The Informal Sector in Latin America - Term Paper Example

The informal sector in Latin America has not declined in recent years, despite this sector being phased out in other developing countries and regions. While it could be argued that this is the reason for the economic problems in Latin America, since China’s economy has improved considerably since the informal sector began to shrink, a more valid argument is that the informal sector is still flourishing in Latin America because of other economic factors. The informal sector is defined as “all income-earning activities that are not regulated by the state in social environments where similar activities are regulated“ (Castells and Portes 1989, P. 12). Latin America is notorious for having corrupt government officials. This makes the informal sector seem much more appealing, since it eliminates government involvement in the individual’s finances. Also, the informal sector allows for the elites that control Latin American society to pay their workers as little as they desire, without having to worry about government intervention that could interfere with their profits. Also, it can be argued that “in developing countries, where unemployment insurance is sparse or non-existent, the consequences may be structural growth in the informal sector” (Galli & Kucera, 2003, P. 821). The amount of individual’s who are employed in the informal sector is not a reason for the success, or lack thereof, of a country’s economy, but are rather a by-product of the failures of the government to make the country more economically viable in the long term. The political and economic problems in Latin America cannot be attributes to one source in particular. It is a complicated problem that these countries will have trouble changing mainly because those who hold most of the power in the region do not want change. A small percentage of the population holds a great percentage of the money in these countries and with that money comes a great percentage of the power. The urban elites and the oligarchic landholders dominate the region financially and their power expands into political realm as well. Bribes, corruption, and the drug trade are major problems in Latin American countries and they are, a lot of the time, what keep the elites on top, as “the R&D policies in Latin America—like many of its economic policies—were formulated in an environment of embedded autonomy, in which state actors and institutions were somehow disconnected from social forces” (Oliveira, P. 238). While there are external problems, such as an inconsistent market on exported goods and the enormous loans given by First World banks in the past, the problems of Latin America can be attributed to internal sources. The internal problems, such as corruption, low minimum wage, a large military involvement, very little job security, and the fact that it is so difficult to get credit, make Latin America a difficult region for its inhabitants to live in. A reason for this is the fact that “meeting labour regulations involves cash outflows. In Peru full compliance with the labour regulations may result in a decrease of profit of over 50 percent. This deduction can affect 75 percent of formal firms which employ up to ten people” (Kappel & Ishengoma, 2006, P. 17). Latin America has a very elitist society. These elitists are the people who are at the top of society like oligarchic landholders, political leaders, and corporate leaders. It is estimated that in Venezuela “the wealthiest 10 percent of the population receive close to 50 percent of the income, while the bottom half of society only get about 4 percent of the income” (Vanden & Prevost, 2002, P. 101). They are also helped out by the low minimum wage. If an elitist happens to start paying his workers more and changes the landscape of the system, pressure from other elitists quickly brings him back to the pack, if he is lucky enough to survive. These elitists also have the money to pay off politicians and other government workers in order to get the development deals they want. There is also a belief in Latin America that “an elite should lead, decide, dictate, or otherwise rule” (Vanden & Prevost, 2002, P. 121). Many of the agricultural elites are involved in the drug trade, which is a highly corrupt sector of the Latin American economy. Since it is mainly up to the military to stop the flow of narcotics, the rich drug producers simply give the military a cut of the profits, which greatly reduces the risk of the entire operation. It has been argued that the “inequality of wealth and disparity of power and influence are Latin America’s greatest curses and are the root of many of the developmental, social, and thus political problems that continue to plague the region” (Vanden & Prevost, 2002, P.106). It is impossible to resolve many of the political and economic problems when the systems in these countries are so corrupt and when so few people hold so much of the power and money. Even if the government did wish to alleviate these problems, “governments in less developed countries may attempt to regulate and tax their economies according to the standards of the more developed ones without having the capacity to enforce compliance. Enforcement of regulations and taxes is difficult in less developed countries because they tend to have weak bureaucracies, frail legal institutions, and poorly educated, largely rural populations” (Loayza, 1996, P. 155). Another internal problem in Latin America, which relates to the last one, is the lack of pay that most of the workers receive. Many Latin American people “still work for less than $5 U.S. a day, and few make more than $10” (Vanden, Prevost 104). This is an economic problem because it does not allow the vast majority of the region’s inhabitants to have a comfortable standard of living. A small percentage of people, the elite class, live very comfortably and control most of Latin America’s financial resources and they have no reason to change this. This is the way it has always been and it is difficult to see it changing anytime soon because of the corruption that is ingrained in many parts of Latin American society. This, of course, also affects political practices as well. Politicians cannot