Not Disaggregating the Informal Economy Properly Hinders Development Efforts

Michael Kimani (@pesa_africa) brought this prize winning essay on the importance of understanding the informal economy to my attention, together with a snippet of text from our last inception report highlighting a major oversight that we believe is of critical importance.

Mike took issue on Twitter with the author’s very first sentence introducing his work as a PhD candidate in The Department of International Development, LSE, viz.,

I research smuggling, or ‘informal cross-border trade’.

and I offered to flesh out our concerns in a blogpost. Here’s the snippet Mike extracted from the tralac website:

C8oeVQ8XgAAnc-fNow, I won’t go into the full scale literature review on the challenge posed by the conflation of illicit activities such as smuggling with the licit yet unrecorded daily commerce in border markets as it’s clearly framed here on page 5 through 7 since the author is already in academia.

However, what I will do is just pull out Kanbur and Keen‘s specifically worded framing of the challenge of not unpacking the various elements of the informal economy as the first step towards understanding it better.

We think this is the wrong way to look at things. The key to policymaking towards informality is twofold. First, to specify more basic objectives, such as efficiency and equity, which transcend informality – informality and its persistence in itself is neither good nor bad. Second, to disaggregate informality into policy-relevant categories, rather than take it as an undifferentiated lump and then gauge policies by their impact on its magnitude.

Let’s take the problem of conflating smuggling with cross border trade in the context of Kanbur and Keen on Rethinking Informality:

In so far as any precise meaning is given to the term in discussions of taxation, informality is usually taken simply to mean non-remittance of tax due – failure to pay. But there are all kinds of reasons why a firm or individual might pay no tax. Maybe they are simply below the threshold above which they are legally obliged to; or maybe they are evading. Might not why no tax is paid matter for policy making at least as much as the fact of it not being paid? And how should tax systems be structured when it is recognised that their design may affect not only how much tax is paid, but the different ways in which it is not paid?

These questions lead, in our view, to a more useful strand of analysis than generalities about reducing informality.

or, in the case of this essay, to generalities about the need to understand the informal without distinguishing within it the various categories of trade that occurs across borders, both biashara and magendo.

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