The informal economy consists of an economic activity that is not taxed or regulated by a government. This is in contrast to the formal economy; A formal economy includes a legal economic activity under national law. The real formal economy can be taxed and included in the calculation of gross national product (GNP) of a government, which is the value of market for all goods and services produced by companies of a countryin a given year. Informal economies are often less institutionalized and include all economic practices that are not included in the calculation of GNP. Thus, informal economies include practices as disparate as drug trafficking and childcare, all of which are not communicated to the government or incorporated into the nation's GNP. All economies have informal elements.
Dealing drugs is an example of participation in the informal economy.
The original use of the term “ informal sector ” is attributed to the economic development model presented by W. Arthur Lewis, used to describe job or livelihood creation and sustainability primarily in the developing world. It was used to describe a type of employment that was considered to be outside the modern industrial sector. Participation in the informal economy can result from a lack of other options (for example, people can buy goods on the black market because these goods are not available through conventional means). Participation can also be driven by desireto avoid regulation or imposition. This can manifest as undeclared employment, hidden from the state for tax, social security or labor law purposes, but legal in all other respects.
The growth of the informal economy is often attributed to changing social or economic environments. For example, with the adoption of more technologically intensive forms of production, many workers have been forced to leave formal sector work and enter informal employment. Without a doubt, the most influential book on the informal economy is El Otro Camino by Hernando de Soto. De Soto and his team argue that excessive regulation in the Peruvian (and other Latin American) economies forces a large part of the economy to enter informality and thus prevent economic development. In a widely cited experiment, his team tried to legally register a small garment factory in Lima.
