A last safe havens in a darkening financial climate

The debate over whether the underground economy is beneficial or not depends, to dome degree, on your working definition of wealth. If, as one economist quoted below suggests, new wealth can only result by way of a growing economy (expansion of physical capital), then I think we are in real trouble. If, on the other hand, real wealth is related to know-how (the nurturing and expansion of human capital) as Bucky Fuller and other proponents of sustainability maintain, then the underground economy may be just what the doctor ordered

When our children were young, we spent many summer weekends at the local flea-market and making the rounds of neighborhood yard sales. Back then these were the only places where we could afford to buy good quality clothes and toys.

I even found a hard-cover volume of Bucky's Synergetics 2 in mint condition at a flea market. It was amongst a bunch of broken tools on a table made from an old door supported on two saw horses . Cost me two dollars. I didn't even have to haggle. (GW)

The Rise of the Underground

By Patrick Barta
Wall Street Journal
March 14, 2009

Ahmedabad, India

Economists have long thought the underground economy -- the vast, unregulated market encompassing everything from street vendors to unlicensed cab drivers -- was bad news for the world economy. Now it's taking on a new role as one of the last safe havens in a darkening financial climate, forcing analysts to rethink their views.

At the Manek Chowk market, in this Indian city's congested center, vendors peddle everything from beans to brass pots from a row of derelict stalls as monkeys scramble overhead. One man sharpens nails using a spinning blade attached to a moving bicycle wheel.

Surajben Babubhai Patni, 58 years old, sells tomatoes, corn and nuts from under a makeshift cloth tarp at one of Ahmedabad's most central street markets.

The "informal economy" - which includes everything from rickshaw drivers to maids to drug dealers - is making a big comeback in the developing world. Can it help ease the global recession? Patrick Barta reports from Thailand and India.

Their wages are pitiful by Western standards. But there are no layoffs at the Manek market. All anyone has to do to work there is show up and start hawking -- something more and more people are doing these days.

Without this job, "we'd have nothing," says Surajben Babubhai Patni, a 58-year-old vendor selling tomatoes, corn and nuts from under a makeshift cloth tarp. She makes as much as 250 rupees a day, or about $5, but it's enough to feed her household of nine, including her son, who recently lost his job as a diamond polisher.

Ms. Patni and millions like her are part of the "informal," or underground, economy, an enormous, vital and poorly understood segment of world commerce. It is becoming a lot more important now, as the global financial meltdown casts millions of people out of steady-paying jobs. Especially in developing economies, many of those people are landing in the informal sector, which has become a critical safety net as the economic crisis spreads.

Economists have stressed the negative aspects of informal trade for decades. Informal businesses often don't pay taxes, and they routinely lack the capital and expertise to be as productive as big enterprises, leading to less innovation and lower standards of living. Since informal workers lack health benefits and other safeguards, they have to save more for emergencies, resulting in less casual spending that further drags down growth. Having a big underground economy "is not something to be cheerful about," says Nancy Birdsall, an economist at the Center for Global Development, a Washington think tank. "When everybody is selling apples to each other, you're not creating new wealth -- it's not a sign that things are OK."

The frightening scale of the current recession is forcing some analysts to reconsider. As many as 52 million people could lose their jobs from the economic crisis world-wide, says the International Labour Organization, an agency of the United Nations. Without the informal sector, many of them will have nowhere to go.

Informal jobs "will absorb a lot of people and offer them a source of income" over the next year, says W.F. Maloney, an economist at the World Bank in Washington. Indeed, the jobs are "one reason that the situation in desperately poor countries isn't as bad as you'd think," says Simon Johnson, a former chief economist at the International Monetary Fund.

Until late December, Pilaporn Jaksurat, 33, was working full-time on a cotton spinning machine in a textile mill in Bangkok. She made about $7 a day and her benefits included bonuses of $30 a month for good attendance and a severance package worth about $800.

Then she was laid off when her factory, which sells fabric to clothing manufacturers in Europe, said it had to cut costs to cope with the global economic crisis. Finding a similar job wasn't an option, since other local factories were also dumping staff due to a massive decline in orders from buyers across Europe and North America. She decided to start her own business, selling shots of medicinal wine to truck drivers and motorcyclists on the highway by her home -- an adult version of the neighborhood lemonade stand. With help from friends, she fashioned a makeshift bamboo stand on vacant grass by the roadside. The start-up cost was about $275, she says, paid for with money from her severance package.

