Small Businesses and the Informal Economy

With my first entry I going to jump right into it and talk about the informal economy here in Mexico. But first, a definition: The informal economy generally refers to individually owned and operated small businesses that exist outside of the tax system and lack reliable access to credit. These businesses are usually run out of a home, on the street, or in an open air market, and can include just about any consumer good or service imaginable, from homemade tamales to t-shirts made in China.

During an economic crisis, as workers are laid off and jobs become scarce, this sector grows. When a worker loses their job in the United States they apply for unemployment insurance. In Mexico, the recently unemployed often start a business. This spirit of entrepreneurship is inspiring but it also shows the disenfranchisement of a significant amount of the community. By some estimates, 40% of the goods sold in Mexico are from the informal economy.

For many, days are long and there is little chance of seeing their business grow because they lack the necessary credit. I was at a cafe the other day in the center of Mexico City when an older man with a bucket of soap and water walked in and approached the barista. With my struggling comprehension of Spanish, I thought I overheard him ask if they needed their door cleaned. The barista nodded "yes" and the man went to work. It turns out he asked if they needed the tracks on their main garage-type sliding door cleaned. He worked for about a half an hour cleaning out the dirt and rust from these tracks and when he finished I watched the barista hand him 10 pesos (85 cents). The man then went on his way to find his next customer.

Not all people working informally, however, receive such little compensation. In some cases, they may be doing better than those with "regular" jobs. A friend of mine in Guadalajara, for example, is a French teacher. She has a bachelor's degree and worked as a teacher in France for a year. Her salary, however, is quite modest. In contrast, her sister, who did not go to college, works in a market selling pirated DVD's. With the money from her job she drives a nice car, wears fashionable clothes and has an apartment in her city of Atlacomulco.

The informal economy appears to function as both a safety net for those out of work and as an alternative for those who do not want the constraints of a formal sector job. It seems to me, however, that the Mexican government should try to "formalize" these businesses by opening up channels for credit and also taxing their profits. This is certainly a tall order and it would be difficult to construct an accurate and fair tax regime. But, by allowing these businesses to plug in, I believe it will create a more fertile atmosphere for innovations to prosper. Consequently, this would create more home grown jobs in Mexico and generally make the people better off.



Also, here's an interesting podcast from NPR's Planet Money, which talks about the benefits of legitimizing Jamaica's informal businesses. http://www.npr.org/blogs/money/2010/04/the_friday_podcast_fear_and_ta.html