White
2008).
5
social struggle, endangering social peace. Nevertheless, from a moral point of view,
we are mostly dealing with (working) situations and conditions, characterised by
dominance and exploitation, in the sphere of survival economics.
If workers within the informal economy perceive themselves to have no alternative to
working in that sector, because opportunities in the formal economy are not open to
them, possibilities for collective action are fairly restricted and formal protest is
almost impossible. There seems to exist a sphere of ‘tolerance’ and they are
considered ‘marginal’ in comparison with the dominant regulated economy
7
.
Therefore, we consider that a sociology of the informal economy should be translated
as a sociology of informal labour and labour division.
If supply and demand (market forces) determine the extent of the informal economy,
as long as most of these activities are to a large degree developing as part of survival
logic, it is not the entrepreneur who is investing, and it is not the government who is
setting the rules of the game. The informal economy will therefore flourish where
opportunities (geographical, social contacts, ...) already exist. It is these opportunities
which we would suggest dictate the precise nature of the kind of informal economic
activity which takes place in different locales.
The informal economy has a certain tradition and is embedded in historical networks
and families, trades and trafficking routes, many of which parallel routes used for
legal goods and services (Tarrius 2003; Godefroy et al. 2003). Informal employment
opportunities are based on social contacts and networks – because the public
advertising which characterises seeking for employees in the formal sector is
inappropriate for those who do not wish to draw the attention of the authorities to their
activities. The demand side: the requirements of citizens for illegal drugs, stolen
designer goods or fake branded goods seem to have a longer history in the informal
economy. Indeed, demand for illegal drugs may well have saturated, with relatively
easy supply everywhere, though the demand for stolen goods may well increase in
times of economic recession or to keep up with the ever-changing demands of fashion
(Sutton 2003). We would also argue that the informal economy may be less able to
develop rapidly and takes less advantage of new business opportunities or competitive
means than the formal economy. For example, it is difficult to supply illegal goods
except from seller to buyer personally: using mail order, electronic web ordering or
conventional postal delivery is risky, because the electronic and postal authorities are
likely to notice the supply of illegal goods. From this point of view, informal
economy is not innovative
8
. Informal economies develop in the periphery of formal
7
See also Foucault (1979), who argued that wide margins of tolerance of informal or illegal work can
serve to provide considerable space in which dominant social groups can control other groups.
8
On the other hand, where technological developments do permit relative anonymity (as in the case of
throw-away, pay-as-you-go mobile phones, or some internet auctions), they have been enthusiastically
6
economies, according to alternative logics of survival. The pressures towards
globalisation which are dominating the formal economy (manufacturing in the
cheapest areas, ‘just-in-time’ delivery of goods because transport costs are relatively
cheap) are countered by the fear of detection once the supply chain moves outside
known contacts and sources in the informal economy. The informal economy, we
would argue, hence is less affected by innovative, more global responses and remains
relatively historically cast, depending upon tried and sure routes and methods.
Though we need to depend upon relatively few research sources, we would also argue
that the workplace for the informal economy is also likely to remain relatively static
in terms of work methods and job descriptions. We would see it as an epiphenomenon
of ritual behaviour, in the sense that informal workers think: ‘It has always been this
way, and it will never change’. Workers are relatively powerless compared to those
higher up the chain: neither means nor possibilities of changing the existing situation
are considered as realistic; they are convinced that power relations are so unbalanced
that they don’t feel able to change this disequilibrium (Verhage and Ponsaers, 2008).
From this angle, the informal economy is quite similar to the organisational structure
of some organised crime. Organised crime entrepreneurs, families and groups may do
different things, but one element seems to be constant. They endure over quite long
time periods and are remarkably stable in their dominant position and in the quasi-
monopoly of the exploitation of their manpower (and victims)
9
.
But also from the point of view of the informal entrepreneur (or employer) the
workplace situation seems to be surprisingly stable. New investments in infrastructure
seem to be unnecessary and avoidable as long as the informal workforce is willing to
sell its labour for low wages in more or less inhumane circumstances. Countervailing
collective power, in terms of, for instance, labour unions or interest groups/lobbies,
stays absent. This is another reason why we would see the informal market as
surprisingly stable, and not changing as fast as the formal economy.
