How the informal economy took over the world
Part 1. Origins and dialectics of the informal economy
How the informal economy took over the world, in P.Moertenboeck, H. Mooshammer, T, Cruz and F. Forman (eds) Informal Market Worlds Reader: The architecture of economic pressure. NAI010 Publishers, 33-44 (2015).
To read Part 2. The informal economy goes global; the rise and fall of national capitalism, click on A better world somewhere at the top, select Archive, and scroll down.
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“General Forms have their vitality in Particulars, and every Particular is a Man” (William Blake).
An essay in two parts: 1. Origins and dialectics of the informal economy, 2. The informal economy goes global.
Before the First World War no-one believed that the state, a hangover from pre-industrial society, could manage the turbulence of urban commerce. Industrial capitalists and the military landlord class formed an alliance in the 1860s and afterwards to keep in check the proliferating working-class spawned by the machine revolution. Germany and Japan took cooperation between these classes within new state structures to an unprecedented level. But the Great War revealed hitherto unimagined government powers: to raise and kill off huge armies, organize industrial production, control market prices, and monopolize propaganda.
After the war, the issue was which kind of state—welfare democracy, fascist or communist—would win the race to organize world society. The whole period, 1914-1945, was a nightmare: two world wars, the Great Depression, a succession of ugly conflicts such as the Spanish civil war, the Japanese invasion of Manchuria, the Italian attack on Abyssinia. Writing just before the end of all this, Karl Polanyi, in The Great Transformation (1944). blamed it all on the nineteenth-century experiment to make society conform to market principles.
No wonder then that, in the late 1940s, the world turned to post-war governments of various kinds to build an alternative system. Their mission, for the first and only time in world history, was to reduce the gap between rich and poor, to increase the purchasing power of working people and to expand public services. The European empires were dismantled, beginning in Asia; a new world order was inaugurated under US hegemony, implementing the accords of Bretton Woods; the United Nations was formed and “development”—a postcolonial compact between rich and poor nations—was the order of the day.
All this took large amounts of state intervention, and it generated the longest boom in world economic history. This boom began to come unstuck around 1970. By the end of that decade, neoliberal conservatives were installed in power throughout the West. Their slogan was the “free market” and in the 1980s, with the active support of the International Monetary Fund (IMF) and World Bank, they set about dismantling state restrictions on the international flow of money in the name of “structural adjustment”, at first in the developing countries. This was the context for the “informal economy” to emerge, first as a description of the Third World urban poor, then as a universal feature of modern economies.
The 1970s were a watershed between threedecades of state management of the economy and the free market decades of one-world capitalism after the Cold War’s demise, that culminated in the world crisis today. The economy has escaped from all attempts to make it publicly accountable. What are the forms of state that can regulate a world of money that is now essentially lawless? The informal economy started off talking about the Third World urban poor living in the cracks of a rule system that could not reach down to their level. Now the rule system itself is in question.
The idea of an informal economy was born when the postwar era of developmental states was ending. The 1970s were a watershed between three decades of state management of the economy and the free market decades of one-world capitalism that culminated in the ongoing financial crisis from 2008. It seems that the economy has escaped from all attempts to make it publicly accountable. What are the forms of state that can regulate a world of money that is now essentially lawless?
The formal/informal pair first saw light in the context of development debates during the world crisis of the early 70s—a sequence of events that included America’s losing war in Vietnam, the dollar being detached from gold in 1971, the invention of money market futures the next year and the dismantling of the Bretton Woods regime of fixed-parity exchange rates. This was soon followed by a world depression induced by the energy crisis of 1973 and then by a glut of euro-dollar loans that ended up as the Third World debt crisis of the 1980s. ‘Stagflation’ in the West (high unemployment and inflation) prepared the ground for Reagan, Thatcher, and their imitators from 1979-80 onwards. After the ‘modernization’ boom of the 60s, the notion that poor countries could become rich by emulating ‘us’ gave way to gloomier scenarios around 1970, fed by zero-sum theories of ‘underdevelopment’, ‘dependency’ and ‘the world system’ advanced by the other side in the Cold War.
In development policy-making circles, this trend manifested itself as fear of “Third World” urban unemployment. It had been noted that cities there were growing rapidly, but without comparable growth in “jobs”, conceived of as regular employment by government and businesses. At this time, Keynesians and Marxists alike held that only the state could lead an economy towards development and growth. Richard Nixon reflected this consensus shortly before his fall when he said, “We are all Keynesians now”. There were a few liberal economists around, but none of them influenced policy. The question was, how are “we” (the bureaucracy and its academic advisors) going to provide the people with the jobs, health, education, transport, and public infrastructure that they need? And what will happen if we don’t? The specter of urban riots and even revolution raised its head. The word “unemployment” evoked images of the Great Depression.
