The Informal Economy
In countries such as Mexico, the informal economy may make up 30% or more of GDP. Most of this actvity occurs as services.
Why is it a problem?
For the government:
no taxes. The government does not collect taxes from people in the "informal economy", even though many of them collect benefits such as driving on the roads, using the hospitals, clean water, etc.
For economic development:
It is a problem because people in the informal economy do not have property rights, or other documents necessary to be the basis for economic development.
How to get people out of the informal and into the formal economy?:
1. Make tax reforms: (a). lower the marginal tax rates so that its not overly prohibitive to pay, and (b) make the punishment severe enough that people are afraid to get caught cheating, or evading taxes.
2. Stop shipments of goods and check for proper invoices, and official paperwork. Watch out for counterfeit papers. This is why you see stop-points in places like Brazilian highways, where they pull over trucks at borders and check the paperwork.
3. As credit becomes available to poor people, they will want access to lending mechanisms. But, in order to borrow money, they need to be official. This gives them incentive to come into the formal economy.
4. Property rights reform (see discussion below).
My take on the "property rights" issue was as follows: I thought he was referring to the need in places like Brazil for people in "favelas" to get property rights.
If you can find some political solution where people can get real ownership of the places in which they live, then two things should (theoretically happen), (1) there is an incentive to build and improve upon that which you own, and (2) people can then take out equity loans from banks that would be backed by home equity. So, poor people could then raise (small) amounts of money to start businesses, etc.
So, part of the "Washington consensus refined" would be the need for countries like Brazil to tackle the need for property rights reform (in order to unlock massive economic potential that is currently tied up in the "informal" economy)
see also, the KookyPlan discusson on: Brazil property rights and development
What is the opportunity:
see our discussion on bottom of the pyramid marketing
Black Market
The black market industry includes such illegal markets as drug trafficking, illicit gun market, and illegal trade....
Its is different than the "informal economy" in Latin America and in many developing nations.
Links from Kooky Plan
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