The informal economy: between new developments and old regulations.

• Author: Sassen, Saskia
• Position: Symposium: The Informal Economy

Saskia Sassen challenges the conventional wisdom that informal economies are caused by increased, often illegal, immigrant labor She argues that the informal economy is a result, primarily, of systemic factors characteristic of advanced capitalist urban societies. These factors include the decline of the middle class as the principal engine of economic growth and increased competition for land and other factors of production among businesses with widely varying profit making capabilities.

The growth of an informal economy in the large cities of highly developed countries prompts new questions about the relationship between economy and regulation today. As I shall employ the term, the "informal economy" refers to those income-generating activities occurring outside the state's regulatory framework that have analogs within that framework. The scope and character of the informal economy are defined by the very regulatory framework it evades. For this reason, the informal economy can only be understood in terms of its relationship to the formal economy--that is, regulated income-generating activity.

The main theories of economic development--whether proffered by the modernization or the Marxist schools of thought--do not foresee the inevitable emergence of an informal economy in highly developed countries. Such theories do allow for criminal activities and underreporting of income in advanced economies; these activities do not signal the presence of any novel or unexplained economic dynamic. Income underreporting, for instance, is acknowledged as an inevitable response to the state's implementation of a tax system. Nevertheless, the main theories of economic development have yet to adequately explain the phenomenon of the informal economy in advanced capitalist (usually urban) societies.

Until recently, theorization about the informal economy has focused on the shortcomings of less developed economies: their inability to attain full modernization, to stop excess migration to the cities, and to implement universal education and literacy programs.(1) The growth of an informal economy in highly developed countries has been explained as the result of immigration from the Third World and the replication here of survival strategies typical of the home countries of migrant workers. Related to this conception is the notion that "backward" sectors of the economy, such as the garment industry, remain backward (or even continue to exist) because a large supply of cheap immigrant labor is available. Both of these views imply that if there is an informal economy in highly developed countries, it is solely attributable to Third World immigration and the existence of backward sectors of the economy, not to the nature of the current phase of advanced economies.

Rather than simply assume the truth of such an argument, we must critically examine the role that Third World immigration might or might not play in the informalization process. Although immigrants, insofar as they tend to form communities, may be in a favorable position to seize the opportunities presented by informalization, immigrants do not necessarily create such opportunities. Instead, the opportunities may well be a structured outcome of the composition of advanced economies. The argument presented here is that informalization must be seen in the context of the economic restructuring that has contributed to the decline of the manufacturing-dominated industrial complex of the postwar era and the rise of a new, service-dominated economic complex.(2) The specific mediating processes that promote informalization of work are: (1) increased earnings inequality, and the concomitant restructuring of consumption in high-income and very-low-income strata; and (2) the inability of providers of many of the goods and services that are part of the new consumption to compete for necessary resources in urban contexts, where leading sectors have sharply bid up the prices of commercial space, labor, auxiliary services, and other factors of production. The growing inequality in earnings among consumers, and the growing inequality in profit-making capabilities among firms in different sectors in the urban economy, have promoted the informalization of a growing array of economic activities. These shifts in earnings and profit-making capabilities are integral conditions for the current phase of advanced capitalism developing in major cities. The new, advanced services complex, typically oriented toward world markets and capable of generating extremely high profits, dominates these cities. The conditions giving rise to informal economies in these cities cannot be said to be imported from the Third World.

To explain the source of informal economies in advanced urban societies, I consider the differential impact that (1) immigration and (2) conditions in the economy at large may have upon the formation and expansion of informal income-generating processes. Each of these factors has specific implications for research and policy development. If conditions in the economy at large have a greater impact on the development of informal economies, then we need to deepen our understanding of the nature of advanced capitalism. But if immigration has the greater impact, then we may indeed find adequate the current development theories of advanced economies or the post-industrial society, which allow no room for phenomena such as informalization. Similarly, the primacy of immigration would suggest, at its crudest, that policymakers should control immigrant activity in order to eradicate the informal economy. If, however, conditions in the economy at large are primary, as I argue, then policymakers should stop approaching the informal economy as an anomaly. They should instead view the informal economy as a necessary outgrowth of advanced capitalism. Rather than treat its components as isolated deviations from the norm, policymakers should recognize that a new norm has developed; rather than attempt to make this new norm fit the regulations developed decades ago, they should develop new regulations to fit this norm.

Elsewhere I have argued that it might be useful to think in terms of regulatory "fractures," rather than regulatory "violations." Increasingly, economic processes diverge from the model for which extant regulations were designed. As these divergences take on a recognizable shape of their own, it becomes meaningless to speak of regulatory violations; informal economic activity as here described is not a scattering of isolated deviations, but a recurrent pattern. The difficulty, if not impossibility, of acknowledging the existence of an informal economy in today's regulatory framework without criminalizing that economy is an instance of what I have referred to as a regulatory "fracture."(3)

In order to identify systemic links between informalization and structural conditions in advanced capitalism, I shall discuss the effects of major growth trends in shaping different types of jobs, firms, and subcontracting patterns that induce or are themselves susceptible to informalization.(4) There is no precise measurement of informalization, and the evidence of this process cannot be culled from one neat set of data. However, pairing systemic trends with the available evidence provides us with a basic understanding of the patterns and scope of informalization and the conditions that foster its growth.

1. SPECIFYING THE INFORMAL ECONOMY

   We can only obtain an operational definition of the informal economy(5) against the backdrop of an institutional framework for economic activity in which the state intervenes explicitly to regulate the processes and products of income-generating activities according to a set of enforceable legal rules. Nevertheless, the informal economy (as I use the term) does not include every transaction that happens to evade regulation. The concept excludes certain types of income-generating activities, such as teen-age babysitting, that we almost expect to escape regulation. What makes informalization a distinct process today is not these small cracks in the institutional framework, but rather the informalization of activities generally taking place in the formal economy. For example, a student of the informal economy would find a sweatshop most interesting because it operates against a background in which people expect such enterprises to comply with regulation. Today's sweatshops may look similar to the sweatshops of the last century. Yet, the implementation of various health and labor regulations since then is what makes today's sweatshops a different form of labor/employer relation than their counterparts of one hundred years past, when no such regulations existed and the vast majority of manufacturing took place in sweatshops. The type of social relation represented by sweatshop work is defined by its historical context, in this case one where the activity of manufacturing has been regulated for decades.

   While there are certain activities that lend themselves more to informalization than others, it is not the intrinsic characteristics of those activities, but rather the boundaries of state regulation, that determine their informalization. As these boundaries vary, so does the definition of what is formal and what is informal. The informal economy is not a clearly defined sector or set of sectors. Neither is the informal economy a fixed set of activities undertaken solely for survival. Instead, the shape of the informal economy changes according to the opportunities created and constraints imposed by the formal economy. The key to an analysis of the informal economy, then, is not so much a precise description of the particular activities it encompasses at any given moment, as a description of the basic dynamics that make possible or even induce informalization, despite regulatory policies and pressure from institutions such as labor unions and enforcement...