Ryzhkova Julia, Petruhina Elena, PenzGU, Penza

Рыжкова Ю.А., Петрухина Е.С., ПГУ, Пенза, Россия

Informal Economy: Problem For the State And Blessing For the Nation

World experience shows that in all times and in all societies there were various kinds of economic activities, that can’t be controlled by formal economy laws and statistics. During the Soviet period everything that was out of the formal government frameworks were referred to as criminal. In the second half of the 20th century this phenomenon attached the attention of researchers and was defined as an ‘informal economy’.

At the last time ‘informal economy’ means economic sphere that can’t be controlled by official institutes, including rank house and shadow economy. Such varied composition of informal economy depends on different types of activities that exist out of the law (for example, home labor) as well as against it (not registered business) [1].

The sector of informal economy according to the majority of scientists includes not only criminal activities but also home labor for self-sufficiency, exchanges and donations between households [3].

Almost all the researches of informal economy concentrated on such ‘material’ conditions of it’s development like management bureaucratization, flow-in of migrants, antinomy, unemployment growth etc. Nevertheless the enormous value of informal economy largely depends on a moral climate of society [1].

Among all economic problems ‘informality’ – one of the least studied. Informal companies don’t carry out of their financial and legal liabilities. They don’t pay VAT and income tax, don’t adhere labor laws (don’t pay social taxes and break the law of the minimum monthly wage) and break the rule of product market’s operations, that includes quality standards, patent legislations and intellectual property laws.

Informal economy is the global phenomenon. However, in developed countries the distribution of informal economy rather limited. Existence of this sector is connected with immigrants’ business activities from developing countries as well as the transition of this countries to postindustrial society and the global competition of ‘non standard form of employments’. Developing countries with low indicators of social and economical levels characterized by larger scale of informal sector that the main playing role of the reproduction on a simple scale for acceptable household’s life level. Scales of informal economic negotiations depend on previous development society track and depend on settled interaction’s character between government and economic agents [4].

In different spheres informality is expressed in different ways. Informal retailers usually don’t pay VAT. Informal food-processing industry companies don’t observe sanitary norms and quality standards. Informal building companies hide real manpower and their real working hours.

For many of us, informal economy is street venders and small undertakers. In reality informality is especially prevalent in small businesses and traditional activities which characterized by the low level of technology and standardization. But in fact in this process more bigger companies of developing countries also take a part.

Informality degree fluctuates from branch to branch. It is an uppermost in the service sphere, particularly in retail trade and in building. Usually in such branches not big companies are popular and the territory on which they operating is rather big. As a result we can see a lot of difficulties in accordance with its determination. Tax departments have difficulties with verifying revenues of these companies because they come in from individual customers. In such companies the liberal share of their total costs accrues on the charges which connected with compliance of labor legislation. As a result of this situation companies is the interest in depreciating of employees quantity.

Informality is wide spread in the most laborious branches like light industry and at least in capital-intensive branches like car, cement, steel, oil and telecommunication industries. However dig industrial companies operating informally. The Growth of informal economy is the result of the three following factors. The First is that state can’t force companies to meet their obligations. It is the result of low qualification of official, bad organization of state’s departments, low penalty, and ineffectiveness of the judicial system. The Second is rather big costs in accordance with functioning in the frames of formal economy. There are a lot of reasons that force companies to go to the shadow: red take, tax load, quality standard cost and labor protection costs. The Last reason is existing social regulations. In developing countries the society is tolerant to disregard the law. Somebody thinks that small companies have the right to evade taxes and break laws. So they can neutralized competitiveness and advantages of big companies.

There are a lot of countries in which sharing of informal economy is growing up for many reasons. For example, in Sweden some companies try to avoid high taxes and use not enough flexible labor legislation. In Brazil 50 percent of non agricultural employees working in informal companies. The Growth of informal economy is the result of high taxes and the cut of the state machinery expenditures . Sometimes it generated by toughening of financial discipline that created by the International Monetary Fund and another financial institutes.

Informal economy is forced on developing countries. Another words, we need studying informal sector for ruling economy [3].

Informality locks the growth of labor capacity and economy in general. There are two reasons. The First one is powerful stimuli, that keep companies on the grey market and forbid rising the scale and capacity for them. Another one is that informal companies reduce their costs by dodging taxes and breaking the legislation. The Cause of it is the increase of their market share. Moreover, informal economy has negative consequences not only for economy, but also for social sphere.

