Reason For The Growth Of Informal Economies

In this essay, I will endeavor to provide reasons for the phenomenal growth of the informal economy. Firstly, I will provide a brief definition of informal and formal economies. I will also discuss the inequalities and instability of the formal economy environment, focusing on the maneuvers which manufacturers and individuals use within the informal economy to alleviate these stresses. I will also put forward a concept of Interactive Distribution which combines the best of what informal and formal economies have to offer the economic environment, creating a powerful system of informal distribution of goods and services.

Thus, it is my opinion that these inequalities within the formal economy, compared to the attractive informal alternatives available to individuals and corporations, ensure the growth of the informal market. Finally, I will give an overview of New Zealand’s history, politics, and economy, from which I will submit possible New Zealand reasons for the growth of informal economies. Alternative income created from the informal system, such as the flea markets around New Zealand. Also, I will discuss the cultural significance informal (traditional) economies have for the Maori people of Aotearoa.

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An informal economy coexists within the formal or capitalist economy, working entirely or partially outside the framework of production and distribution of goods and services within our economy. The formal sector is our capitalistic principles that regulate our market. Capitalism’s main function, in my opinion, is to continually replicate itself, establishing its set of structures and regulation, to the benefit of a few.

The inequalities that exist within our global economy concerning labor and wages have seen the rise in unemployment and an increasing gap between rich and poor. The lack of economic opportunities has also plagued our formal economy, placing pressure on individuals and manufacturers to seek new forms of production and distribution. As Moser (1978) stated, “The accelerated growth model… aimed to increase overall national growth through a policy of accelerated industrialization… industrial expansion would result in increased wage sector employment on the basis that there was inevitably a positive relationship between the growth of output, employment, and labor productivity, while the filter-down effect would lead ultimately to the redistribution of resources and income throughout society” (p. 1042).

This theoretical assumption has fallen well short of its original goal, as the redistribution of resources and income in our competitive environment has seen the polarization of wealth for the few and the increase of poverty around the world.

The majority of businesses around the world are involved in retail sales, which have their own problems such as expensive overhead, wages, advertisement, storage facilities, and distribution, all adding up to decreasing profits and an increasing cost to consumers. The informal economy gives multinational corporations the opportunity to subcontract assignments to informal organizations. By making use of informal distribution networks, industries eliminate the substantial cost of maintaining a permanent sales force (Portes, Sassen-Koob, 19XX, p. 38).

Our capitalist thirst for profit has encouraged the exploitation of minorities and underdeveloped countries, such as Nike in China and sweatshops in Mexico. Individuals also have the opportunity to benefit in this volatile environment. Individuals or groups of individuals from developed countries are able to act as middlemen/women, drawing upon their informal social networks to create a core group of informal employees utilizing skills to complete work. The monetary earnings of these informal ventures may vary but can be much higher when compared to formal employment (Garcia and Kelly, 1985).

For employees who face economic uncertainties, informal ventures are a better choice than poverty. The potential growth for manufacturers to use home-based social networks to create a niche market of potential customers is significant. These business ventures that rely on the informal organization of social networks and the production of goods and services in the formal economy have created a market of interactive distribution.

Network marketing or interactive distribution creates home-based enterprises with access to multiple manufacturers who deal directly with one principal corporation. This is a powerful informal economy distribution system, distributing goods and services produced in a formal economy environment. Manufacturers are able to bypass wholesalers and retail outlets, promote products and services directly in the home, and avoid expensive overheads. Yager (1994: 70) states that Interactive Distribution “…combines the very best aspects of retailing, discounting, warehouse clubs, and franchising, and then blends features with the hottest trends known as IN-HOME SHOPPING, INTERACTIVE MEDIA, SMALLER AND NICHE BUSINESSES, and HOME-BASED ENTERPRISES.”

The business owner of the home-based enterprise benefits from this relationship by having access to products and services directly in their home. Business owners are also able to purchase products and services at wholesale prices. The interactive distribution gives business owners the opportunity to build their own businesses. Simply networking and sharing the opportunity of the system with others, people are able to create a business group.

The potential growth for manufacturers and the wealth creation for business owners foresee a bright future. Therefore, it is my submission that due to the instability and inequality existing within the formal economy, informal businesses are an attractive alternative. Cheap production and distribution alternatives for manufacturers also ensure the livelihood of informal economies. With opportunities such as interactive distribution available to individuals and manufacturers, growth in informal economies is certain to continue.