A few weeks later, shouting to be heard over the roar of oncoming trucks, Ms. Pilaporn says she's making a profit of about $10 a day after expenditures for ingredients, including herbs and wine. That's better than the $7 or so she made at the garment factory. She likes being her own boss, she says, and the income allows her to keep sending money home every month to help support her parents and 2-year-old child, who live together in a rural area in northern Thailand.

"It's a bit noisy here, but you get used to it," she says. If business "keeps up like this, I'll be fine."

Defining what makes a job informal isn't easy. Generally it includes any work outside the traditional "formal" sector, in which companies register with the government, pay taxes and provide jobs with fixed salaries and benefits like pensions or health care. It includes self-employed street vendors in Cairo, tortilla sellers in Mexico City, rickshaw drivers in Kolkata and scrap collectors in Jakarta.

There are also some informal workers in the U.S. and other wealthy countries, including off-the-books maids, gardeners and "gypsy" cab drivers, though the phenomenon isn't nearly as widespread as in the developing world. Analysts say it may add up to as much as 10% of the overall U.S. economy, and probably is growing now that employers are slashing staff, forcing more people to try their own small-scale businesses or make do with part-time contract work.

Before the Industrial Revolution, the difference between formal and informal employment was largely meaningless. With the rise of factories and trade unions, labor markets became more efficient and specialized. Workers increasingly entered into contractual relationships with employers that set benefits, while governments passed laws establishing minimum wages, social security plans and other protections. By the latter part of the 20th century, most American and European workers were in these formal arrangements.

Economists assumed developing countries would follow. With the spread of industrialization and wealth, they thought, underground endeavors would be replaced by factory and office jobs. Rickshaw drivers would get replaced by big transport companies, while street-cart vendors would give way to restaurants that paid taxes and observed health codes.

That isn't always happening. One-half or more of the developing world's nonagricultural workers are employed in the underground informal sector, according to the International Labour Organization. In India, 83% of workers are informal, while in sub-Saharan Africa, about 72% are.

The percentage of workers in informal trades has even increased in some developing countries at times in recent decades. According to the ILO, informal activities accounted for about 90% of the new jobs created in Africa over a roughly 10-year period in the 1990s. In Mexico, informal employment rose to about 54% of all jobs in 1997, from about 50% in 1990. Venezuela and Brazil saw similar increases.

Some researchers are starting to argue the informal economy is becoming a permanent fixture in some poorer countries -- in good times and bad -- as population growth outstrips job creation. The current recession, which is pressuring companies to cut labor costs, could intensify that process by pushing companies to ditch expensive formal workers in favor of cheaper part-time employees without benefits. Many laid-off workers may never be re-absorbed by the formal economy, as companies grow more accustomed to the flexibility of their informal counterparts.

Despite India's rapid growth of recent years, economists believe the bulk of new jobs created were in the informal sector, not the flashier salaried positions of corporate titans like Infosys Technologies Ltd. and Reliance Industries.

India's basic problem -- as with much of Africa, Asia and Latin America -- is that its economy can't create enough steady, salaried positions to absorb the millions of people entering the labor force each year. Between 2000 and 2005, the most recent year for which data are available, the number of formal jobs in India stayed flat at about 35 million, while informal jobs grew 17% to 423 million, according to the Indian government. Creation of new formal jobs has probably picked up since 2005, but not by enough to dramatically change the situation, economists say.

To alter that equation, the Indian economy would have to maintain stellar growth rates for years, says Jeemol Unni, an economist at India's Gujarat Institute of Development Research, a research center. It costs a lot more to hire full-time employees than take on temporary workers, so big corporations in India only add them when they're really flush, economists say.

As a result, much of India is now embracing the underground economy. That includes Ahmedabad, where informal jobs have played a crucial role in keeping the economy afloat in recent years.

For decades, this city of roughly five million people, where camels still amble down city streets, was known as the "Manchester of India," after the city in England famous for textiles. In the early 1980s, it had more than 60 giant mills employing 150,000 people or more, most of them with generous pension packages and other benefits. The industry trade union, started by Mahatma Gandhi himself (he kept an ashram by the city), was one of the most powerful institutions around and even ran a bank and hospital.

Then the mills entered a long and disastrous decline. More efficient operations were opening in other places, including China, and most of Ahmedabad's factory owners refused to make investments to become more efficient.

