I’m somewhat interested in the idea of informal economies. According to this paper from the National Bureau of Economic Research, economists tend to think they’re bad – either a cause of poverty and slow development, or a symptom of it:

We establish five facts about the informal economy in developing countries. First, it is huge, reaching about half of the total in the poorest countries. Second, it has extremely low productivity compared to the formal economy: informal firms are typically small, inefficient, and run by poorly educated entrepreneurs. Third, although avoidance of taxes and regulations is an important reason for informality, the productivity of informal firms is too low for them to thrive in the formal sector. Lowering registration costs neither brings many informal firms into the formal sector, nor unleashes economic growth. Fourth, the informal economy is largely disconnected from the formal economy. Informal firms rarely transition to formality, and continue their existence, often for years or even decades, without much growth or improvement. Fifth, as countries grow and develop, the informal economy eventually shrinks, and the formal economy comes to dominate economic life. These five facts are most consistent with dual models of informality and economic development.

I’ve never bought into the idea that informal economies are 100% bad. I’ve been very lucky to spend some time in central Thailand, right on the edge between a rural and urban area, and to experience a mix of the informal and formal economies. It makes perfect sense that higher-tech sectors like mining, manufacturing, banking, and so forth are run by efficient, formal, corporations. But lower-tech service sectors provide a chance for “poorly educated entrepreneurs” (a pretty condescending term, actually) to provide everyday goods and services to each other at low cost and practically no overhead. Why is it “efficient” to pay $10 for a tasteless corporate meal at the mall, with most of that money going to pay rent to a real estate corporation and its army of lawyers, accountants, human resourcers, and insurance agents, plus the gas and wasted time to get there, vs. $2 for a tastier meal from a neighborhood entrepreneur? When you stop and chat with your neighbor, that’s culture and social capital, not “inefficiency”. And when something bad happens, you and the neighbor are going to lean on each other for help, not the lawyers and accountants working for the faceless corporation that runs the mall.