The Dual Economy concept of the 1940s as theoretical ...Dualism Formal-Informal Dichotomy Controversy Trichotomy Continuum of Interdependence Marginalization & Exploitation Countercyclical

Presentation at the InGRID Summer School

on Advanced Poverty Research 2014:

”Intergenerational and Life-Course Transmissions of Poverty”

The Dual Economy concept of the 1940s

as theoretical predecessor of the discussions on the

Formal-Informal Economy Continuum

by Christine Clement

University of Hohenheim, Economics Department, PhD-student at Prof. Hagemann’s Chair of Economic Theory, [email protected]

InGRID Summer School on Advanced Poverty Research Christine Clement Bremen, September 2014

Context

Addis Ababa, May 2014

FORMAL AND INFORMAL SECTOR: DICHOTOMY OR CONTINUUM?

Addis Ababa, May 2014


Causal vicious cycle

I. Context

Economic Exclusion

Informal Sector Persistent Poverty

& Poverty Traps


Causal vicious cycle

I. Context

Economic Exclusion

Informal Sector Persistent Poverty

& Poverty Traps

!


IS ≡ Continuum of non-formal activities

ILO (2002):

all economic activities

not covered by formal arrangements

Definition of the Informal Sector

II. Definition of the Informal Sector

I. Context



ILO (2002):



IN LAW

activities operating outside the formal reach of the law



I. Context



ILO (2002):



IN LAW


IN PRACTICE

law is not applied or not enforced



I. Context



ILO (2002):



IN LAW


IN PRACTICE

law is not applied or not enforced

IN CIRCUMVENTION OF THE LAW

The law discourages compliance

due to its inappropriateness, burdensomeness or excessive costs.



I. Context


Naissance & Proliferation of IS

TWO-FOLD ARGUMENT

I. Natural phenomenon,

by-product of structural change:

Dualism in institutional settings (political, social & economic sphere)

Hypothesis of the paper: Theoretical

Review


I. Context

III. Hypothesis


Naissance & Proliferation of IS

TWO-FOLD ARGUMENT

I. Natural phenomenon,

by-product of structural change:

Dualism in institutional settings (political, social & economic sphere)

II. Not transient,

persistent phenomenon:

Choice of status due to Economic Exclusion

Purpose of the paper: Theoretical Review


I. Context

III. Hypothesis


Social

& Economic

Dualism

Formal-Informal

Dichotomy

Controversy

Trichotomy

Continuum of

Interdependence

Marginalization &

Exploitation

Countercyclical

dynamics

1940s–1950s 1960s–1970s 1980s – …

Timeline of the concept’s evolution

Hirschman (1958)

Lewis (1954) Boeke (1946, 1953)


I. Context

III. Hypothesis

IV. 1940s - 1950s: Economic Dualism


IS roots in economic dualism

STRUCTURAL CHANGE

Divergence

Cohabitation

SYNERGY OF AGRICULTURAL & NON-AGRICULTURAL SECTOR

Theoretical roots

Labor, food,

agric. exports

Manufactured goods,

complem. industr. inputs


I. Context

III. Hypothesis



East-West divergence in socio-economic settings

(19th century) IMPLEMENTATION OF WESTERN CAPITALISM IN DUTCH-INDONESIA

Continuous disintegration of East-Asian societal structures

every

group moves in its own economic order

The Dual Economy concept of Boeke (1953)


I. Context

III. Hypothesis



East-West divergence in socio-economic settings

(19th century) IMPLEMENTATION OF WESTERN CAPITALISM

Continuous disintegration of East-Asian societal structures

“When one distinguishes all these [eastern and western] peoples according to

their degrees of culture and their political situation, one perceives that every

group moves in its own economic order and that every theoretic system has to

rest upon its own economic order to be usable for a given nation”

PERSISTENT INCONGRUENCE OF INSTITUTIONAL SETTINGS

HIGH CAPITALISM COMMUNALISM / COMMUNITY-BASED SOCIETIES

The Dual Economy concept of Boeke (1953)


I. Context

III. Hypothesis


Emergence of 2 distinct economic subsystems


Hirschman’s – The Strategy of Economic Development

PERSISTENCE OF TRADITIONAL PURSUITS IN AGRICULTURE & SMALL TRADE

𝑷𝒕𝒓𝒂𝒅𝑳 < 𝑷𝒕𝒓𝒂𝒅

𝑲 vs. 𝑷𝒊𝒏𝒅𝑳 > 𝑷𝒊𝒏𝒅

𝑲

The Dual Economy concept of Hirschman (1958)