Most readers of this essay live substantially inside what we may call the “formal economy”. This is a world of salaries or fees paid on time, regular mortgage payments, clean credit ratings, fear of the tax authorities, regular meals, moderate use of stimulants, good health cover, pension contributions, school fees, driving the car to the commuter station, summer holidays by the sea. Middle-class households suffer economic crises from time to time and some people feel permanently vulnerable, not least many students. But what makes this lifestyle formal is the regularity of its order, a predictable rhythm and sense of control that we often take for granted. I only discovered how much of this had become natural to me when I went to live in a West African city slum half a century ago.
I would ask people questions that just didn’t make sense to them such as, “How much do you spend on food a week?” Most households were in any case unbounded and transient. If someone had a regular wage (which many didn’t), it was pitifully small; the wage-earner might live it up for a day or two and then was broke, relying on credit, help from family and friends or not eating at all. A married man might use his wage to buy a sack of rice and pay the rent, knowing that he would have to hustle until the next paycheck. In the street people moved everything from marijuana to refrigerators in deals marked more by flux than stable income.
The conventional story of the crisis of “Third World unemployment” didn’t square with my fieldwork experience in the slums of Ghana’s capital, Accra. It took me some time to work out why, but the result was a paper for a 1971 conference on ‘Urban unemployment in Africa’. It eventually appeared after an International Labor Office report influenced by my paper had launched the idea of an ‘informal sector’ in Kenya. I wanted to persuade development economists to abandon the unemployment idea and accept that there was more going on in the grassroots economy than their bureaucratic imagination allowed for. To that end, I had two sections: the first was a vivid ethnographic description (“I have been there, and you haven’t”); the second tried to engage their interest in the consequences for development theory, using what I call “economese”—how to sound like an economist without formal training in the discipline—something I had learned by moonlighting as a writer for The Economist.
I had no ambition to coin a concept, just to insert a vision of irregular economic activity into the debates of development professionals. This was a classic example of realism. The ILO Kenya report, on the other hand, did want to coin a concept and that is what it subsequently became, a keyword helping to organize a segment of academic and policy-making bureaucracies. The idea of an “informal economy2 thus has a double provenance reflecting its two sides, suspended between bureaucracy (the ILO report) and the people (my ethnography).
Drawing attention to activities that had previously been invisible to the bureaucratic gaze had a clear value, but I was struck later by how static my analysis had been. My aim had been to show that no single idea (the “state”) can ever capture the complexity of real life. But I conceived of informal income opportunities as at best a minor appendage to the state-made economy, perhaps a bit more than “taking in each other’s washing”, but essentially going nowhere.
After completing my doctorate, I went to work in a development studies institute. There I saw my main task as trying to get this ethnographic experience across to development economists. My use of the informal/informal paircame out of those conversations. The formal and informal aspects of society are already linked since the idea of an informal economy is entailed in the institutional effort to organize society along formal lines. “Form” is the rule, an idea of what ought to be universal in social life; and for most of the twentieth century the dominant forms have been those of bureaucracy, particularly of national bureaucracy, since society was identified to a large extent with nation-states. This identity is now ending because of neoliberal policies, the digital revolution in communications and the global economic crisis.
Formal and informal appear to be separate entities because of the use of the term sector. This gives the impression that the two exist in different places, like agriculture and manufacturing, whereas both the bureaucracy and its antithesis contain the dialectic within themselves, as well as between them. There is a widespread perception that together they constitute a class war between the bureaucracy and the people. It was not supposed to be like this. Modern bureaucracy was invented by the Italian city-states of the quattrocento as part of a democratic political project to give citizens equal access to what was theirs as a right. It still can co-ordinate public services on a scale that is beyond the reach of individuals and most groups. It is disheartening that bureaucracy (the power of public office) should normally be seen now as the negation of democracy (the power of the people) rather than as its natural ally.
Forms are necessarily abstract, and a lot of social life is left out as a result. The gap may be reduced by naming a variety of practices as an informal sector’ They appear to be informal because their forms are largely invisible to the bureaucratic gaze. Mobilizing the informal economy will require a pluralistic approach based on at least acknowledgement of those forms. Equally, the formal sphere of society is not just abstract, but consists of the people who staff bureaucracies and their informal practices. Somehow the human potential of both must be unlocked together.
‘Form’ is an idea whose origin lies in the mind. Form is the rule, the invariant in the variable. It is predictable and easily recognized. Idealist philosophers from Plato onward thought the general idea of something was more real than the thing itself. Words are forms, of course. In his Science of Logic, Hegel shows the error of taking the idea for reality. We all know the word “house” and might think there is nothing more to owning one than saying “my house”. But before long the roof leaks, the paint peels and we are forced to acknowledge that the house is a material process that requires attention. The formal sector is likewise an idea, a collection of people, things and activities; but we should not mistake the category for the reality it identifies.