always follow their own agenda because, firstly, they are easily bribed and, secondly, there is a high level of government turnover, through revolts. These revolts can come from different sectors of society but the one they are most worried about is that of the military. The military has a great amount of influence in the political landscape of the countries of Latin America and they have been known to use force in order to protect their economic and financial interests. Social assistance is also something that most Latin American countries lack. There was, however, a few countries that “developed sufficient social welfare programs to at least soften the savage capitalism that globalization had unleashed in Latin America” (Vanden, Prevost, 66). There are also external problems that have negatively affected the countries of Latin America. First of all, these countries have a high reliance on argo exports and mineral exports. When these commodities are at a high demand, the Latin American economy will be positively affected. Much of the region’s growth in the past has been a direct result of money received from these exports. The problem is that the global market for these resources is very unpredictable. During the depression, Latin America was hit hard because of the low demand for their top exports. This dependency on foreign investment remains a problem because of its unpredictability. The fact that the market fluctuations have such a large impact on the Latin American economy is not the fault of the First World buyer, it is the fault of the governments of these countries. Instead of using the money they make from the market being high to expand into new industries, the elitists of this society would much rather see the money go into their own pockets and there are no government regulations in place to combat this. During the 1970s, when the Organization of Petroleum Exporting Countries was formed, the price of crude oil increased drastically and much of this money was deposited in First World Banks. The banks, however, could not afford to make the interest payments on all this money. The solution that they came with was to loan this money to Third World countries, including the countries of Latin America. This is a decision that these countries are still attempting to recover from. Many of the governments in Latin America at this time were military dictatorships and these dictatorships decided not to invest all this money into the future well-being of their respective countries, but rather to use it for personal expenditures. Some of this money was used for government spending and to help out local businesses, but most of it was used unwisely. Much of the money, that was supposed to be used for economic growth in this region, ended up back in U.S. banks once the interest rates increased. This left a huge financial burden on the countries of Latin America. The 1980s were the worst for them as that decade left Latin America with very little growth. While part of the blame for this catastrophe lies on the shoulders of the First World banks, for loaning so much money to these countries with no purpose whatsoever, and the international community in general for not monitoring what the political leaders of Latin America were using the money for, much of the blame falls on the governments of the Latin American countries. With a little intelligence, this money could have been used to expand the countries and make them an overall better place to live. The elite class of Latin America is the internal source of this economic problem. With these economic problems come more political problems. New leaders come and go, and many times the military hold much of the power anyway. Many times if a leader of a Latin American countries does something that a power group of people does not agree with, his power is short lived. Overthrowing of governments are common things in Latin America and much of these problems have to do with the economic problems in the area. What is most needed in this region is change and that is what the people are after. Change, however, brings instability and volatility to the situation, which is where they are at right now. Also the voting system brings about problems in Latin America. Many of the countries are in fact democratic, but the information that the people have on the candidates is limited. Many people, especially in rural areas where literacy rates are less than the city, based on name recognition. The problem is that the name could be recognized from something negative, rather than something good that the candidate has done. Latin American politics and economics are tricky subjects because the entire region has been this way for quite some time. Also, the elites are the people who have the power to changes things in Latin America, but choose not to because it would hurt their financial interests and “while formal sector employment is subject to regulation, social premiums and taxation, with wages paid on a regular basis and explicit contracts between employers and employees, the informal sector consists of very small firms that are not subject to institutional regulations” (Gong & van Soest, 2002, P. 517). While capitalism can be blamed a great deal for the problems of this region, the way the leaders have handled this change to a capitalist society is what should be blamed the most, since “large firms can compensate for costly tax and labour codes by restricting the size of their formally employed labour force and subcontracting the rest to informal entrepreneurs. Through these mechanisms, the informal economy contributes to the political stability and economic viability of poorer nations. These realities help explain why informal activities are commonly tolerated by many governments, in contradiction to their law-enforcement duties“ (Portes & Haller, P. 420). Their handling of money from loans and exports has been very poor and the elites in this society have not done their part to improve their own society. Government regulations are needed, but first a government that is not corrupt is needed, as “the size of the informal sector depends positively on proxies for the tax burden and labour market restrictions. The size of the informal sector is also negatively