I. Context

III. Hypothesis



Hirschman’s – The Strategy of Economic Development

PERSISTENCE OF TRADITIONAL PURSUITS IN AGRICULTURE & SMALL TRADE

𝑷𝒕𝒓𝒂𝒅𝑳 < 𝑷𝒕𝒓𝒂𝒅

𝑲 vs. 𝑷𝒊𝒏𝒅𝑳 > 𝑷𝒊𝒏𝒅

𝑲

DUALISM AS LOW-LEVEL EQUILIBRIUM (i.e. TRAP)

Huge traditional sector

Production with modern equipment but preindustrial flavor

Small industrial sector

Lack of capital-intensive industries due to wage differential

The Dual Economy concept of Hirschman (1958)


I. Context

III. Hypothesis



Historical evolution of the IS-concept:

Social

& Economic

Dualism

Formal-Informal Sector

Dichotomy/Controversy

Continuum of

Interdependence

Marginalization &

Exploitation

Countercyclical

dynamics

1940s–1950s 1960s–1970s 1980s – …

Hart / ILO (1973)


V. 1960s - 1970s: Buffer & Engine of Growth


I. Context

III. Hypothesis



IS as trickle-down tool for development

PARTICIPATION BUFFER BETWEEN OFFICIALLY EMPLOYED VS. UNEMPLOYED

The Informality concept of Hart/ILO (1973)

Households

FirmsCosts

Production factors

Goods

Revenue

Resource markets

Income

Product markets

Expenditures

Resources

Goods

Informal Economy



I. Context

III. Hypothesis



Historical evolution of the IS-concept:

Social

& Economic

Dualism

Formal-Informal

Dichotomy

Controversy

Trichotomy

Continuum of

Interdependence

Countercyclical

dynamics

1940s–1950s 1960s–1970s 1980s – …

Samal (2008)

Schneider & Enste (2000-2010)

De Soto (1989, 2000)


VI. Informal Sector as result of economic exclusion

Von Braun & Gatzweiler (2014) V. 1960s - 1970s: Buffer & Engine of Growth


I. Context

III. Hypothesis



Interrelation of IS with GDP per capita

Source: La Porta & Shleifer (2014), p. 23

Self-employment and GDP per capita




I. Context

III. Hypothesis



Size of IS in Developing and Transitional Countries

Source: own calculations based upon ILO (2014), KILM VIII – Employment in the Informal Sector

00

10

20

30

40

50

60

70

80

90

2009 MF 2008 MF 1998 MF 1999 MF 2006 MF 1993 MF 2010 MF

2004 MF 2002 MF 2005 MF 1995 MF 2007 MF 2000 MF

Share of persons (♀♂) employed in IS in total non-agricultural employment




I. Context

III. Hypothesis



Interrelation of IS with Economic Exclusion

Source: Graw & Husmann (2014), in: Von Braun & Gatzweiler (2014), p. 79

Overlay “number of marginality dimensions vs. population living on <US$ 1,25/day”




I. Context

III. Hypothesis



Informality through marginalization-induced exclusion:

involuntary position margins of

prevent them from access

eventually causing extreme poverty

[Von Braun & Gatzweiler (2014)]

The marginality concept of Von Braun & Gatzweiler (2014)




I. Context

III. Hypothesis


Economic Political

Social


Informality through marginalization-induced exclusion

BURDENSOME REGULATIONS, EXTRACTIVE INSTITUTIONS & LACKING INCENTIVES

I. Marginality Economic Exclusion Informality:

“lack of means to define, benefit from or enforce one’s claim to (economic) rights”

Informal worker excluded from benefits of privileged caste of workers

Costs of formalization too high

e.g. administrative, geographical, cultural…

The informality concept of De Soto (1989, 2000)




I. Context

III. Hypothesis


Economic Exclusion

Informal SectorPersistent Poverty

& Poverty Traps


Informality through marginalization-induced exclusion

BURDENSOME REGULATIONS, EXTRACTIVE INSTITUTIONS & LACKING INCENTIVES

I. Marginality Economic Exclusion Informality:

“lack of means to define, benefit from or enforce one’s claim to (economic) rights”

Informal worker excluded from benefits of privileged caste of workers

Costs of formalization too high

II. Informality Endemic Poverty:

Permanent status quo

unless external change

Insufficient capital

accumulation

The informality concept of De Soto (1989, 2000)




I. Context

III. Hypothesis


Economic Exclusion


& Poverty Traps


I) RECAPITULATION OF THEORETICAL ROOTS

I.1) Exclusion vs. Poverty Traps

I.2) IS vs. Poverty Traps

II) ADAPTATION OF MARGINALITY HOTSPOT MAPPING

TO CAUSAL NEXUS

Next steps…




I. Context

III. Hypothesis


Economic Exclusion


& Poverty Traps


Thank you

for your attention!

Questions are welcome!

Documents

The Dual Economy concept of the 1940s as theoretical ...Dualism Formal-Informal Dichotomy Controversy Trichotomy Continuum of Interdependence Marginalization & Exploitation Countercyclical