We should not overdo, however, these distinctions between the formal and informal
economy. As Patrick Van Calster (2006) demonstrates, focusing on the illegal
informal economy and on organised crime, the microscopic study and analysis of the
more mundane aspects of everyday economic life may reveal how practical concerns
of and minute decisions by economic actors weave an almost inextricable pattern of
practices across the formal/informal divide.
taken up by those engaged in illegal or informal work (for example, drugs smuggling or distribution of
stolen goods or (normally prescribed) pharmaceuticals).
9
This doesn’t mean of course that all informal activities are necessarily forms of exploitation by
organised crime groups. We only want to stress the striking similarity.
7
Another angle on the intertwining of formal and informal work is the extent to which
participants are labelled as falling foul of official rules on criminalisation or
regulation. In many circumstances, for example, informal labour is performed within
illegal situations. From a pure legalistic point of view, the informal worker is
commonly in these circumstances labelled as offender, as ‘criminal’. Here we think
for example of drugs couriers or female drug ‘mules’ (Seddon, 2008) or beach sellers
(Nelken, 2006). Because of the striking situation of exploitation in which participants
are working, however, the role of the ‘offender’ seems easily to shift to that of the
‘victim’. Within the domain of trafficking and smuggling of human beings this shift is
sometimes officially recognised, although it is still the subject of much debate by
researchers (Sanders, 2008)
Using the same line of reasoning, Nikos Passas (2006) and Dina Siegel (2008) argue
that informal money transfer systems such as hawala banks ought not to be over-
policed or over-controlled, or driven ‘underground’. In particular migrant workers put
more trust in hawala bankers than in formal banks for transferring their money to
their families abroad. Nevertheless van de Bunt (2008) warns about the misuse of the
hawala banking system by criminal organisations in transferring their proceeds of
crime, which again is an illustration of how easily victims shift to the role of offender
and vice versa.
We have seen that, though the fundamental structure of the informal economy may be
relatively stable, the form and the extent of it can vary considerably (Ponsaers,
Shapland and Williams, 2008). Those activities that can be considered as belonging to
the formal economy in one country, can be part of the informal economy in another.
National regulation and law enforcement can vary strongly. National governments
make choices in respect to this, by regulating or not, by criminalising or not, by
engaging in considerable control activity (using inspectors etc.) or not. An important
part of the informal economy is trade, and by necessity international trade (or
trafficking). Though some trade is illegal practically everywhere (opiate drugs,
endangered species of animals), for some other commodities (such as prescribed
drugs, antiquities and fashion garments), we observe a constant shift in the labelling
of these goods, as they travel, from informal to formal (illegal or legal) and vice versa.
There seems to exist a growing interaction and interwovenness between formal and
informal markets. We suggest that the combination of formal and informal economies
can lead to synergetic, or to symbiotic relations, but that it can also lead to conflictual
relations and even to parasitic relations (Vande Walle, 2008). As a epiphenomenon of
that, even the vulnerability of certain formal sectors, such as property/real estate, for
illegal activities becomes a subject of analysis (Vander Beken, 2008).
8
Informal economies have both a stabilising and a transforming potential. According to
Henry and Sills (2006), capitalism is the unsettled outcome of relations with a
plurality of economic orders, both formal and informal at the same time. The free
market seems to have an endless ability to absorb, co-opt, transform and capitalise
even those fragments which seem to challenge this kind of economy. As Gerald Mars
(2006) argues in his anthropological analysis of shifts in workplace cultures, the
‘hidden economy’ seems to be growing in an age of globalisation, individualisation
and technological change. The concept of the ‘bazaar economy’, proposed by
Vincenzo Ruggiero and Nigel South (1994), questions the possibility of ever stably
identifying crime zones precisely. The evocative value of the concept of the bazaar
economy is that it alludes to a variety of individuals interacting in a marketplace
where goods and services are bought and sold without regard for whether they are
legal or illegal. The concept of a bazaar, applied to contemporary large cities, or even
regions, expresses the coexistence of legality and illegality and changes in the
boundaries between the two. The art market is a impressive example of these
mechanisms (Massy, 2008).