related to a proxy for the quality of government institutions which reflects the quality of bureaucracy, corruption in government and the rule of law” (Pratap & Quintin, 2006, P. 8). Basically they need to restructure their entire system, but this will not happen anytime soon because the elites, who have most of the money in Latin America, do not want any restructuring going on. The country is also full of “companies that operate partially or wholly outside the law by avoiding taxes, ignoring product-quality and -safety regulations, infringing copyrights, and sometimes even failing to register as legal entities. In this way, these companies gain a cost advantage and thus compete successfully with their law-abiding counterparts“ (Capp et al., 2005, P. 9).The militaries of these countries also do not want things to change because the officer classes are doing quite well for themselves with the status quo. As long as the people with all the power and influence keep this power and influence, change in this region is not likely. Outside of foreign intervention, it will be difficult to restructure things in Latin America and make it a better place for the majority of Latin Americans to live. These examples show that the population has little choice but to turn to the informal sector, as the formal sector is riddled with just as much corruption, but it also forces them to pay taxes. International trade is something that will always be debated because it is interesting to see who has the advantages and why. The most common manner by which to explain the advantages that certain countries have over others in trade in by using a comparative advantage model. There will always be different scales because of the various differences between countries’ finances, education levels, population, demographics, resources, and other factors. China is a country that has traditionally been used for its labour, due to its extremely high population and its lack of good paying jobs. This shows the China’s accession into the World Trade Organization will be a positive for the country. It will allow for entrepreneurs within the country to expand their horizons into more lucrative markets. This money, in turn, will be put back into the Chinese economy. Also, the borders will be opened up to more international investment. This investment will bring about more jobs and will, therefore, help stimulate growth in the Chinese economy. China is also unique because “informal labour organizations are a special sub-category of the informal sector, which is not found in other countries. This composes laid-off and unemployed workers who initiate the venture voluntarily, raise the capital, manage the venture themselves and share the profits and losses. The local government provides assistance and sometimes subsidies to these labour organizations” (Narayana et al, P. 14). By moving towards a free market economy, China will be able to utilize its strengths effectively. These strengths are the pure population numbers that this country has and the number of people that it can contribute to the global workforce. By 2050, if this accession into the WTO is handled correctly by the Chinese government, China could become a superpower because with that many people, the odds of certain individuals creating something great is higher than in any other country. This new Chinese economy is the reason why the informal sector is shrinking, but it was not caused by the shrinking of the informal sector. The informal sector is much smaller in places where the economy is growing and this is not a coincidence, but the shrinking informal sector does not cause this economic growth. The economic growth is largely in place due to new economic policies that inspire growth, making to formal sector much more appealing to the public. If the public does not trust the government and its policies, it will be much more likely to seek employment in the informal sector because their income will be questionable either way. As China’s citizens began to have more confidence in the country’s economic plans, the informal sector began to shrink, since jobs in the formal sector began to look more appealing financially. This has not happened in Latin America because of the corruption that exists, as well as the elitist power that is present. If Latin America is to move away from its current system, the change will have to come from the top of society, not the bottom. Works Cited Capp, J., Elstrodt, H. and Jones Jr, W.B., (2005), “Reining in Brazils informal economy”, The McKinsey Quarterly, No. 1, pp. 9 – 11. Castells, Manuel, and Alejandro Portes. 1989. “World Underneath: The Origins, Dynamics, and Effects of the Informal Economy.” Pp. 11–37 in The Informal Economy: Studies in Advanced and Less Developed Countries, ed. Alejandro Portes, Manuel Castells, and Lauren A. Benton. Baltimore: Johns Hopkins University Press. Galli, R. and Kucera, D., (2003), “Labour Standards and Informal Employment in Latin America”, World Development, Vol. 32, No. 5, pp. 809 – 828. Gong, X. and van Soest, A., (2002), “Wage differentials and mobility in the urban labour market: a panel data analysis for Mexico”, Labour Economics, Vol. 9, No. 4, pp. 513–529. Kappel, R. and Ishengoma, E.K., (2006), Economic Growth and Poverty: Does Formalisation of Informal Enterprises Matter?, MPRA Paper, No. 1456, Munich: University Library of Munich Loayza, N.V., The economics of the informal sector: a simple model and some empirical evidence from Latin America, Carnegie-Rochester Conference Series on Public Policy, Vol 45, December 1996, Pp 129-162. Oliveira, Glauco A. S. "Openness, R&D, and Growth: Differences in Latin American and East Asian Policy and Political Economy". Viewed 18 Feb. 2008. Prevost, G. & Vanden, H.E. (2002). Politics of Latin America: The Power Game. New York: Oxford University Press. Narayana, N., Kaino, D.K., & Sekwati, L. "Informal Sector Experiences of Developing and Transitional Economies: What Lessons Can Botswana Learn?". Viewed 18 Feb. 2008. Portes, A. & Haller, W. "The Informal Economy". Viewed 18 Feb. 2008. Pratap, S. and Quintin, E., (2006), “The Informal Sector in Developing Countries: Output, Assets and Employment”, UNU-WIDER Research Paper, No. 2006/130. Read More