Rational agent-based understanding of the informal sector: A critical assessment

Abstract

The main economic theories that have studied the informal sector have had little success in explaining the consistencies founded empirically and in proposing efficient policies to bring up to date the non-structured sector. This work proposes that more suitable theoretical analysis, which supports policies directed to encourage productivity in the informal sector, would emerge if new variables (such as institutional arrangements) were incorporated in the analysis and if some assumptions are modified – particularly those related to agent rationality – in the analysis of these social phenomenon.

Keywords:

• informal economy
• policies
• cognition
• social environment

JEL classification:

• E26
• F64
• N97

Acknowledgments

I would like to thank Dr. Arturo Torres and two anonymous reviewers for their valuable comments and suggestions to improve the quality of the paper. I am also grateful to Alena Juárez and Alejandra Mendoza for their gentle assistance.

This paper is part of a research project ‘Explorando los mecanismos de aprendizaje e innovación en la microempresa informal’ carried out in UAM and funded by CONACYT (Project num. 33511067).

Notes

1 In this work, the terms ‘informal economy’, ‘non-structured sector’, ‘informality’ and ‘informal sector’ will be taken as synonyms.

2 This theory finds some empirical support in the case of economic growth and employment in Taiwan during the second half of the twentieth century. This country had a high unemployment rate (around 6.3%), in the following six years of continuous growth, unemployment in Taiwan fell to 4.3% and wages in manufacturing had a total increase of 2%. This sequential process of economic growth and falling unemployment would remain until the 1980s and 1990s with real wages doubling every decade, not only in manufacturing but throughout the Taiwanese market work (Fields 2004).

3 Freije (2001) offers an interesting review of several contributions about this topic. For the Latin American vision in recent years, see chapter 4 of Tokman (2004).

4 In his work The mystery of capital (2001), Hernando de Soto would give an international character to his theory.

5 A number of public personalities have expressed high regard for the work of de Soto; these include Kofi Annan, Margaret Thatcher and the former President of Mexico, Vicente Fox. Thatcher's opinion is representative of all of them and therefore we quote: ‘The mystery of capital has the potential to create a new, enormously beneficial revolution. It should be mandatory reading for all those who are responsible for the wealth of nations’ (de Soto 2001, book cover, in Spanish in the original).

6 Maloney states in his work that self-employed workers are equivalent to informal workers.

7 It is interesting to note that the presence of periods of economic growth does not necessarily imply a reduction in the informal sector. This will be seen in more detail in a later section.

8 At the beginning, it was thought that informality was a specific problem of underdeveloped countries. However, lately, some evidence related informality (at least, a particular kind of informality) to processes that help to reduce costs and increase the competitiveness of larger formal firms (Castells and Portes 1989). Thereby, informality is enhanced by globalisation and modern strategies of production and can be found in any country. In consequence, the term is currently not applied only to less developed countries.

9 This classification of jobs is highly correlated with the informal sector.

10 Tironi (1995) defines adaptation as the learning process that leads the individual to discriminate between punishments, opportunities and rewards that the environment in which he is located offers and act strictly according to this. Resignation, on the other hand, is the attitude characterised by the fatalism towards the situation.

11 ENAMIN is the acronym of Encuesta Nacional de Micronegocios (in Spanish).The ENAMIN provides information about economic, demographic and labor microentrepreneurs statistics, as well as the characteristics of the firm that they manage (size, income, number and type of clients and legal status).

12 Own elaboration, based on ENAMIN (2008).

13 The concept of learning required by this perspective is not limited to schooling, though it includes factors such as education and formal training, but it is conceptually linked with all those cognitive processes that allow the economic agent to capture process and interpret information that the social and natural environment offers.

14 Many other theories and models have used similar assumptions. Examples of these are the evolutionary theory (Nelson and Winter 1982), the number of studies related with complex systems, as well as, of course, all those schools that are related to the intellectual inheritance of Herbert Simon.