Overall, despite the potential for change, particularly in markets which have only
recently been the subject of international legal intervention or regulation (intellectual
property matters, art), we would characterise the main emphasis within the informal
economy as one of a relatively stable, but geographically diverse, set of activities. If
formal regulation and social policies stay constant, and there is no war or major
upheaval, there seems to be no major change.
Who gets involved in the informal economy?
Pursuing work within the informal economy is often said to be useful for migrants,
youngsters or socially excluded persons, including asylum seekers. However, is this
correct? Are these kind of activities only functional for marginalised groups within
society?
Nelken (2006), for example, argues in his article concerning immigrant beach selling
along the Italian Adriatic coast, that it concerns a ‘social issue’. The problem is,
according to him, how countries could regulate the flows of immigrants and to create
possibilities for immigrants to find work without being forced into illegal activity
(such as selling goods on the beaches). This would include either more flexibility in
awarding entry licences to be used for alternative work, such as factory work, or the
legalisation and regulation of selling: special places set aside for this form of selling,
specific licences, seasonal permissions for work, etc. As Aden argues (2009), if
employment or remunerative work can occur without any formal requirements, it
cannot enter into the field of illegal work. Public policy can also reduce the market for
9
illegal work by making legal work more attractive and salient for workers and
employers. However, at the same time Nelken points to the formal – and therefore
taxed – shopkeeper economy, which is vehemently opposed to particular informal
selling practices, and labels these activities as forms of ‘unfair competition’. Yet
shopkeepers themselves are inclined towards informality if it furthers their own
interests. In other words, informal activities are not limited to marginalised groups,
althought they clearly are undertaken by marginalised groups.
First, by ‘marginalised’, we are referring not only to those shunned by mainstream
society but also the bottom stratum for employment in the legitimate economy. Here
we are dealing with those without qualifications, those without a work record, and the
young with no contacts (and so no social capital). Two pilot projects done in two
European cities in summer 1997 show nevertheless that the informal economy – as
opposed to the criminal economy – requires skills , though not the formal paper
qualifications increasingly required for work in the formal economy. It particularly
requires skills so that it does not come to the attention of regulatory authorities, e.g.
through accidents. One of these projects was in Aulnay, a suburb to the north of Paris,
which was in fact one of the areas (banlieus) in which riots occurred later on, in
November 2005 (Godefroy et al., 2003). The second project was in a part of Frankfurt
(Smettan, 2003). Both were in residential areas and did not encounter much street
prostitution or other localised forms of the informal economy (Shapland, 2003).
The population of Aulnay was quite young and rapidly changing (nearly 40% had
changed between 1982 and 1990), with significant numbers of migrants. The profits
from all the informal activities were very small and most people involved were young,
including migrants. Families might be supported by several of these activities, as well
as some members of the family having casual jobs, state benefits or some
employment. Key elements in the informal economy included: very visible car
maintenance and repair workshops in the car parks, which included both legal
businesses repairing people’s cars and dealing in stolen vehicles and parts; trade in
fashion items, primarily clothing and hi-fi, stemming from non-local commercial
burglary; subcontracting of construction trades down to a level where the people
doing the work had profit levels which could not sustain state regulatory activities;
provision of services, such as hairdressing, cleaning etc. through unregistered
businesses; a visible and large market in cannabis; and home work by women, often
through ethnic networks, in the garment industry; etc.
The pilot study in Germany was in Bornheim, an old residential district of Frankfurt,
with a considerable proportion of migrants and guest workers (27%). Again, the
profits from the various forms of the informal economy were very low and those
involved were primarily the young, unemployed, migrants, and those in debt. The
10
locations for localised activities were well known to residents and agencies. The
forms of the informal economy were, at that time, very much influenced by state
taxation and regulation: provision of services through notices put up in the
neighbourhood or adverts in local papers for personal services, tuition, gardening,
household repairs etc., on a cash-in-hand, no-bills basis; other services, such as the
catering trade, taxi driving and cleaning services, a proportion of which were
unregistered and did not pay taxes; trade in stolen goods, carried out primarily in
some bars, restaurants and private houses; and a visible drug market (all kinds of
drugs) around the metro stations and one of the squares; etc.
In short, even though we are confronted here with marginal groups, functioning
within the informal economy seems to be demanding and presupposes a certain day-
to-day ability. It certainly requires skills to cover up these – rather massive –
economic activities.
