Reason For The Growth Of Informal Economies


Reason For The Growth Of Informal Economies Essay, Research Paper

In this essay I will endeavour to provide reasons for the phenomenal

growth of the informal economy. Firstly, I will provide a brief definition

of informal and formal economies. I will also discuss the inequalities and

instability of the formal economy environment. Focusing on the

manoeuvres which manufacturers and individuals use within the informal

economy to alleviate these stresses. I will also put forward a concept of

Interactive Distribution which combines the best of what informal and

formal economies have to offer the economic environment. Creating a

powerful system of a informal distribution of goods and services. Thus, it

is my opinion that these inequalities within the formal economy, compared

to the attractive informal alternatives available to individuals and

corporations ensure the growth of the informal market.

Finally, I will give an overview of New Zealand s history, politics and

economy from which I will submit possible New Zealand reasons for the

growth of informal economies. Alternative income, created from the

informal system such as the fleamarkets around New Zealand. Also I will

discuss the cultural significance informal (traditional) economies have for

the Maori people of Aotearoa.

An informal economy co-exist, within the formal or capitalist economy.

Working entirely or partially outside the framework of production and

distribution of goods and services within our economy. The formal

sector is our capitalistic principles that regulates our market. Capitalism s

main function in my opinion is to continually replicate itself establishing

its set of structures and regulation, to the benefit of few.

The inequalities that exist within our global economy concerning labour

and wages have seen the rise in unemployment and an increasing gap

between rich and poor. The lack of economic opportunities have also

plagued our formal economy placing pressure on individuals and

manufacturers to seek new forms of production and distribution.

As Moser (1978) stated

The accelerated growth model … aimed to increase overal

national growth through policy of accelerated industrialisation …

industrial expansion would result in increased wage sector

employment on the basis that there was inevitably a positive

relationship between the growth of output, employment and labour

productivity, while the filter down effect would lead ultimately to

the redistribution of resources and income throughout society ( p.


This theoretical assumption has fallen well short from it s original goal.

As the redistribution of resources and income in our competitive

environment have see the polarisation of wealth for the few and the

increase poverty around the world.

Majority of businesses around the world are involved in retail sales which

have their own problems such as expensive overhead, wages,

advertisement, storage facilities and distribution. All adding up to

decreasing profits and an increasing cost to consumers. The informal

economy gives multinational corporations the opportunity to subcontract

assignments to informal organisations.

By making use of informal distribution networks, industries

eliminate the substantial cost of maintaining a permanent sales

force (Portes, Sassen-Koob 19XX p. 38).

Our capitalist thirst for profit has encouraged exploitation of minorities

and underdeveloped countries such as Nike in China and sweatshops in


Individuals also have the opportunity to benefit in this volatile

environment. Individuals or groups of individuals from developed

countries are able to act as middle men/women. Drawing upon their

informal social networks they can create a core group of informal

employees utilising skills to complete work. The monetary earnings of

these informal ventures may vary, but can be much higher when compared

to formal employment (Garcia, Kelly 1985). For the employees who are

faced with economic uncertainties informal ventures are a better choice

than poverty.

The potential growth for manufacturers to use home based social

networks, create a niche market of potential customers. These business

ventures that rely on the informal organisation of social networks and

production of goods and services in the formal economy. Have created a

market of interactive distribution .

Network marketing or interactive distribution creates home-based

enterprises with access to multiple manufacturers who deal directly to one

principle corporation. This is a powerful informal economy distribution

system, distributing goods and services produced in a formal economy

environment. Manufacturers are able to bypass wholesalers, retail outlets,

promote products and service directly in the home and avoid expensive

overheads. Yager (1994 : 70) states that

Interactive Distribution…combine the very best aspects of retailing,

discounting, warehouse clubs and franchising, and then blend

features with the hottest trends known as IN-HOME SHOPPING,



The business owner of the home-based enterprise benefits from this

relationship having access to products and services directly in their home.

Business owners are also able to purchase products and services at

wholesale price/s. Interactive distribution give business owners the

opportunity to build their own business. Simply networking and sharing

the opportunity of the system with others, people are able to create a

business group. The potential growth for manufacturers and the wealth

creation for business owners foresees a bright future.

Therefore it is my submission that due to the instability and inequality

existing within the formal economy, informal businesses are an attractive

alternative. Cheap production and distribution alternatives for

manufacturers also ensure the livelihood of informal economies. With

opportunities such as interactive distribution available to individuals and

manufacturers, growth in informal economies are certain to continue.

