What is Informal Economy? It was first posed by Walras in his article “The Economic System of a Country” in 1970. An Informal Economy is nothing but a system where production, consumption, distribution and taxes do not have a face to face interaction. An informal economy is basically the opposite of a formal economy; it is self-managed through diffuse interactions.
Walras first defined informal economies as those wherein direct exchange of commodities is made between individuals. This is unlike the case of a formal economy, wherein there is a singular economic entity involved whose interactions are guided by laws anarchy. Informal economies are characterized by individual-based bargaining. They are also characterized by high levels of specialization and flexibility, both of which facilitate competitive restructuring of production processes and of the market. It also facilitates the decision making process and free rein for creativity and risk taking.
What is Informal Economy then? It is a hybrid model of the economy which regards the fact that production, distribution and consumption are influenced by the needs of the market at the time, instead of depending on the needs of the producers and consumers of commodities at a specific time. For instance, if there is a crisis in the formal economy, the informal sector will be affected, while the formal economy will have no trouble absorbing the crisis because its central bank can inject money into the market to absorb the lost value of production.
What is Informal Economy then used for then? It can be used in any formal economy where there is a high level of specialization, flexibility, specialization and the freedom to alter production and consumption processes according to the circumstances. What is Informal Economy then used for then? For instance, in the United States, it is used in order to counter the chronic unemployment problem that the formal economy is facing.
In this new system of production and distribution, there is no long term relationship between the producer and the consumer. In fact, it is a direct relationship between the producer and the customer, which are completely opposite to the traditional models. What is informal economy then used for then? It can be used for various other purposes also like marketing, advertising, packaging, safety regulation etc. In the United States, it is widely used in all the sectors which face problems with chronic unemployment.
What is Informal Economy then used for then? The first step towards utilizing the Informal Economy is understanding the nature of the market. The markets are characterized as informal, meaning that there is no set relationship between the producers and consumers. The market is very flexible and there is no requirement for anyone to work in the formal sector. The informal market has highly competitive factors, which makes it highly unstable and not very dependent on any particular sector.
The other aspect which needs to be understood very clearly is the production cycle. What is Informal economy then used for then is to be understood on the basis of production cycles that are highly customized. This is because the production cycle of a product is completely determined by the needs of the users.
Thus, we come to another aspect which needs to be mentioned briefly – the needs of users. What is Informal economy then used for then is targeted towards gathering the data of the needs of the market. These needs are very complex and are very specific and differ from one user to another. They require a lot of collecting and information collection and so they require an informal market.
The collecting of data is the core activity of the informal economy. The informal producers collect information about the production process, how the product is produced, who produces them, where they are produced, what is used to produce them, when they are produced, how much they are produced etc. These data are then analyzed to understand the market. Then comes the distribution of the product, which needs to be clearly understood in the context of the informal economy.
Distribution of products thus arises as the core activity of the informal markets. Different products have different stages of production and distribution. The distribution also varies across informal markets. In formal markets where the production and distribution are very well controlled, the distribution of products is very homogeneous and there is no room for choice.
On the other hand, the informal economy is characterized by variation in the distribution of products. The producer may prefer to distribute the product in more quantities or may be forced to sell it at a low price. This is because the producer may be compelled to sell it at a low price in an informal market, or if he wants to control the price, he can manipulate the pricing mechanism and quality of the product. Thus we find the product comes in various shapes and forms and having various classifications.