Secondly, there are other marginalised groups than those mentioned already. Here we
focus on groups and individuals who are living in a country, but are not officially
registered as citizens or legal immigrants: those without (official, formal) papers.
They are groups which are in fact officially non-existent, and thus by definition
‘informal’. They do not necessarily act illegally, they are themselves (labelled)
illegal. Most of them have left their home country because of economic reasons. We
are dealing here with persons that can have certain abilities, skills and educational
qualifications, sometimes even people who have previously held professional jobs.
Economic migrants often come from families with financial resources. That is mostly
the reason why they had the ability to leave their original situation. They should not
be seen as similar to the (indigenous) downtrodden masses left on housing estates as
others sell up and move on. But social networks and ethnic ties (and common
languages) are really important in respect of which groups of immigrants (legal or
illegal) find themselves where in each country.
In an intriguing paper Saitta (2008) shows how a group of Roma from Kosovo, living
in the area of Mazara del Vallo (Sicily) since the 1970s, have gained a livelihood
through such enterprising methods as music, improvised handicrafts, and small-scale
drug dealing. Their precarious situation is conditioned in large measure by the
complex interplay of state regulation and the practice of local authorities.
Nevertheless, these individuals have been able to exploit the ambivalence of the
authorities as well as opportunities presented by the endemic informality of this
southwestern Sicilian city. Although a culture of poverty perspective would suggest
that they are merely reproducing poverty from generation to generation, in-depth
observation shows nevertheless that the informal economy presents paradoxical
means for social advancement.
11
Thirdly, there are those who pursue criminal opportunities. Some do so because they
find it very difficult to obtain legal employment (because they have few
qualifications, have been in care and so have no contacts to find work, have substance
abuse problems or mental health issues, or have no stable place to live and so live on
the streets). Usually part of the indigenous population – and relatively visible to the
public authorities – they are another marginalised group.
Of course these different social segments who take part in the informal economy are
not mutually exclusive. Migrants may undertake criminal activities as well as illegal,
non-regulated work. Those who make most of their money from shop theft or drugs
may also take cash in hand jobs. Many participants in the informal economy have
portfolio jobs, both at the same time and over time – a bit of one and a bit of the other
(Sbraccia, 2008b).
However, the precariousness of all these types of work (whether informal or criminal)
seems to start preying on people’s minds as they get older (Shapland, 2003). It
reinforces the point of view that it is the workers’ perception which determines what
they are prepared to accept or the conditions they wish to tolerate. Being at least to
some degree illegal, informal economic activities only continue if workers wish to
continue them: coercion will only work for so long; employers and bosses (even
organised crime bosses) can only continue to exist if noone ‘blows the whistle’ on the
business.
There is an analogy to this at the societal level. If the informal economy is very
prevalent in a country (in terms of service provision or manufacturing industry), then
the population itself may become accustomed to it. Once this point reached, it
becomes very difficult to raise standards or impose effective regulation. This will be
for example the case for the societal acceptance of corruption (Dobovsek, 2008) or the
habit of not paying taxes (Smettan, 2003).
The effects of different policies which may be ‘encouraging’ the informal
economy
In this section, we indicate a number of national or regional policies (especially social
policies) which can have an encouraging or boost effect on the development of the
informal economy. The list has been generated through discussion during the
seminars which gave rise to this book, primarily through the opportunity the seminars
provided for discussion of the effects of different policies in different European
countries. These effects are very difficult to discern through single-country studies
and indicate the value of pan-European research. Because the informal economy is
often connected with the supply of labour, rather than goods, it tends to emphasise the
12
effects of social, economic and foreign policies which affect the labour supply. The
list is not in any way exhaustive.