The mills became uncompetitive and shut down, dumping their workers and leaving scores of rotting mills and smokestacks that still loom ominously over the city. Today there are only about 10 mills left in operation. Membership in the trade union has fallen to about 9,000 people, and its bank and hospital have closed.

In many American or European cities where major industries died, like Buffalo, N.Y., urban centers fell into decay because there was nothing left to replace them. But Ahmedabad remains a thriving city. Most of the laid-off employees were able to find work in street vending, rickshaw driving, day-wage construction or other informal jobs, and as a result, the percentage of people employed in the underground economy increased. Today, Ahmedabad has some 55,000 rickshaw drivers, 70,000 street vendors, 70,000 construction workers and 45,000 roving trash collectors and recyclers.

As the sector has boomed, it also has become more sophisticated. It spawned its own trade unions, including one called the Self-Employed Women's Association, which began in Ahmedabad in the 1970s and has grown to a million members across India. The group provides training to teach women how to lay bricks and even started its own bank.

It also has a research staff of 22 women who study the underground economy and compile data to bolster the group's advocacy efforts, which include filing court cases to prevent government officials from kicking street vendors out of public areas. "The reality is that this sector is there and it's going to grow, so you have to deal with it," says Reema Nanavaty, director of economic and rural development at the group.

Despite the long demise of its signature industry, Ahmedabad today "is vibrant, it has life," says Martha Chen, a lecturer at Harvard's Kennedy School of Government who has studied the city. Based on Ahmedabad's experience, "I think we should see the informal economy as the solution" to urban decay and unemployment, she says, "not the problem."

The jobs aren't pretty. The trash collectors, known as rag pickers, live in squalid slums amid rotting piles of garbage. Street vendors have endured beatings by police who don't want them to clog thoroughfares; in some cases, they say, corrupt officers demand bribes to let them stay.

The workers aren't immune to the global economic slowdown, either. At one rag-pickers' slum by an abandoned mill, residents say traders are now paying as little as half what they shelled out a few months ago for plastic bags, steel scraps and animal bones. Some residents have started stockpiling waste in the hopes prices will recover, adding to the stench.

Another problem is that with more people losing their formal jobs, the informal sector is getting more competitive. At the Manek market, for instance, there are now about 500 vendors, from 325 six months ago. More informal jobs also means more lost tax revenues. I.P. Gautam, the local municipal commissioner, says 30% of the city's residents pay no taxes at all, a figure that could rise further if the informal sector keeps growing.

Yet Mr. Gautam believes the underground economy is essential to Ahmedabad's future. He says that while Ahmedabad has attracted a smattering of good jobs in financial services and the chemical trade in recent years, they weren't nearly enough to meet the overall labor needs in the city. Worse, big companies are quick to ditch workers when business slows, he says.

In cities like Ahmedabad with lots of informal jobs, "per capita income is less, and growth is slow, but you get your bread and butter," he says. The existence of a big underground economy is "why we are going to survive" the downturn. He says the city is now shifting to try to create more informal jobs, including setting aside new space for public markets at bus stops.

In the streets, many workers say they're just happy to have work. Ms. Patni, the tomato vendor at Manek market, says she would be happy to have a better job with a real salary, but finding one would be impossible. With little education, and few solid jobs to go around, "we can't get something like that," she says.

Kavitaben Uttambhai Parmar, 25, says she had one of the better jobs in the city until recently, stitching pants and other clothes in one of the few remaining major textile factories. During her five years there, her salary more than tripled to 115 rupees per day; she recently dreamed of buying a refrigerator. Then one day in November, she was laid off with one of her best friends, 30-year-old Jayshree Kantilal Makvana.

"That was a bad day for us," says Ms. Parmar, whose income helped support a household of five, including her mother, brother, sister and grandfather. "I went home crying."

Both later found informal work, doing stitching for a smaller textile company that pays only by the piece, allowing each woman to earn about 50 rupees per day. They also are making bracelets in their spare time to sell at festivals for about five rupees per 12 dozen.

Ms. Parmar says she is cutting back on electricity. Ms. Makvana says she's using city buses to get around instead of more expensive rickshaws. But they're happy they're still earning something.

"At least we're surviving," Ms. Makvana says.

—Wilawan Watcharasakwet and Vibhuti Agarwal contributed to this article.