What today is variously called the informal, irregular, black, hidden, shadow, parallel, subterranean, nonmonetary, second, unofficial, invisible, traditional, household, sub- or off-the-books economy (Mattera, 1985: 1; McCrohan and Smith, 1986: 49; Capecchi and Pesce, 1984: 20), has been with us since the Middle Ages. Nonetheless, U.S. academics have recognized its significance only since the early 1970s (Ditton, 1977; Ferman, Henry, and Hoyman, 1987: 10, 16).1

Current developments of the informal economy are related to several structural changes in the dominant economy: increased competition for dwindling foreign markets, to which major Western corporations have responded by searching for cheaper foreign labor and replacing domestic labor with high-technology machines; cheaper imports, which challenge domestic industrial production; demographic developments, such as additional female, young, and new immigrant labor-market entrants to a pool of workers already swollen by technological changes; and attacks on the welfare state as paternalistic, bureaucratic, and incapable of fulfilling promises.

The political response to these assaults has ranged from:

The recessions of 1974-1975 and 1980-1982 accelerated these changes and had devastating effects on the economies of Third World countries and pushed their economies toward "informalization." These informal economies then linked up with those U.S. and Western European manufacturers seeking to cut labor costs through deregulation and other illegal operations (Portes and Sassen-Koob, 1987: 54-55).

On the U.S. labor front, such developments meant reworking the existing dual labor force. The holders of higher-paid, relatively secure jobs with good working conditions (core workers) stand apart from many other workers whose insecure, low-paying, service-sector jobs often reflect the loss of hard-won, post-World War II guarantees such as the minimum wage and protection from environmental and work hazards (periphery workers).2

Capital, on the whole, has sought low-wage, nonstate regulated labor, and states have sought to attract, rather than to regulate, capital. Full-time workers have been converted into a mix of temporary, flexi-work, subcontracted, part-time workers who employers can fire whenever they need to minimize their own obligations. The fall in world prices for exports such as coffee and copper has hit Third World countries especially hard. As a result, state superstructures have deteriorated, and both their inflation rates and foreign debts have risen.

It is from such massive changes in the world economy that the informal economy derives its form and force. This "Introduction" discusses the definitional problems posed by the informal economy, describes some of its activities, and indicates the kinds of groups which participate in it. It also approximates its size, reviews explanations of why it exists, and examines the interrelation between the formal and informal economies. Finally, I suggest how the articles in this issue of Social Justice fit within this conceptual framework.

Defining the informal economy is a formidable task. As Alison Lever, one of the contributors to this issue, states (personal communication), "anyone who attempts 'a global theory' of the 'informal economy' at an abstract level is undertaking a task of Herculean proportions." Nevertheless, all attempts at definition have two things in common:

1.     That the informal economy is part of the dominant economy, which determines its main characteristics and from which it is not independent.

2.     That the informal economy is largely defined by its opposition to state regulation.

As a reading of the articles in this issue makes clear, though, once these givens are accepted, agreement disappears. Like the metaphor of the blind men and the elephant, everyone grabs a different part. Commentators describe the informal economy as: activities inadequately counted by state economic measuring devices because of the sellers' informal business styles or because such sales leave an inadequate statistical trail (McCrohan and Smith, 1986: 49); exchanges of nonmonetary goods and services excluded by accepted economic measures, such as those goods and services produced for family consumption, neighbors, friends, or those in the same community (Capecchi and Pesce, 1984: 20); activities unregistered by the national measuring system such as the gross national product (GNP); activities unrecognized by law and uncontrolled by administrative regulations and therefore not under and subject to state regulation (Gaudin and Schiray, 1983: 5); activities unknown to state authorities, and therefore outside the control of government, such as those seeking to evade compliance with state regulations and taxes (Ibid.); and activities that form "a nexus of social glue that makes the formation and maintenance of social life possible" (Gaughan and Ferman, 1987: 25).