(a) Policies which hinder desistance from criminal activity/lack of polices
encouraging desistance
Within criminology there is increasing interest in desistance: the processes by which
people cease criminal activity or reduce its frequency. As offenders move into early
adulthood, some start to desist from the bulge of criminal activity in adolescence
(Bottoms et al. 2004). However, desistance requires replacing the income obtained
from criminal activity with income from more legal sources, which can be very
difficult if the young person has dropped out of school or been excluded from school
and so has few or no qualifications. Desistance policies have tended to emphasise
changing attitudes away from criminality, but researchers have shown that support is
often required from correctional or community criminal justice personnel to acquire
jobs and sort out accommodation and debt issues, particularly on release from
correctional establishments (Farrall and Calverley, 2005; Shapland et al.
forthcoming). Desistance policies hence are designed to prevent or remedy (through
adult education) school drop-out, minimise structural unemployment, alleviate social
isolation, etc. In other words, desistance policies are directed to restructure the
unstructured, to formalise the informal. On the contrary, policies which stop people
desisting or hinder desistance in the early and late twenties may encourage those who
drop out of school or who commit crime in adolescence to continue or start in the
informal economy, or continue criminality.
Examples of national social policies which may be hindering desistance are: the
absence of resettlement policies after being in care or after custodial sentences;
requiring people to produce certificates to employers saying they do not have any
criminal record to obtain a job in the formal economy; requiring formal qualifications
for relatively low skilled jobs; and cartels which tend to restrict some forms of
employment to certain social or ethnic groups and so reduce employment possibilities
for others. These kind of policies can be considered as counterproductive, not only in
terms of prevention of recidivism, but also with respect to encouraging informal forms
of economic activity.
(b) Creating underclasses
It seems clear to us that creating ‘ghettos’ of the less skilled or poorer will stunt the
aspirations of young people and either create political dissent/riots or possibly
encourage criminal ‘solutions’. A striking example of the creation of underclasses
became clear when looking at the reasons behind the youth riots in the banlieus of
Paris in November 2005. Body-Gendrot (2008) describes the youths engaged in these
13
riots as very diverse. Some were college students, some had regular jobs; some were
high school students, others were idle; their attitudes and age varied. Some of them
disapproved of the actions that were taken by the rioters, such as arson of schools or
of day-care centers, and did not want to jeopardize their future with a judicial warning
on their file. Not all banlieues were poor, some were even rich. Within some banlieues
very poor immigrant newcomers doubled up in impoverished housing units, while in
others middle class households contributed to the gentrification process.
What was striking was that these youths asked for nothing, they merely expressed
emotions during rioting. They were probably aware that there were no structures and
no elaborated social proposals aimed at engaging in a dialogue with them. They were
to be considered as ‘institutionally disempowered’ and politically ignored. Despite the
political rhetoric and the media coverage, society and political parties were rather
indifferent to people at the margins who hardly voted. It was ironical to observe that
during the urban unrest, the Stock Exchange kept rising from 4,320 points on 28
October to 4,521 points on 8 November 2005 (Roché, 2006).
This kind of observation is far from new in criminology. Julius Wilson (1996), one of
our foremost authorities on race and poverty, challenged - already years ago - decades
of liberal and conservative pieties in the United States to look squarely at the
devastating effects that joblessness had on urban ghettos. Marshalling a vast array of
data and the personal stories of hundreds of men and women, Wilson persuasively
argued that problems endemic to America's inner cities stem directly from the
disappearance of blue-collar jobs. Julius Wilson’s structural perspective was based in
understanding the racial and economic history that developed what he termed the
‘underclass’ or the ‘ghetto poor’. This structural perspective sites the rise of disparity
in opportunity and social isolation, noting current and historic discrimination, to
create minority urban communities with high rates of delinquency and areas in which
the only viable economy is the illegal drug economy.
(c) High service taxes, much outsourcing and inefficient regulation
Classical economists were not able to predict the notable shifts in recent years from
mass production to flexible specialised production. Neither did they predict the
persistence of traditional forms of non-standard wage work (e.g. casual jobs) and self-
employment (e.g. street vending or [high-tech] home-based work); or the emergence
of new forms of work (e.g. temporary, interim and part-time jobs with low or hourly
paid wages) and exchanges of services without even any financial transaction (barter,
exchange of favours). Today, however, the labour market is under pressure, in
transition, becoming more ‘flexible’, and forms of outsourcing and subcontracting are
14
common (Chen et al., 2002). As a result of that, there is a remarkable convergence in
insight that the informal economy is here to stay, in both new and old guises.
