Do services degenerate faster in an informal economy?

In conventional thinking, there are many advantages in living in a formal economy, where entrepreneurs and laborers work together according to established rules agreed by everybody through the involvement of the State.

This is supposed to guarantee fairness and more recently, a widespread care system centered around protecting the poorest, most vulnerable and the most elderly members of the society

On the other hand, a more or less completely informal economy is the day-to-day experience of hundreds of millions if not billions of fellow humans, especially (but by no means only) in so-called emerging and developing Countries.

In an informal economy, certain types of income and the means of their generation are “unregulated by the institutions of society, in a legal and social environment in which similar activities are regulated.”

It is usually a sign that the State is locally very weak. So income (including salaries) is received without paying taxes; work arrangements do or do not follow lawful standards, there is no apparent provision for old-age pension

And more often than not, one has to have cash at hand to guarantee speedy treatment of one’s issue for example in a state court: in what we call corruption

However scandalous to the average well-disposed thinker, this is a system that a) is very widespread and b) appears to be working more or less smoothly. In fact, there is an element of trust: however small or big the bribery, it would not get paid if the service would then not be provided

This obviously applies to specific cases. You can call it “salary informalisation”, where things get done quickly only when the “customer” pays directly into the pocket of the employee on the other side of the counter, rather than through the State for example via taxes.

Other circumstances are completely different: think of the police officer that threatens to impound the car unless offered money; the politician cutting 15% on a nation’s foreign contracts, “otherwise they won’t get signed”

These are two different kinds of corruption. The former is about asking additional money in order to provide a service. The latter is greedy intimidation into paying in order to avoid getting oneself into a dangerous position. This is far worse, as it sucks money away with very little to show in return

Corruption as parasitical intimidation is what stiff sentences and worldwide campaigns against corruption should concentrate on

What are the drawbacks then of the more benign kind of corruption, the “salary informalisation”? At first glance, it is quite tempting to accept it. If (and when) it works, it is much more efficient than having to deal with a far-away incorporeal entity called “the State”. Even fairness can be far superior than in the formal economy, as rules are ready to be renegotiated and can be bent to be just in every occasion, not only as described by the necessarily incomplete Law.

The problem is of course in those two words: IF and WHEN. An informal economy works well only as long as there is no excess of abuse on one side or the other: otherwise the requisite of fairness disappears, and we fall back in the “corruption as greed” trap.

And in fact, is not that what too easily happens when the Rules and the Laws are not enforced appropriately, exactly when the State is too weak to do so? Worse, the usual cures evolved the world over can be worse than the malady: as soon as “Groups of Mutual Help” arise to protect the members against unfair treatment, their intentions are hijacked turning them into Mafias, with further damage to the economy

This is not a necessity. But an informal economy is simply too fragile: its services may disappear at the whim of the providers, and organized crime can only thrive without a clear, enforced set of rules called the Law

An informal economy can never be considered a good, healthy economy