Informal Economic Activity

The previous chapters have dealt with important economic characteristics of poor countries. Each of them actually provides some explanation also for the large size of the informal sector in low-income countries. Exclusion from the merits of formal institution is a dimension of poverty that often makes the family, mutual assistance groups or other informal community networks the only source for obtaining a minimum level of social protection and livelihood security. Being denied access to official product and labour markets, moreover, means that poor people have to live from subsistence farming, unregistered homework, small-scale trade or from employment by informal firms. Informal economic activity is often a reaction of individuals and firms to the high transaction costs associated with entering the formal sector. For example, a substantial number of companies in Angola, Benin or Djibouti operate in the informal economy, as the legal registration of their activities would cost them more than twice their respective country’s annual per capita income (World Bank and IFC 2008). Property titles are also mostly exchanged informally in countries such as Nigeria or Senegal where formal registration of property transactions costs more than 20% of the property value (ibid.). In other countries, property registers are not established at all, which means all property is, by default, possessed informally. The discussion in Chap. 4 has shown that wherever necessary formal institutions are absent or ineffective, people will invent informal alternatives or have to resort to traditional ways of organising social and economic life.