Again we can ask ourselves: who is avoiding regulation: informal workers, or their
employers in both informal and formal businesses? This can be translated into the
question we raised already, in criminological terms, as: ‘Who is the victim?’, or even
‘Who is the offender?’ The answer to this question is highly related to the perception
governments have of the problem and will determine to a large extent the (tax/fiscal)
policy they develop: dismissive (ignoring), punitive (eliminating), restrictive
(containing) or promotive (supporting/protecting).
In analysing the likely impact of fiscal/tax policies, policy makers need to consider
the impact of direct and indirect taxes on the informal workforce as both consumers
and producers. There are several forms of taxes involved, including personal income
tax and value added tax. Personal tax policies can be progressive or regressive,
depending on whether a differential progressive rate or a flat rate is imposed. It is
important to recognise that many categories of informal activities are governed by
powerful economic interests in the formal economy (e.g. home-based workers). We
would argue in favour of a policy that recognizes that the informal economy is linked
to the formal economy, and recognizes at the same time more explicitly the distinction
between informality and outright illegality. More concretely, we would argue for a
policy that recognizes that street vendors often have to vend informally either because
they are not incorporated in existing regulatory frameworks or because existing
regulatory frameworks are too punitive or constraining. Informal workers have little
(if any) bargaining power with the economic units who put out work to them.
Consequently, it seems arguable to us that in those countries where a policy of high
service and manufacturing taxes exists, combined with an important amount of
subcontracting or outsourcing, and where there is relatively inefficient regulation and
law enforcement agencies or inspectorates, the consequence could be an expanding
informal economy. It is the combination which is important, with each interacting
with the other in its effects. So, a high tax rate for VAT or on businesses will not
encourage the informal economy if these businesses are relatively stable, keep work
in-house and are relatively visible to inspectorates. In this case, they have no incentive
to maximise profits by not paying taxes, because they will know that their activities
are very visible. However, if there is much sub-contracting, particularly if supply is
opaque, then the sub-contractors can do work more cheaply, acting under the official
radar, not paying relevant taxes or not providing good conditions for their workers,
through using informal economic methods. This is most likely to occur if the official
radar, in the sense of enforcement and compliance, is only concerned with relatively
large businesses and, because of enforcement costs or because dealing with large
15
businesses maximises the number of workers inspected, is unconcerned with small
subcontractors.
(d) Lots of rules, few controls/inspections/enforcement
If there are no regulations, then the distinction between formal and informal work
becomes obsolete. But just creating regulations, even criminal legislation, does not
necessarily affect the way in which the work is done. In earlier work (Vande Walle
and Ponsaers, 2006) we demonstrated that the informal economy in developing
countries is indeed being formalised through the globalisation of patent right
protection in the pharmaceutical sector (TRIPS). But further international regulations
and their implications for the accessibility of the formal medicine market in poor
countries have led to an increase in non-official sales. At that point we speak no
longer of an informal market but of a purely illegal market. In short, the formalised
western industry sometimes stimulates the informal market and sometimes annexes it.
In many cases the latter is even criminalized by means of international regulations.
We have to conclude that creating formalised world trade or intellectual property rules
does not affect developing informal world practices in particular cities, although they
have an overall effect at the level of inter-country trade.
If there are many regulations, but they are not enforced, then the tendency will be lots
of informal work. Opportunities to commit crime exist when suitable targets are
present and capable guardians are absent, Nelen (2008) argues, following the crime
prevention logic of situational crime prevention, but discussing the sector of real
estate. In ‘Looking for loopholes, processes of incorporation of illegal immigrants in
the Netherlands’ van der Leun (2003) offers a detailed account of how illegal
immigrants, who are legally excluded, managed to become incorporated into Dutch
society. By combining the perspectives of immigrants on the one hand and of those
who had to implement a ‘discouragement policy’ on the other hand, her study shows
how tensions between restrictive rules and day-to-day practices grow. Based on long-
term research, attention has been focused on the role of informal employment and
criminal involvement. In the Netherlands, van der Leun observes a shift from semi-
formal employment to informal employment, as there have been more crackdowns on
whether people have a proper social security number. Illegal workers have moved out
of sight, into back premises (e.g. in catering or in private households). They are
consequently less visible to inspectors and potentially more able to be exploited.
