Reasons For Informalisation

Reasons for Formation of Informal Sector

1.) Informalisation is correlated to income and development i.e. Impacts of globalisation on trade openings and employment generation.

From the advent of neo liberalization, trade opening became a common phenomenon across countries. This meant that the goods produced in the country could be exported and the producers could earn greater profits. However, at the same time there is a large influx of goods from other countries. In order to keep pace with the growing competition, more goods had to be exported rather than imported. Cheap labour and technology hence became the most sought after solution for producing large amount of goods at a cheaper and faster pace. Large firms, in order to maximize their

Though people are now being employed, it doesn’t contribute to the GDP since this sector is a grey/shadow sector.

Apart from this, there are several other reasons for informalisation such as:

2.) Governance and regulatory burdens

Another major reason for informality is the governance and the regulatory structure. According to De Soto, burdensome regulations thwart the efforts of small entrepreneurs and thus force them to stay in shadow. Interaction of governance with regulations also leads to informality.

Regulation structure which includes high taxation, lack of pension plan, social security, MMIC based measure coupled with other social factors like level of schooling, share of youth, share of rural population and share of agriculture in GDP, encourages people to remain in the informal sector. Also government indicators such as presence of corruption, weak rule of law and poor level of democracy also cause informality.

3.) People’s perception about the use of the taxes to provide

In order to join the formal sector, an entrepreneur must first invest in an advanced technology, without which the firm cannot compete in the market. Moreover, low institutional quality allows entrepreneurs to invest resources to obtain larger returns from their investments, so that in equilibrium, the richer the entrepreneur, the more profitable the investment (Ana Maria Oviedo, 2009). In turn, poor entrepreneurs find it optimal to join the informal sector, where the technology is available to all, but productivity, and hence profits, are low. (Ana Maria Oviedo,