Mindsets, Trends and the Informal Economy

The informal economy comprises those economic activities which are beyond the purview of the state because they lie outside its framework of laws, regulations and protections. A small proportion of these activities are illegal, but mostly they are activities which are simply not covered by the state’s rules and regulations. The informal economy is of great concern to policy makers the world over, and Indian policy makers are no exception. The core economic reasons for the concern are the strong association of informality with poverty and with low productivity. But the roots of recent pre-occupation with informality lie in the tension between two opposing forces. One of these is a historical policy mindset built on the expectation that informality will decline and disappear with development. The other is a global trend which shows informality to be not declining as fast as might be expected with economic growth, and indeed in some cases not declining at all but increasing. The object of this paper is to complement the “politics trumps economics” theme of this volume by exploring how policy mindsets influence policy making, and how they tend to persist even in the face of counter trends in reality. [The author]I first of all develop the history of economic thought and economic policy making on informality, to establish the route through which we came to be where we are today. [He] I then present the main global trends on informality and discuss some possible explanations for them. In light of this discussion, [the author]I then turn to policy and most importantly, how to change the mindset of those who formulate and implement policy on informality.