So, we cannot avoid the general observation that regulation in itself is not the most
important determining factor for the presence of a informal economy, enforcement is.
Absence of enforcement does not result always in bad working conditions for
employees or lack of tax payments, etc. We can observe for example widespread
16
activities in the informal economy in Northern Italy, but not by definition in bad
working conditions (Palidda 2003). However, in contradiction to this observation, we
see in England, that the informal economy, the sense of paid employment in illegal
but not criminal sectors (in garment workshops, restaurants etc.) tends to be
synonymous with bad employment conditions. This leads us to the conclusion that
what will happen depends largely upon what is seen as ‘normal’ in the specific sector
in terms of conditions, paying taxes, etc. Cultural factors about what workers expect
as conditions will affect workers’ willingness to work in such environments, as we
discussed above, and also employers’ provisions.
If there are many regulations and they are only partially enforced, which is the case in
the majority of countries, then tensions will be created at enforcement points, for
example, at borders or during major transactions. There may also be more informal
control – e.g. employers informing on workers who annoy them or who are less useful
(Sbraccia, 2008b).
(e) Migration
Market economies work best when there exists a shortage of labour. If there is free
movement of labour, more skilled people and those for whom conditions are more
favourable will cluster in better paid and, usually, more ‘formal’ and ‘legal’
employment. There may be some labour shortages for less skilled work (or work
which demands fewer official papers), which may create an overall shortage. If so,
both employers and employees have a considerable interest in attracting outsiders.
Migration affects the supply of the workforce, not the supply of goods.
There are many instances of managed labour schemes for attracting migrants (student
schemes in Australia and New Zealand; licensed gangmasters and farmers in England
for agricultural work). In general, however, these will not stop illegal migrants filling
these posts more cheaply, unless border controls are very strict (it is interesting that
the countries mentioned are islands, making borders more secure). The scheme in
Italy (Ferraris, this volume), for example, seems to be less successful, because of slow
processing and high demand (by both employers and migrants).
Where borders are more permeable (for example, in mainland Europe) and
particularly if legal movement is easy (within the EU), it may become normal for
there to be (legal) migration for some age groups etc. It is noticeable that there is now
substantial migration of young people in Europe for limited periods. The European
tour of the English aristocracy in the nineteenth century, for example, seems now to
have become a flood of students on gap years, young educated Europeans deciding to
work abroad for a period and people taking career breaks in later life.
17
Illegal migration, however, creates real problems for both migrants and host countries
(exploitation, low tax returns, security concerns). This is particularly so if ‘becoming
legal’ ‘requires’ the commission of illegal acts, for example, if residence in a country
for several years is needed in order to get papers or residence permits, but if there is
no legal way to support oneself during this period. (Ferraris, 2009). Like all informal
economies, migrants obtaining work depend upon social networks, including ethnic
networks – it is who you know that counts, not what your formal qualifications are or
what your previous workplace has stated you know.
It is unclear to us what the balance of advantage is between, on the one hand, issuing
temporary papers to allow illegal migrants to obtain work (as in amnesties,
particularly if coupled with strict employment controls, so that people can be traced)
and, on the other hand, refusing absolutely to countenance having non-legal people in
the country (imprisonment, deportation etc.). In strict economic terms, detaining in
custodial establishments many non-legal people, including young fit men (as is the
case in England and Wales, or with those reaching Hong Kong or Australia by boat)
would seem almost certainly to create a net economic disadvantage (though political
and security concerns have to be offset against this).
(f) High demand for low paid workforce, low native supply
The informal economy is encouraged when national or regional formal economies
depend for their survival upon low paid workers but where there is an insufficient
supply of legally employed native workers to do this. Many Western countries are in
this position. However, as Dario Melossi pointed out during the seminars which
formed the basis of this book, this situation may have bad long-term effects. Relying
on cheap (informal) labour does not encourage modernisation or investment in
industry and machinery.
This problem links to the amount the country is prepared to spend on its welfare
system (public sector costs) as well as the price of its goods/services (wages, private
sector costs). The more illegal the worker, the less the country may have to pay in
social benefits (housing, health, education), including the likelihood that informal
workers will not bring over their families. Van der Leun (2003) argues that welfare
benefits set a floor below which wages have to be paid within the informal economy.
