Underground Industries Flourish Worldwide
Tuesday, September 18, 2007
More than 50 percent of all Latin Americans, 78 percent of Africans (including South Africa), 65 percent of Asians?excluding those who work in agriculture?work in these gray industries.
WASHINGTON?More than 50 percent of all Latin Americans, 78 percent of Africans (including South Africa), 65 percent of Asians?excluding those who work in agriculture?work in these gray industries.
Underground industries generally refer to businesses which operate outside a country’s laws by not paying taxes, refusing to offer benefits to employees, disregarding health and safety regulations or violating international patents or copyrights.
These businesses include mom-and-pop stores, newspaper kiosks, street vendors, small construction firms, small car repair shops. Many self-employed individuals such as cleaning personnel, babysitters, gardeners, rickshaw drivers are also considered to reside in the gray markets.
The above recent statistics were published by the World Bank and the International Development Research Center (IDRC). They are only estimates of the size of informal markets, since precise figures aren’t available.
IDRC said that if it were possible to collect actual data in India, China and a number of other Southeast Asia countries, the estimated percentage of underground workers in Asia would most likely be much higher.
More than 90 percent of India’s estimated workforce in 2002 were employed in the informal market, according to Women in Information Employment: Globalizing and Organizing (WIEGO), a global not-for-profit research organization based in Cambridge, Mass.
Although the above stresses the existence of informal industries in regions where the majority of people are poor, it does not conclude that there are no such industries in America and Europe. Estimates suggest that 30 percent of people in the United States and 25 percent in Europe are active in informal markets, such as household cleaners, yard workers, renovators and private instructors.
Filling A Market Niche
Underground markets fill a niche that is hard to tax or oversee. WIEGO calls these people the “working poor.”
The largest group in the informal market is people who work out of their homes, followed by street vendors, according to data from WIEGO.
“The informal sector is comprised of ’plucky’ micro-entrepreneurs who choose to operate informally in order to avoid the costs, time and effort of formal registration,” said Hernando de Soto, a Peruvian economist, according to WIEGO.
If there is a market for a product or service, the void will naturally be filled. Offerings by these underground businesses often cost less than their more established counterparts, due to less operating expenses and business tax. Others, however, argue that since these businesses are not regulated, the quality of their products or services may suffer.
In turn, Latin American street vendors, and many Indian and Chinese rickshaw drivers have formed trade associations. Street vendors in Mexico formed a union abbreviated as the FNOTNA CROC. Street vendors in Nicaragua also formed the Confederaci?n de Trabajadores por Cuenta Propia.
Small Scale Entrepreneurs
Gray markets exist because of what economists call market imperfections. One of the foremost reasons for their existence is that low-income residents need to buy food and other products, but most established businesses aren’t willing to move into or operate in a low-income area?there is just not enough profit to be made.
Researchers suggest that such industries thrive in countries with high taxes, weak legal enforcement systems and a large proportion of poor people. The truth is, underground businesses thrive in rich or poor countries alike.
Often, during times of economic upheaval and high employment, informal industries will spring up more so than during times when secure, legal employment is readily available.
In most Latin American countries, “Regulation, restrictive labor laws, and a labyrinth of red tape conspire to make Latin America’s business environment difficult for law-abiding companies,” said Roberto Fantoni of McKinsey & Co.’s Sao Paulo, Brazil office.
It takes an average of 152 days to form a business in Brazil, three times longer than anywhere else in the world. A license to build and start a warehouse takes 460 days compared to between 5 and 69 days in the United States. To register a business takes 21 days in Nigeria, compared to three days in Finland. On average, creditors of those filing for bankruptcy in India receive 13 cents on every dollar owed, whereas in Japan they receive on average 90 cents for every dollar.
Underground economies will survive as long as government regulations and costs to form and operate a business “are stifling private enterprises,” suggested de Soto.
In South American, Asian and African countries, established, legal firms still outsource job functions to those who work in underground industries. Miguel Angel Centeno and Alejandro Portes, professors at Princeton University, suggest in “The Informal Economy in the Shadow of the State” that companies are inventive and will find ways to skirt rules and regulations. These companies will subcontract much of the work to small informal companies.
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