Tuesday, May 09, 2006

Tackling the Informal Economy
Business Week
Diana Farrell

Research on economic development from the McKinsey Global Institute has demonstrated that there is a direct correlation between the extent of an informal sector in an economy and its level of development. Singapore, Japan and South Korea are examples of highly developed countries with small informal sectors.

The author dispels the notion that the businesses acting in the gray economy are mostly small. According to McKinsey's research, the businesses operating in the informal sector
ranged from supermarket chains to software distributors to consumer-electronics assemblers. In countries such as Brazil, the informal economy represents as much as 40% of GDP. The author states that developing countries have large informal economies partially because it is difficult to establish legitimate businesses and because of the enormous amounts of red-tape legitimate have to contend with.

The author points out an interesting paradox - most of the social spending undertaken in developing countries is financed by high taxes levied on legitimate businesses. However, the money never reaches those who need it because most of the people requiring assistance operate in the informal economy and therefore are not eligible to receive the benefit of social security or insurance.

The author offers a three-point plan for "curbing informality" - making corporate taxes and business regulations easy to understand, creating harsher penalties for breaking the law, and applying penalties uniformly to those who violate the laws.

No comments: