Guest post from Natalie McGarry:

vendorIn developing economies, the “informal sector” is full of babysitters, maids, gypsy cab drivers and gardeners. These workers do everything from selling food to stitching pants to making bracelets to selling wine from roadside stands. They’re paid in cash so their income is not reported to the government, and no taxes are paid.

The Wall Street Journal explains that contrary to conventional wisdom, the informal economy could be what’s saving developing countries from financial ruin.

Traditionally, the informal sector “is not something to be cheerful about,” as Nancy Birdsall of the Center for Global Development puts it. The Journal explains:

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.

In the current financial crisis, the Journal notes, the informal sector may actually be the saving grace of developing economies. With demand for export goods falling, many workers are being laid off from their formal sector jobs in factories and are turning to creative alternatives for income. Without these informal opportunities to make and sell products — at the market, on the roadside, or as street vendors — many would be destitute.

The WSJ article, “The Rise of the Underground,” highlights several of these informal workers, including a laid-off factory worker who built her own roadside stand to sell homemade medicinal wine to truckers. She now makes $3 more per day than she did at the factory.

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