New Zealand is not exempt to the inequalities that are associated with the

formal economy. Society and it s reality that it creates are based on an

Anglo-Saxon ideal that has been misinterpreted, Adam Smith s notion of

a decent society (Heilboner, R., 1997). One can also say that the reality

that haunts New Zealand are also contributed to the persistent nagging

by the infamous New Zealand Business Round Table such as their

recommended policies for New Zealand to push for a free market

economy regulated through competition published in Moving into the

fastlane, 1996.

Somewhere over the last 150 years of New Zealand s written history we

have moved away from our community and collective identity towards a

hard nosed capitalistic, individualistic society.

With New Zealand deregulating the market, the workforce within NZ

have undergone dramatic changes such as tariffs on the motor industry.

In society there are winners and losers. But the gap between the two

groups in the New Zealand workforce is widening (Chateau, C. 1998).

The New Zealand Herald August 8-9 1998 describes one such loser to the

governments free market philosophy, the closure of Toyota car assembly

factory in Thames. With closures becoming a common occurrence around

NZ the question here is what does this mean for us?

The struggling economy has taken its biggest hit on the job front in

13 years with a wave of layoffs that saw 26,000 fulltime positions

lost in the three months to June (New Zealand Herald, Jobless

quarter worst in 13 years, August 6, 1998).

Our profit seeking society has seen the government cutting benefits,

selling off New Zealand s own assets, cutting tariffs and cutting taxes. By

cutting benefits we make it harder for families and individuals who are

dependant on the government and taxpayers to maintain some kind of


Within this doom and gloom New Zealand has a strong entrepreneurial

spirit. New Zealand has a large informal community of sporadic

fleamarkets which exist in our formal economy. New Zealand s Otara

Market a national icon, pull together individuals or groups of individuals

who set up store within this informal system selling cheap alternative

goods and services to the general public. The Otara market shows a

unique example of how both informal and formal systems can work

together. The market attracts a large population of people generating

customers for themselves and the legitimate store s within the Otara

Centre. Creating work and redistributing money back into our


New Zealand Maori and their collective community exist within both

spheres of economies at the same time, as the line between informal and

formal economies fade into each other. Drawing upon the uniqueness of

both formal and informal (traditional) economies. It is my assumption

that indigenous informal economy or traditional distribution of goods can

be used to maintain or legitimise one s culture. Under the Treaty of

Waitangi, Maori people lay claim to natural resources, the right to be

recognised as a people and as an indigenous culture. The traditional

economy that exist within the Maori culture enable non monetary forms of

transactions, for example some master carvers except the natural produce

of the area (fish, kumera, mutton) as payment. Strengthening there

kinship relationship, culture and utilising the resources available to them.

With the excess produce they are able to sell these at the market

purchasing items for the community which are not available in nature.

In conclusion the informal economy can wear many masks to justify its

own existence. The volatile environment of the formal economy gives

way to unique business opportunities. It has provided potential grow for

the manufacturers and entrepreneurial s acting as middle men/women

within these informal organisations. These business ventures do not

follow the norm of the formal economy, rather an informal business

innovation. Interactive distribution or network marketing demonstrates

the powerful potential for economic growth when two spheres of ideas are

combined. This business concept allows growth both within the formal

and formal economies. The New Zealand fleamarket phenomenon is an

example of an informal system which exists creating employment and

redistributes money back into the community. The cultural implication of

informal economy or traditional economy for the indigenous people of

Aotearoa, help maintain one s culture and strengthen kinship


Informal economic organisations are growing and will continue to grow in

our free market environment. Informal ventures are too attractive to be

ignored by corporations and entrepreneurial individuals.

Reference List

Chateau, C., Future shocks, New Zealand Herald, August

8-9, 1998.

Heiboner, R., The wordly philosophers, 1980, Business in

society coursebook, 1997.

Kelly, M. P. F., & Garcia, A. M. (1985). The making of an

underground economy; hispanic workers, homework and the

advance capitalist state. Urban Anthropology 14, 13

New Zealand Business Round Table, Moving into the

fastlane, 1996, Business in society coursebook, 1997.

Moser, C (1978). World development, Informal sector or

petty commodity production: dualism or dependence. Great

Britian: Pergamon Press.

Portes, A., & Sassen-Koob, S. (19XX). Making it

underground: comparative material on the informal economy

in western market economies. Unknown.

Unknown, Jobless quarter worst in 13 years, New Zealand

Herald, August 8-9, 1998.

Yager, D. R. Sr., & Yager, D. (1994). The business

handbook; A guide to building your own successful

amway business. USA: InterNet Services Corporation.

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