In Lever's words, the informal economy is a "rag-bag of economic activities" linked by the fact that:

Thus, the major defining characteristic of the informal economy is that it is not only outside or hidden from state regulation, but also in its "very origins" integral to "the structural conditions and processes in the larger society, and cannot be divorced from them" (Henry, 1982: 469, citing Ferman and Ferman).

Its historical origins may be linked to a kinship mode of production, in which the "personal social domains and social-network relationships" dominate "impersonal marketplace" economics and form what may be called "the social economy" (Gaughan and Ferman, 1987: 18, 20-21).

Who Is in the Informal Economy?

The informal economy is likely to be found at all times and in all places (see fn. 1, however). Its activities are likely to be part-time, home-based, random, barter, domestic or community work, or other nonmonetary exchange.

Thus, informal employment often involves piecing together various regular and unofficial jobs and government benefits, with off-the-books payment rather than a salary. As a result, it is difficult to designate informal employment participants as "employed" or "unemployed."

Informal transactions tend to be smaller than those in the official economy. They are locally based, taking place among relatives, friends, neighbors, and acquaintances (Mattera, 1985: 3). When an elite is involved, activities may consist of a "new tribalism" which cuts across ethnic lines and instead substitutes organizational connections (Lions and Rotary clubs) or fraternal bonds between members of the dominant class (MacGaffey, 1983: 364). Much of it is noncriminal, consisting of a "social exchange of services, such as neighborhood self-help networks" (Gaughan and Ferman, 1987: 16).

Presidents (Watergate) and their henchmen (Irangate), the middle classes, pharmacists, lawyers, doctors, and business executives (Scraton and South, 1984: 14) have all chosen to enter the informal economy. But those at the bottom of the scale -- women, blacks, and recent immigrant groups -- for the most part, have been forced into it (Mattera, 1985: 3; 124). As Gaughan and Ferman (1987: 23) have stated:

Not all participation in the informal economy can be ascribed solely to the dispossessed, and much documentation and analysis demonstrate that the informal economy is used by many middle-income and upper-income people.

Therefore one must consider that low-income groups use informal exchange systems to meet different needs from those of middle-class groups -- for example, survival versus stretching a dollar, respectively.

Estimates of the size of the U.S. informal economy vary from $60 to $330 billion (McCrohan and Smith, 1986: 50-51, provide estimates from different writers). These figures are generally unreliable (Portes and Sassen-Koob, 1987: 42). Researchers believe the upper limit to be $42 billion, of which about $7.3 billion is reported on income tax returns (McCrohan and Smith, 1986: 49, 53).

Table 1 summarizes the findings of McCrohan and Smith's survey (1985: 53-55), which indicates the following percentages of purchases of total goods and services in the informal economy:

Table 1

The survey concluded that:

These statistics are highly suspect because they are based on survey information and subject to the respondents' motivation to hide or distort information. Moreover, they ignore a whole range of criminal activities (Gaughan and Ferman, 1987: 22). Even if this survey is accurate -- though it only deals with the cash exchange part of the informal economy -- a finding that the informal economy occupies about 11.5% of all U.S. domestic transactions is not inconsequential. It is consistent with the "working estimate" of another researcher who suggests that the informal economy represents about 10% of the GNP, and with that of one of the authors in this issue, Alejandro Portes. Thus, it is "large enough to make the underground economy a phenomenon of considerable importance" (Mattera, 1985: 53). In comparison with Italy, however, where the estimate is 30% (Ibid.: 84), and with Latin America, which has a similar figure (Portes and Sassen-Koob, 1987: 35), the U.S. informal economy is modest. In the United States, about 12 million people may work in the informal economy as moonlighters, part-timers, self-employed, unemployed, or illegal immigrants (Ibid.). The numbers increase impressively if mere participation as customers in the informal economy (garage sales, for example) is included due to the importance of these social and economic functions.

In Third World countries, "the growth of the second economy may exceed that of the official economy" since "it provides an alternative or supplementary means of livelihood to wage labour for most of the population" (MacGaffey, 1983: 352, 355). Both Portes and Bôrôcz, and West have touched upon this point in their writings.