New Zealand is not exempt from the inequalities associated with the formal economy. Society and the reality it creates are based on an Anglo-Saxon ideal that has been misinterpreted – Adam Smith’s notion of a decent society (Heilboner, R., 1997). One can also say that the reality that haunts New Zealand is also contributed to by the persistent nagging of the infamous New Zealand Business Round Table, such as their recommended policies for New Zealand to push for a free-market economy regulated through competition published in Moving into the fast lane, 1996.

Somewhere over the last 150 years of New Zealand’s written history, we have moved away from our community and collective identity towards a hard-nosed capitalistic, individualistic society. With New Zealand deregulating the market, the workforce within NZ has undergone dramatic changes, such as tariffs on the motor industry. In society, there are winners and losers. But the gap between the two groups in the New Zealand workforce is widening (Chateau, C. 1998).

The New Zealand Herald, August 8-9, 1998, describes one such loser to the government’s free-market philosophy, the closure of Toyota car assembly factory in Thames. With closures becoming a common occurrence around NZ, the question here is, what does this mean for us? The struggling economy has taken its biggest hit on the job front in 13 years with a wave of layoffs that saw 26,000 full-time positions lost in the three months to June (New Zealand Herald, Jobless quarter worst in 13 years, August 6, 1998).

Our profit-seeking society has seen the government cutting benefits, selling off New Zealand’s own assets, cutting tariffs, and cutting taxes. By cutting benefits, we make it harder for families and individuals who are dependent on the government and taxpayers to maintain some kind of existence. Within this doom and gloom, New Zealand has a strong entrepreneurial spirit. New Zealand has a large informal community of sporadic flea markets that exist in our formal economy. New Zealand’s Otara Market, a national icon, pulls together individuals or groups of individuals who set up stores within this informal system selling cheap alternative goods and services to the general public.

The Otara market shows a unique example of how both informal and formal systems can work together. The market attracts a large population of people, generating customers for themselves and the legitimate stores within the Otara Centre, creating work and redistributing money back into our communities. New Zealand Maori and their collective community exist within both spheres of economies at the same time, as the line between informal and formal economies fades into each other. Drawing upon the uniqueness of both formal and informal (traditional) economies, it is my assumption that an indigenous informal economy or traditional distribution of goods can be used to maintain or legitimize one’s culture. Under the Treaty of Waitangi, Maori people lay claim to natural resources, the right to be recognized as a people, and as an indigenous culture.

The traditional economy that exists within the Maori culture enables non-monetary forms of transactions. For example, some master carvers accept natural produce from the area (fish, kumera, mutton) as payment. This strengthens the kinship relationship and culture while utilizing the resources available to them. With the excess produce, they can sell them at the market to purchase items for the community that are not available in nature.

In conclusion, the informal economy can wear many masks to justify its existence. The volatile environment of the formal economy gives way to unique business opportunities. It has provided potential growth for manufacturers and entrepreneurs acting as middlemen/women within these informal organizations. These business ventures do not follow the norms of the formal economy but rather represent an informal business innovation. Interactive distribution or network marketing demonstrates the powerful potential for economic growth when two spheres of ideas are combined. This business concept allows growth both within the formal and informal economies.

The New Zealand flea market phenomenon is an example of an informal system that exists, creating employment and redistributing money back into the community. The cultural implication of the informal economy or traditional economy for the indigenous people of Aotearoa helps maintain one’s culture and strengthen kinship relationships. Informal economic organizations are growing and will continue to grow in our free market environment. Informal ventures are too attractive to be ignored by corporations and entrepreneurial individuals.


  1. Chateau, C. (1998, August 8-9). Future shocks. New Zealand Herald.
  2. Heiboner, R. (1980). The worldly philosophers. Business in society coursebook, 1997.
  3. Kelly, M. P. F., & Garcia, A. M. (1985). The making of an underground economy: Hispanic workers, homework, and the advanced capitalist state. Urban Anthropology, 14(1), 13.
  4. New Zealand Business Round Table. (1996). Moving into the fast lane. Business in society coursebook, 1997.
  5. Moser, C. (1978). World Development, Informal sector or petty commodity production: Dualism or dependence. Great Britain: Pergamon Press.
  6. Portes, A., & Sassen-Koob, S. (n.d.). Making it underground: Comparative material on the informal economy in western market economies.
  7. Unknown. (1998, August 8-9). Jobless quarter worst in 13 years. New Zealand Herald.
  8. Yager, D. R. Sr., & Yager, D. (1994). The business handbook: A guide to building your own successful Amway business. USA: InterNet Services Corporation.
  9. Words/Pages: 1,658/24

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