If welfare benefits are not paid, however, there are the same problems, potentially, as
in creating ghettos, particularly if workers congregate.
In order to deal with these problems of labour supply, some countries have adopted a
system of guest workers (for example, Germany and some states in the Middle East).
Some have encouraged waves of migration, for example, from former colonies (for
example, the UK, the Netherlands). Both solutions may create tensions in terms of
18
whether the temporary workers are granted full citizens’ rights and in terms of
absorption into the host country (multi-cultural tensions etc.). Some countries and
industries have attempted more recently to move the problem offshore, by creating
subsidiary companies in lower-waged countries (both in the manufacturing sector and
service sector call centres). These can be quite short-lasting solutions, primarily
because the offshore country can then develop its own sector with the expertise gained
and then compete against the original outsourcing country/company (even maybe
taking it over – as has happened in the automobile industry). Occasionally, countries
have ‘tolerated’ substantial elements of the informal economy in order to solve these
labour problems, only occasionally checking workers’ papers (unless there is an
incident) and ignoring non payment of taxes. Police may say ‘I don’t want to see your
face again today – change where you’re selling these’ (Sbraccia, 2008b).
Do these solutions create problems? The answer, as with so much to do with the
informal economy, depends upon whether the ‘solution’ generates unanticipated
problems. If, for example, the presence of a secondary labour force without full
citizen’s rights (whether a legal or an informal labour force) encourages organised
crime elements from the sending countries to infiltrate the host country, then problems
may be imported. If the sending countries have different practices in relation to
business ethics, again the host business culture may change. This does not always
have to be in a negative direction – the sending country may have higher standards or
be less prone to organised crime - but there are examples of the encouragement of
organised crime in relation to trafficking of women for sexual purposes (through
piggybacking illegal transport onto legal links), corruption of regulators and officials,
and substandard construction/manufacture/employment practices through
subcontracting without adequate safeguards or the use of unlicensed gangmasters. It
may be that the potential for negative unexpected consequences is less harmful in the
service sector than in manufacturing or construction – because service sector clients
can complain more easily than if there are shoddy goods or buildings.
Conclusion
National social and economic policies are usually adopted for their own sake, with
little thought as to the effect they may have on the labour force, or on the relative
sizes of the formal and informal economies in that country. It is often only when
workplace regulation or criminal legislation is being considered that the division
between criminal and legal, or illegal and legal employment arises in discussion. The
crime prevention or crime escalating effect of other social, economic or fiscal policies
tends not to be a preoccupation of legislators, though its importance seems to be
becoming more visible (Albrecht et al. 2001), because of the increasing salience of
crime and law and order to the European public.
19
We hope, however, that the above discussion shows some examples of how many
different national policies may impact on the size and extent of the informal economy
in particular countries. This is a relatively new subject for study, perhaps because it
intrinsically requires cross-national comparison, a difficult enterprise at any time, but
particularly so when speaking of the informal economy, with its varying fiscal, legal
and social elements. In setting out the list above, we are not implying that increasing
the informal economy is unmitigatingly bad for any country: whether it is desirable or
not depends on whether there are alternative avenues for survival of those who are
depending upon it. Having no informal economic sector (beyond the supply of
criminally proscribed goods or services) implies having a very rigid economy and
having little place for new arrivals (without running a continuous deficit in labour in
the formal economy).
However, having a substantial informal sector does imply a lack of governmental
oversight of work practices in that sector and may include a substantial risk of
attracting organised crime. We have also argued that workers in the informal sector
will find it difficult to improve conditions by themselves and that informality militates
against the creation of organised labour. Changing governmental edicts will affect the
size of the informal economy, as Aden (2009) has shown for Germany. It is less clear
whether it affects the remaining workers in the informal sector. What we are unable to
do, because of the lack of relevant research studies, is to look at the extent of the
cultural workplace links between practices in the formal and informal sectors in
different countries – and so at whether it is possible to influence conditions in the
informal economy through conditions in the formal economy. There is clearly a need
for both more governmental consideration of the effects of new social and economic
policies, which consider effects on the informal economy as well as the formal
economy – and more cross-national study of the implications of governments and
international bodies adopting new policies.
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