Much of the inquiry into the development of the informal economy relates to questions about the crisis of the state (Gaudin and Schiray, 1983: 1; Mattera, 1985: 2, 5-6). Such a focus is understandable because the dominant characteristic of the informal economy is its "almost complete absence of relations with the State" (Choncholm, 1984: 25).

The structural changes discussed above led to a smaller, more service-oriented manufacturing sector. The informal economy filled this gap in the formal economy for affordable goods and services (Henry, 1982: 465). Ethnic and cultural segregation as well as state regulations -- which add to the cost of production and exchange through specialization, professionalization, licensing restrictions, and protections excluding people from employment -- encourage the informal economy (Ibid.: 469).

The informal economy attracts individuals financially or otherwise incapacitated, who are thereby unable to satisfy state requirements to enter the market. They are:

Informalization often has as its precondition both a profit squeeze, which results from increasing labor costs or competition from cheaper foreign goods, and a decentralization of work arrangements coupled with the availability of a willing labor force. Given those conditions, skilled workers in manufacturing industries (such as garment, footwear, and furniture production) enter as entrepreneurs into subcontracting arrangements with formal market providers. The same process occurs in consumer services because these are frequently small in scale and labor intensive (Portes and Sassen-Koob, 1987: 54).

Mattera (1985: 66) sums up these changes:

In the Third World, access to the state serves to create and maintain a dominant class by restricting the ability of others to gain access to resources crucial for the accumulation of wealth (MacGaffey, 1983: 363). Today, however, the state in First and Third World economies has often ceased to be the crucial agency for accumulation and is incapable of providing essential services, such as education, health care, the judicial function, and a social welfare system. Global multinational corporations, operating in the equivalent of 19th-century rugged individualism, have the best of both worlds. Workers in Third World countries produce and assemble their products at starvation wages, while workers in First World countries like the U.S. are forced into low-paying service jobs or into the informal economy.

Since official economic figures may bear little resemblance to reality as a result of the development of the informal economy, new means of statistical measurement must be devised (MacGaffey, 1983: 352). Much of the macro-economic data may be "compromised" and economic models may be unable to predict consumption accurately (McCrohan and Smith, 1986: 49).

More importantly, major employers in First World countries have regained "control over the wage relationship" (Mattera, 1985: 5), while the labor movement has lost much of its membership -- and thus the political power to influence labor legislation. The movement has been "set back decades as workers find themselves toiling in conditions reminiscent of the nineteenth century" (Ibid.: 38). As Mattera (Ibid.) states, many firms in the informal economy carry on their businesses free from state inspection and regulation, and thereby circumvent worker protections supporting the minimum wage and occupational health, and forbidding race and sex discrimination. Thus, post-World War II state controls and taxing policies aiming to enforce equality are now being replaced by working arrangements which promote inequality (Lever, personal communication).

Yet the informal economy has also resulted in the decentralization of production from huge factories to small workshops, and even to workers' homes. Occasionally, such reorganization of work has resulted in formation of groups seeking better working conditions (Mattera, 1985: 125; Robinson, 1985: 115-117). For some people, the informal economy has represented freedom of choice and an alternative way of life (Mattera, 1985: 129). In Third World countries, it is at times more remunerative than formal employment. Ironically, given the vagaries of a stable employment relationship for the average worker, the second economy often offers the worker more reliable, safe, and stimulating employment than does the primary economy (Ferman and Ferman, 1973).

Nonetheless, the participants in the informal economy must be grouped as entrepreneurs and workers. Entrepreneurs' earnings can considerably surpass those of formal economy workers, while informal economy workers generally earn less than those in the formal economy (Portes and Sassen-Koob, 1987: 40).

The prosperity of informal entrepreneurs is based...on the continuing plight of their own employees. Unprotected workers at the bottom of the labor market thus subsidize the well-being of their immediate employers as well as the profitability of the formal firms on which those employers depend [for subcontracting business to them] (Ibid.).

Many of the participants on both sides are recent immigrants (Ibid.: 48, 54). Recent legislation covering immigrants creates a huge mass of undocumented workers subject to deportation, and thus creates the perfect setting for an informal economy.

