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Development Essay Final

Development Essay Final

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Published by: hishamsauk on May 18, 2011
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12/16/2012

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Is the Informal Sector a locus of importantdevelopmental activity that needs official recognitionand support, or is it merely an indicator of economicdistortion and bureaucratic obstruction? Discuss withreference to either Colombia or Mexico.”
Given that estimates for the size of the informal sector can reach up to90% of the rural labour force and 69% of the urban labour force inColombia (Bernal, 2009), key consideration must be given to the originsand the role of this substantial sector in developing countries. This essaywill first consider varying definitions of the informal sector, finding thatthe both its origin and role differs markedly depending on which definitionis adopted. Secondly, the issue of the informal sector as an indicator of economic distortion and bureaucratic obstruction is discussed and while itis found to be true to an extent, a model of the informal sectorcharacterised by voluntary entry is considered. Finally, attention will begiven to both the positive and negative impact that the informal sectorhas on the development of the Colombian economy, with particular focuson the linkages between sectors and the recent rural conflict as a result of the illicit drugs trade. There is substantial disagreement about how the informal sector shouldbe defined, both theoretically and empirically. One school of thoughtsubscribes to the notion that the informal sector is simply a ‘reserve pool’of labour, as suggested by the Harris-Todaro model; the urban informalsector compromises of recent migrants of rural origin who were unable tosecure formal employment. Capp et al. (2005) subscribe to this view, and
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considers the informal sector as wholly separate from the formal sector,undermining it by being a source of cheap and exploitable labour. Portes(1983), however, rallies against such a dualistic notion, arguing that theinformal sector actually predates the formal sector; consequentially, thereare strong bilateral links between the two sectors, examined later, thatsuggests the informal sector plays a greater developmental role than astore of cheap labour.Flórez (2002) provides a comprehensive framework into which the bulk of the literature falls by identifying two schools of thought, each with twodefinitions. The first is the dualistic notion under which there is a pure
dualism
’ definition with the informal sector as the disadvantaged sectorin the economy, and the
excessive regulated 
approach where theinformal sector arises as a response to excessive regulation and strictlegislation; workers are pushed into a sector with low productivity andpoor remuneration. The second school of thought is of the informal and formal sectors asbeing highly integrated, as Portes (1983) suggests. The two approachesFlórez (2002) lists here are the ‘
Structural Articulation Approach
’ and the
Entrepreneurial Approach
’, although the latter is a subset of the former(and restricts the possible size of an informal sector firm). The structuralarticulation approach highlights the heterogeneity of the informal sectorby considering three sub-sectors: direct subsistence (similar to dualisticnotions, with the informal sector as a survival mechanism), subcontractedlabour (used to reduce formal sector costs) and an autonomous
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entrepreneurial sector, raising the possibility that each sub-sector mayplay a different developmental role. Under all definitions considered, theinformal sector is beyond the control of Government; however thestructural articulation approach specifically considers informal sectoractivity as the illicit production of licit goods, excluding the drug trade. InColombia, this drastically alters the effect of the sector, as discussed later.
Figure 1: Size of the Informal Sector in Ten main Colombian cities. Source:
Flórez (2002)
Figure 1 shows not only that the size of the informal sector can varysubstantially by theoretical and empirical definition (old-PREALC/new-PREALC are dualist estimates), but also that the size of the informalsector, under all definitions, follows a seemingly counter-cyclical pattern,falling during the early 90s boom and rising during the late 90s recession. This supports the dualistic notion that the informal sector is a survivalmechanism to a lack of opportunities in the formal sector, whilst Flórez
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