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Social, Political, Economic Implication of the Informal Sector


Date Posted: 5/9/2018 1:53:36 AM

Posted By: chammy  Membership Level: Silver  Total Points: 379

The social, political and economic implication of the informal sector

Availability of food.

Increasing food prices suggest that urban food security is unlikely to improve in the foreseeable future, especially considering the impact of the recent drought. Here, the informal sector has come handy to make food available to every person since food is one of the physiological needs and human beings cannot do without.

Increased food security.

Food security is not just about food availability; access is also important. The informal sector is vital in this regard and often overlooked. Indeed, government lacks a clear and coherent policy in terms of the informal economy but it has really helped in making food accessible to people in different areas of the world.

Increased standard of living.

Since informal sector involves people venturing in businesses which are small scale; this create for them income that they need for their day to day needs. As a result their living standard is improved.

Poverty alleviation.

Most people in developing countries leave in extreme poverty levels because of unemployment and lack of income. Informal sector has helped eradicate poverty by allowing people to venture in businesses which can earn them some income at the end of the day which is able to sustain them.

Improved health.

Existing evidence suggests that 72% to 82% of street traders sell food. One study, drawing on data from Kenya, Nigeria, Ghana, South Africa and other African countries, found that adults’ daily energy intake from street foods was 13% to 50%, while for children it was 13% to 40%.
Street foods, then, make a significant contribution to energy and protein intake in developing countries, and their use should be encouraged, provided that they are healthy, traditional foods.


Street traders gravitate to areas where there is foot traffic, while spaza shops are often evenly distributed throughout townships and informal settlements. Proximity is

important in areas where there is no or erratic electricity or no refrigeration, as fresh food must be bought daily. This is highly social since there will be a balance between the rich and poor.
A 2015 study of the Kanana informal settlement in Cape Town, for example, found that only 31% of residents had access to a refrigerator, 49% used cupboards and 15% used buckets to store food.

Low prices.

A 2009 study compared the prices of 53 products (including fresh produce and fast foods) sold by informal traders in the Warwick Junction area in Durban to the equivalent sold at a range of formal retailers. On average, the cost in formal shops was 76% more than the same product sold by informal traders. This is really helpful since most of the people are low income earners and this makes it possible for them to get their suppliers they need to survive.

Appropriate quantities.

Informal retailers often sell products in smaller quantities that are more appropriate for those with low and erratic incomes and limited storage space.

Reduction of crime.

Since many people are going to be engaged in their daily business, the rate of crime is going to reduce and thus the lives which are always claimed by the authorities is also going to reduce.

1. Increased outbreak of diseases

- Since some deal with first foods and they may not have the legal requirements to operate business thus as a result the product produced may be of poor quality which may later lead to spread of diseases e.g. cholera.

2. Increased drug and substance abuse

- Most of the businesses in this sector are not registered as required by the law. Drug cartels tend to smuggle drugs which affects many people in the society.

3. Poor living standards

– Since most of their activities are not well articulated in business law thus they end in unstable income because their activities are not standardized.

4. Increased school dropout

- This is mainly caused by the drugs circulating in the society where students become drug addicts and some are expelled from school and others neglect in order to get employed in these sector or start their own small businesses in order to get some money for survival.

5. Environmental pollution

– Many informal sector plays sometimes tend to be insensitive to the environment thus dumping their unwanted waste matters which in turn pollute the environment. These waste matters include plastics, pieces of metal, dirty flows such as contaminated water etc.

6. Development of vicious circle of poverty – this is because the government is unable to collect taxes in many of these sectors which could have been used to provide other services to the society.

Political implications.

1. Increased government revenue

– This is mainly because of the imposition of a single business permit license by the government as a result the informal sector has been forced to go legal thus able to get revenue from operating of those businesses.

2. Avoidance of large scale lobbying

– This is as a result of large scale informal sector in the market which help the government avoid large scale lobbying by firms which would otherwise demand labour market deregulation so they can improve productivity and be more cost effective in the global economy (Cimoli, primi, and pugno 2005).

3. Increased International relations

- This because of the presence of free flow of goods and services within the boundaries of countries. Most of them are informal based e.g. charcoal from Usange beach to Uganda, this increased good relationship between these two states.

4. Easier entrance of informal sector in the global environment

– Policy makers find it easier to welcome informal sector in global world because of their promising future in product and service delivery.

5. Effective labour reforms

– it has brought about labour reforms that call for labour market flexibility and reduction of social security and wage benefits primarily impact this very small and privileged segment of workforce in developing economies.