The informal economy should not be seen as a chaotic array of small, disconnected, and marginal operatives. On a global scale, it represents "well-organized entrepreneurial activity" which connects First and Third World countries in a new, yet undefined, contractor-subcontractor, employer-employee relationship (Ibid.: 56-57).

Hazel Henderson has created a model for the informal economy which is reminiscent of Braudel (1981: 29). Taking a broad view of the informal economy, Henderson (1986: 3) estimates that "over half of all production, consumption, and investment in the world is not monetarized and, therefore, is overlooked in most global economic statistics." Henderson writes:

This underground economy is the illegal underbelly of those sectors. It includes the billions of corporate and government barter deals, the drug traffic, tax-dodging coupon clippers, as well as petty moonlighting to make ends meet.

The third layer down is the "caring economy" of altruism, volunteering, mutual aid, and cooperation. Upon the bottom layer, Mother Nature, rests the entire cake.

Increasing evidence shows the cooperative, nonmoney sectors to be the bedrock of prosperity without which the GNP-dominated sectors would collapse. The manipulation of money itself in the global "funny money" game has given it an air of unreality and is forcing a re-examination of policies for full employment and sustainable production. By recognizing the importance of the caring economy and viewing our economy as a whole, we begin to understand the importance of using our money wisely and humanely, leveraging our vision of a better world (Ibid.).

For the most part, the U.S. Left has ignored the informal economy. My own interest in the subject (Robinson, 1985: 115-117) led me to propose to the Social Justice Editorial Board a special issue on the informal economy. In acting as special editor of the issue, I had in mind a particular format. I did not want either articles that centered on definitions of the informal economy or bibliographic essays.3 The literature is full of such arcane debates. Instead, I wanted an article that would discuss the significance of such an economy for the Left. Stuart Henry agreed to do that. I also wanted at least one ethnographic study which would take a particular community and show how the informal economy affects workers. That community had to be placed in the context of the national and international marketplace. Alison Lever, who had recently completed her doctorate on women embroiderers in a small village in Spain, met that requirement. A third author, Steven Sampson, submitted a paper on the informal economy in Eastern Europe. In the meantime, the Editorial Board, convinced of the importance of the subject, commissioned four additional articles, those of Galasi and Sík, Headley, Portes and Borocz, and West. Portes and Borocz analyze how the principles applicable to the informal economy apply to developed capitalist and socialist countries. Henry's article raises theoretical questions that pertain to the entire issue. Headley addresses the informal economy's links with the Third World. Lever provides a detailed case study of the problems of regional underdevelopment within a developing capitalist economy (Spain). West, Sampson, and Galasi and Sík examine various aspects of the informal economy in socialist economies.

Portes and Borocz suggest that one of the most important recent discoveries in the field of economic sociology concerns the close-to-universal extent and the explanatory significance of the informal sector. Their comparative research merges insights of studies on the processes of informality under capitalism with those on the role of the second economy under state socialism, where it operates outside the channels of centralized planning. The differential effects of involvement in informality and the second economy are weighed in terms of people's class positions, race, gender, and ethnicity, the difficulties involved in satisfying basic social service needs, the upward and downward pressures on wage levels and union power, and the costs resulting from difficult work conditions, long hours, and uncertainty. Ultimately, they argue, the contributions to the status quo of increased flexibility and profitability for firms resulting from informalization of certain sectors under capitalism and the "escape valve" and means of circumventing supply bottlenecks in rigidly planned command economies require that the process of informalization becomes a direct threat to the state's regulatory powers -- the very powers which make the existence of a formal economy possible.

In his article, Henry poses the question as to the revolutionary character of the informal economy. He argues that capitalist society is composed of several interacting economies, one of which is the informal economy. Even though the market economy is dominant in capitalist society, this dominance does not preclude the existence of subordinate economies, of which the informal economy is one. Henry discusses how the informal economy can either support or "undermine" the dominant economy. He concludes that although informal economies do not "overthrow" the dominant economy since they are by definition outside the official economy, they do allow some persons to experience control over their lives. However, because the informal economy's interaction with the dominant economy is complex, further development and inquiry, and especially ethnographic studies, must be undertaken before we can answer whether the informal economy has revolutionary potential.