What makes something formal is its conformity with such an idea or rule. Formal dress often means that the men are supposed to look the same, so they adopt a uniform that cancels out their individuality. Formality endows a class of people with universal qualities, with being the same and equal. What makes dress informal is the absence of such a shared code. But anyone can see that clothing styles in an informally dressed crowd are not random. We might ask what these informal forms are and how to account for them. The dialectic is infinitely recursive. No wonder most economists find the conceptual dichotomy confusing and impossible to measure.
There is a hierarchy of forms, and this hierarchy is not fixed forever. The twentieth century saw a general experiment in impersonal society whose forms were anchored in national bureaucracy, in centralized states and laws carrying the threat of punishment. The dominant economic forms were also bureaucratic and closely linked to the state as the source of universal law. Conventionally these were divided according to principles of ownership into public and private sectors. This uneasy alliance of governments and corporations is now sometimes classified as the formal sector. On the surface they share being subject to regulation, conformity to the rule of law. How then might unregulated economic activities, the informal economy, relate to this formal order?
They may be related in any of four ways: division, content, negation, and residue. The moral economy of capitalist societies is based on an attempt to keep separate impersonal and personal spheres of social life. The establishment of a formal public sphere entailed another based on domestic privacy. The pair was meant to constitute complementary halves of a single whole. Most people, once men more than women, divide themselves every day between production and consumption, paid and unpaid work, submission to impersonal rules in the office and the free play of personality at home.
Money is the means whereby the two sides are brought together, so that their interaction is an endless process of separation and integration or division. The division of the populations into males and females is the master metaphor for this dialectic of complementary unity. When the lines between the paired categories become blurred, we enter a phase of “negative dialectic”—Hegel’s term for the blurring of paired categories-from which a new positive idea may eventually emerge. Identifying the informal practices that constitute a bureaucracy implies such a blurring of the ideal dichotomy.
For any rule to be translated into human action, something else must be brought into play, such as personal judgment. Informality is built into bureaucratic forms as unspecified content. This is no trivial matter. Workable solutions to problems of administration invariably contain processes that are invisible to formal order. For example, workers sometimes work to rule. They follow their job descriptions to the letter without any of the informal practices that allow these abstractions to function. Everything grinds to a halt. Or take a commodity chain from production by a transnational corporation to final consumption in an African city. At various points invisible actors fill the gaps that the bureaucracy cannot handle directly, from the factories to the docks to the supermarkets and street traders. Informal processes are indispensable to commerce, as variable content to the form.
Some of these activities break the law, through theft, embezzlemt, breaches of safety regulations, tax evasion, smuggling, the use of child labour, selling without a license etc. The third way that informal activities relate to formal organization is thus as its negation. Rule-breaking takes place both within bureaucracy and outside it; and informal is often illegal. It is hard to draw a line between colorful women selling oranges on the street and the gangsters who exact tribute from them. When the rule of law is weak, the forms that emerge in its place are often criminal in character. Modern civilization protects the public image of bureaucratic processes from a hybrid reality that mixes formal order with corruption and criminality. We enjoy watching movies about cops and gangsters, but we insulate these fictions from belief in the rule of law that helps us to sleep at night.
The fourth category is not so obviously related to the formal order. Some informal activities exist in parallel, as residue. They are just separate from the bureaucracy. It would be stretching the formal/informal pair to include peasant economy, traditional institutions, and domestic life as somehow informal. Yet the social forms characteristic of these domains often informal economic practices and vice versa. Is society just one thing—one state with its rule of law-or can it tolerate institutional pluralism, leaving some spheres to their own relative devices?
Communities depend on members understanding each other for practical purposes; and they operate through culture. They use implicit rules (customs) rather than state-made laws and regulate their members informally, through the sanction of exclusion rather than punishment. European empires, faced with a shortage of administrative resources, turned to indirect rule as a way of governing semi-autonomous subject peoples. Anthropologists played their part in making this work. Any serious attempt to combine the formal and the informal anew requires similar openness to plurality of form.
The informal economy started off as a way of talking about the Third World urban poor living in the cracks of a rule system that could not reach down to their level. Now the rule system itself is in question. Everyone ignores the rules, especially the people at the top—politicians, bureaucrats, corporations, banks—and they routinely escape being held responsible for their illegal actions. Privatization of public interests is probably universal, but what is new about neoliberalism is that, whereas the alliance between money and power used to be covert, now it is celebrated as a virtue, wrapped up in liberal free market ideology.