1. Tax Evasion

– Most businesses in the informal sector by operating illegally to avoid paying taxes due to the little earnings from their businesses thus they feel like its oppression by the government.

2. Non-compliance with legal requirements

– Majority of the informal sector players do not follow the set business operating policies by the government thus leading to the loss of income by the government.

3. Insecurity

– This is mainly observed by street hawkers especially the ones who are not genuine doing business but turn to be con men, thieves etc. They pose a big threat to the members of the society at large.

4. Illegal business activities

– Most informal sector businesses are not regulated by government or do not follow polices and laws governing businesses. Many engage in illegal activities such as drug trafficking, selling of sub-standard products etc.

5. Immigration

– This is due to rise in the informal sector in the country, majority of people migrate to other countries to take advantage of business opportunities available. This affects the people of the host country negatively due to limited resources and unequal distribution of resources.

Economic implications:

1. Improved standards of living

– This is seen through better housing, education to children and people being able to meet their human wants from their earnings in the informal sector.

2. Creation of employment

– People have been success in their businesses employ unemployed people in the society thus reducing the dependency ratio. These people are in turn able to meet their basic wants and able to survive.

3. Contribution to exports
– This is mostly from the people producing products in low where some are exported to other countries thus contributing to revenue for the government.

4. Mushrooming of micro finance banks

–These banks are now spreading their growth to the lower levels of the counties in a measure aimed at easily reaching potential clients as the governments decentralizes most services.

5. Creates social change

-Through their unique offerings of new goods and services, they break away from tradition and indirectly support freedom by reducing dependence on obsolete systems and technologies. This results in an improved quality of life, improved morale and greater economic freedom.

6. Community Development
-Informal sector has brought development of the community which has been one of the dragon the government has really been fighting since independence. This has been a success due to the availability of resources and quick access of goods and services needed for upbringing of new developments.

7. Increase in capital and output growth.

-According to Schumpeter (1975) capital and output growth in an economy depends significantly on the local ventures and the grass root entrepreneurial activities, capital grows rapidly or slowly, and whether the growth involves innovation where new products and production techniques are developed.

8. Increase in Grand National Product.

-Through the creation of employment the disposable incomes will rise further,contributing to the increase of the social standards. Consumption will also increase,impacting positively on the national incomes (Keskin, Dhe Senturk 2010).

9. Increase in Per Capita Income.
-Through the creation of new businesses in the economy, the people will have money hands on thus there will be an increase in the per capita income resulting from the increase in the Grand National Product of that country.

1. Slow economic growth
– This is mainly observed where these businesses in the informal economy do not pay or evade tax which could have been used in national development.

2. Erosion of funds
– funds that could have been used for development in major projects are used to fund the informal sector by providing them with subsidies and other incentives.

3. Inflation.

-The informal sector may result to the increase of inflation in the country resulting to high circulation of money in the economy if not looked into may results to massive government failures.

4. Measure of the economy.

-It is very difficult for the government to measure the actual state of the economy thus it is very difficult to come up with policies which are up to date to enhance growth of the nation and allocation of funds in the government budget expenditure after every financial year.

5. Low rate of external investment.

-The informal sector has really made most of the large economy driven cities to be deprived due to fear of investment by foreign countries and individuals as result of increase in insecurity. This has made most of the foreign investors to invest elsewhere.

6. Introduction of fake and counterfeit products.

-Informal sector has some with introduction of fake products which has really brought about the degrading f the economy in most of the developing countries. This has taken place since there are no specific legal by laws that surround the informal sector.

7. Failure and closure of local industries.

-Since most of the informal sector economy deals with good and services of low quality which are cheap and affordable to every citizen, as a result many people tend to go fr this products other than those being produced in the local industries which in turn experience low returns and may end up closing business.


Davis, S. J., Haltiwanger,J &Schuh,S. (1993). “Small Business and Job Creation: Dissecting the Myth and
Reassessing the Facts.” Business Economics 29, 13-21.

Z.J.,& Szerb, L (2007). Entrepreneurship, economic growth and public policy. Small Business
Economics, 28(2/3), 109–122.

Capecchi, Vittorio. 1989. "The Informal Economy and the Development of Flexible Specialization in Emilia-Romagna." In Alejandro Portes, Manuel Castells and Lauren A. Benton, eds.

Charmes J. (1997): Informal Sector and Micro-enterprises in Tunisia: Towards a Renewed Approach. (in French). National Institute of Statistics, Tunis, Paris, 14p.

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