Companies that choose informality lose the chance for investing their business and increasing their capacity. Informal companies rarely turn to formal credit institution because they haven’t legal registrarion. Instead of it they turn to underground moneylender with small loans but a big rate. Informal companies haven’t legal mechanisms for providing contract conditions, protecting their property or adjusting of disputes. So they have a risk if their partners are out of their closed surrounding. Then companies keep growing more frequently to attract interest of the state. Conclusion: the growth of informal companies is not profitable.

So, the statement that informal companies can grow and become a part of economy is only a myth. On the contrary, they intentionally do not use modernization. And they never try to leave a vicious circle of low capacity.

Honest productive companies can’t increase their share market because of informality. Due to dodging taxes and breaking the legislation informal companies cut their costs by 10% as compared with formal companies. This benefits lead to weakening of formal companies’ positions. It breaks the normal process of a competitive struggle according to which more productive companies drive out less productive.

One more cause of informality. Tax revenues reduce and governments increase tax loads on the formal sector. Tax increasing lead to multiply informal companies’ privilege and decrease net income of formal companies after paying taxes. As a result they lose the chance to invest this money in their own capacity. There is a vicious circle. High taxes force companies to go in to informal sector. Tax loads for formal sector as a result grow up. 80% of tax loads in developing countries provide remaining formal companies.

Society also has loses. There are a lot of developing countries providing rather large social support programs. Especially considering their economy level. Problem in this case is small proportion of employees which have such supports. They are members of state departments and employees from the formal companies. But informal workers are vulnerable.

Consumers also suffer. Speaking about informal economy, they have rather limited choice. For consumers in developing countries this situations can be illustrated by two different ways or choices. On the one hand consumers buy very expensive and high quality goods exactly the same as in developed countries. Or on the another hand unaware of the risks they buy cheap and low quality goods from the informal companies. As you can see we can’t find goods for the middle class. Small and middle companies, which manufacture goods and services for middle class, functioning in informal sector. As a result they have no stimuli and possibilities for taking this niche [5].

At the same time for micro level informal companies is rather suitable. Existence of informal sector is not only a natural mechanism in operating economy, but also a good solution for today’s problems of formal rules. Informal and semi-formal markets allow to buy staples at low prices for poor people. Costs and risks of such trading are not scaring for somebody. People risk_ by quality to gain price. Wild spread of informal markets in postsocialist countries and small impact of prohibitive regulations of informal sector sad about vitality and positive impression of this phenomenon by people. Situation in the sphere of informal labor negotiations is suitable for all. Employers avoid unnecessary costs for taxing and social supporting of employees. Informal employees for its part get higher ‘black’ wages and ‘moral justification’ for working not at full strength, and do not think about observance of labor discipline.

Informal paying for medicine is not so acutely perceived by the nation. But the quality of this medicine has many complaints.

Sum up we can say, that informal economy is rather natural for many people from the different social groups and involved in different informal negotiations. The fact of informality rather rarely creates discomfort feelings.

The Examples above show that informal negotiations in economy are important. For employees they are comfortable, for small and middle companies they allow finding the chance for uncontrolled ‘black cash’. For officials they compensate low wages. For politicians they help to make electioneering.

Who then is not satisfied of informal economy? We think that informality, firstly, is the problem of the government. People don’t value a form of deals. More over the position of the state and people about formality and informality, legal and illegal are always different. Pal Tamash, Hungarian sociologist, sad that informal economy first of all is the problem of the Finance Ministry, because it is interested in the taxes and political elite, who blame each other for illegal economic actions in their political games.

In other words, such researches are not interesting for somebody except academics and some politicians [3].

Library:

1. Barsukova S.U. Informal economy and Russian system of values. URL http://www.isras.ru/files/File/Socis/01-2001/Barsukova.pdf

2. Olympieva I., Pechenkov O. Informal economy as social and researching problem. URL www.indepsocres.spb.ru/

3. Ruchin A.V. Entrepreneur in the informal economy. URL http://www.jourssa.ru/2006/4/9cRuchin.pdf

4. Titov V.N. Social mechanisms of operating and reproducing of informal economy sector in the modern Russian market economy system. URL http://dibase.ru/article/24082009_titovvn/8

5. Farrel D. Hidden threats of informal economy. URL http://www.e-xecutive.ru/knowledge/announcement/340953/