Reason For The Growth Of Informal Economies

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 Zealands 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. Capitalisms
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 …

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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 its 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 its reality that it creates are based on an
Anglo-Saxon ideal that has been misinterpreted, Adam Smiths 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 Zealands 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 Zealands 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 Zealands 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 stores 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 ones 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 entrepreneurials 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 ones 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.
/ Pages : 1,658 / 24