Headley describes the economic, political, social, and cultural rise of Jamaican youth gangs, their ensuing adoption of drugs and violence as an accommodation to the material conditions of their lives, and the export of these gangs to the United States. The author shows the progression of successive generations of jobless youth from casual employment in the informal economy through employment by corrupt politicians and, then, to the arena of international drug trafficking, where gun-running and gun use became natural counterparts. Unable to gain a living in their own country, Jamaicans emigrated to the U.S., bringing drugs and gang violence with them. Thus, Headley reveals the interrelationship between successive generations of a reserve army of casual labor in Jamaica and gang violence in the U.S.

Alison Lever's ethnographic study places female embroiderers working in a Spanish village within the ideological and legislative framework of the Franco and post-Franco state. Lever's analysis of the village economy shows the importance of the embroidery industry in village life, the crucial role played by women, why the work is outside the formal economy, how that economy affects the women's working conditions, the importance of personal relations between employer and employee, the household as the unit of production, and the internal dynamics of the family as affected by market demands. She compares characteristics found in the informal economy of her village with those found in underdeveloped economies in other countries. Her study reveals the interrelationships between the informal economy and big capital, as well as the relative advantages and disadvantages of the informal economy for both entrepreneurs and "self-employed" workers.4

West discusses the informal economy in Nicaragua as a product of a combination of causes: the devastation inflicted on the country by the 1972 earthquake, the depleted resources left from years of the Somoza dictatorship, the impact of the global economy on Third World countries, and the marginal economies imposed on all Third World countries by their First World-Third World relationship. The author shows how Nicaragua's informal economy pervades every aspect of the economy and how the government has responded to control it. West argues that the interventions by the Reagan administration created a marginalized population, which engages in criminal activity as a way of life.

Steven Sampson examines the social and political consequences of the informal economy in Eastern European communist states. He details significant differences in how the informal economy operates in Romania, the Soviet Union, and Hungary. He differentiates official from unofficial economies and compares how the second economy works in communist, capitalist, and Third World states. The characteristics of second economies in and consequences for Romania, the Soviet Union, and Hungary are evaluated. Sampson concludes that one reason for the passivity of peasant populations in these countries may be the positive functions performed by the unofficial economies.

Like Sampson, Galasi and Sík analyze Hungary's problems in considerable detail. Their typology, which is similar to Henry's, aids in examining the sources of "invisible" incomes. Their calculations show that invisible incomes and the labor performed by households in the informal economy amounts to as much as one-third of the national income. The consequences of this divergence of labor to the informal economy include: a reduction in government revenues, increased difficulty for the government in calculating the state of the economy (the GNP, the pace of inflation, or actual employment), income stratification within the population, and an increasing acceptance of lawless activity. Conversely, the informal economy may have a stabilizing effect on an otherwise inefficient economy. The authors suggest two scenarios that vary by the degree to which Hungary's future economy is transformed into a market economy. No matter which scenario is adopted, they conclude, the informal economy will continue to expand. Nevertheless, to the extent that the government "legalizes" the illegal economy, there may be beneficial results. Yet unless conditions in the economy make invisible income less attractive economically, the state is unlikely to succeed in reducing the informal economy by repressive means.

To conclude, although the informal economy has been known since feudal times in a variety of forms, its present size, flexibility, and international scope have so far successfully challenged state regulation. State strategies have generally been limited to recognition and legalization. Repression has been uniformly unsuccessful. Its very vitality and chameleon-like nature make its future virtually unpredictable and uncontrollable. Scholars have not even been able to establish an accepted typology. Yet it is an area of activity which the U.S. Left can no longer ignore. We hope that this issue of Social Justice will contribute to an understanding of some of its ramifications and will encourage both researchers and community activists to think of the portent of the informal economy as one of the factors holding promise for a radical transformation of our present society.