Is addressing the informal economy very different from addressing the formal economy?

The answer to this question is Yes and No. The ‘methodology’ of addressing the informal economy is similar to that of addressing the formal economy.  However, the informal economy often requires special attention as it operates under different sets of assumptions, procedures, and conditions: 

• Those in the informal economy are often 'invisible'. They are thus frequently overlooked in a stakeholder consultation process.  A LED stakeholder process should make a specific effort to involve this group, particularly if the informal economy contributes significantly to the aggregate economy.

• Traditional methods of information collection often fail to count the informal economy.

• Informal businesses are ‘micro’.  Often they earn quite little, are hampered by a lack of capacity, and are owned by women.

• Investment climate programs are common within LED strategies. At a general level, addressing an investment climate for the informal economy is similar to that of formal businesses.  However, issues of harassment, policing, and health may affect those in the informal economy differently than in formal business.

• Special attention is needed in addressing the economic sectors within the informal economy (i.e., cluster analysis, backward and forward linkages), recognizing the linkages between the formal and the informal economies and the importance of the informal economy as part of the city’s economy. 

Some Issues of Concern

Addressing the informal economy in a LED process is not a simple task.  There are various questions and concerns that are commonly espoused by local governments and formal business.

Mediating Tensions

Addressing the informal economy often means addressing tensions between various different groups. These include:

• Tensions between non-regulation of informal activities and local taxation.

• Urban Management issues.  A well-managed environment is a function of local government, but the informal economy often requires flexible and innovative urban management.

• Formal business is often a major revenue generator for the local government, and their interests may be in contradiction to those of the informal economy.  Local government must balance the interests of formal business with those of the informal economy.

• Fiscal tension. Actors in the informal economy often fail to pay local taxes. This causes a tension with a local government who requires that income to function efficiently.

Regulation and Formalization

The issue of regulation and formalization is often raised in discussions on the informal economy.  The extent to which formalization or regulation becomes a goal within a LED process depends on the nature of the informal economy in that particular area. The real question to ask is, why are the actors informal? If the answer is that to formalize requires procedures and practices that are overly onerous, then formalization is possible through a review of regulatory processes (i.e., an almost automatic formalization will occur once the regulations and procedures are reviewed). In this case formalization will be a goal of the informal economy LED process.

If the answer is that the margins of profitability are so low that regulation means the destruction of the activity itself, then for those in the informal economy regulation in the way that it applies to formal businesses may not be viable.

Should the Program to Address the Informal Economy be Administered Separately?

The decision to administer an informal economy policy and strategy process as a distinct process from the LED strategy process depends on the city economy.  If the local economy is largely informal then a separate process is probably not necessary. However, a separate policy process may assist in the mediation of tensions between the various groups.

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