Street Vendors, Modernity and Postmodernity:Conflict and Compromise in the Global Economy 

By John C. Cross, Ph.D.

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Abstract

     In this essay based on a decade of research among street vendors and the informal economy,
I explore street vending and the informal sector within the context of the shift from modernism
to postmodernism. Specifically, Modernism often implied crackdowns on street vendors
because of the ideals of public order and state control. Postmodernism is more open to the
informal sector as the economy disaggregates, but this also creates new dilemmas for the
informal sector, as it is expected to solve the problems of the formal sector by becoming
formal. I end with a suggestion that policy makers allow deregulated sectors of informality in
the economy to function as incubators for new businesses.

We typically think of street vending as a part of the premodern, traditional economic order that
survives only on the fringes of modern society. How could something that we think of as premodern
be associated with the (current) postmodern age? Our reasons for presenting the reader with this
conundrum is rooted in our research on street vending in various countriesresearch that we began
with the common assumption in mind that street vending should, by all logical criteria, eventually
disappear. What we found, however, is that street vending, despite some problems and frequent
attacks, is a thriving and growing phenomenon for reasons tied, we believe, to the current changes in
the global economy that have been associated by many authors with postmodernity.1

If someone were asked 30 to 40 years ago what the future of commercial activity would be, they
would probably enthusiastically talk about shopping centers, supermarkets and department stores:
places where consumers could enjoy a variety of choices within a convenient, comfortable
environment. Obviously, internet shopping would not have occurred to anyone besides a few sci-fi
fans. For different reasons, it is doubtful that anyone would have associated street markets and street
vending with commerce in their future. Street commerce was something that belonged to the past,
and only existed as a survivor soon to be made extinct. But, if anything, open air markets have
become more popular over the years, rather than less. While the formal economy, to be sure,
became dominated by megastores and multi-national corporations, large sectors of the economy
resisted such concentration.

The reasons for this have to do with many factors. Some factors are local and idiosyncratic, such as,
in the first world, the popularity of flea markets in the hippie culture of the 70s, and the popularity of
farmer’s markets in the yuppie culture of the 90s. Others are economic, such as the inability of large,
capital intensive (and tax paying) retailers to make a profit in low-income neighborhoods (Tokman,
1978). Others are political, such as the ability of street vendors to defend themselves against
attempts by formal stores and government officials to legislate them out of existence (Cross 1998).
This chapter will explore a far broader theme, however, that has been generally overlooked in the
literature on street vending and the informal sector to date: the global transformation from a “modern”
economic/political system, which saw street vendors and the informal sector as parasitic or at best
inefficient, to a “postmodern” economic/political system in which street commerce is often seen as a
source of growth and flexibility.

Defining the undefinable: informal commerce and street vending

The definition of the informal economy has always been somewhat problematic. Initially, the idea
was to contrast large-scale “modern” development, whether sponsored by the state or large
corporations, that were failing in their efforts to “develop” the third world with small-scale economic
practices carried out on an individual or family basis primarily for immediate survival (Hart 1970).
Hart’s main purpose was to show that these activities, previously denigrated as “marginal” or “black
market”, could be seen as entrepreneurial in their own right, and thus as a potential source of
development. The early ILO-led studies (and most government censuses) operationally defined the
informal sector primarily in terms of size and capitalization criteria (Sethuraman, 1980), but the
problem was that these criteria had no theoretical grounding. Furthermore, neither Hart nor the
ILO’s optimistic conception of the informal sector could adequately distinguish between
entrepreneurial activity that was worthy of support and activity that could be seen as predatory. A
small unlicensed “shop” selling candy out of a apartment window to neighboring children could
possibly be seen as a form of positive entrepreneurship worthy of support. But what about the illegal
production and sale of illegal drugs or controlled substances such as beer (one of Hart’s examples)?
Jobs are being produced, but perhaps at the expense of the moral climate of the community.

Perhaps the best theoretical definition is provided by Portes, et al (1989a): the informal sector is
comprised of economic activity that uses illegal means to produce legal products. Thus, illegal
products such as crack would clearly be seen as outside the informal sector. However, there are still
many grey areas between the formal, informal and illegal sectors. “Pirated” products that evade the
payment of royalties are clearly illegal from the standpoint of intellectual property-rights laws, but are
rarely considered as serious crimes by members of the general community. Tax and regulatory
evasion are also typically seen as a part of the “process” by Portes, et.al. and others, so they would
see street vendors who avoid zoning codes and tax laws as informal rather than illegal. Again, a very
different perspective may be taken by officials even if the average citizen fails to be incensed. And
what is to be said about dangerous work conditions in informal factories (often called sweatshops)
that may lead to the death or maiming of workers?

From a strictly legal point of view, the distinction used by Portes, et al, and even by this author, can
hardly be defended. Typically, products of an illegal production or distribution process are
considered to be illegally obtained, and thus as illegal in themselves. Pirated CDs are destroyed just
like illegal crops of marijuana or heroin. In fact, any product can be considered legal under certain
circumstances, and illegal under others. Marijuana grown by the United Stated Department of
Agriculture is legal–that grown by Uncle Bob in the hills is not. Coca leaves grown in Peru for
chewing is legal (with the appropriate permit)–that grown for processing into cocaine and thus
without a permit is not. Opium is a vital ingredient for a number of legal (albeit controlled)
medications, and thus is legal under the right circumstances. Moonshine whiskey is illegal while
tax-paying whiskey is not. To use a different type of example, a chair may be a legal product of a
workshop in one case but, after being stolen, is now contraband.

The point here is to show that the distinction between the formal, informal and illegal sectors may
never be perfectly clear. Does this make our project (or any project involving the informal sector)
indefensible, as some have suggested (e.g. Peattie 1989)? We don’t think this is true. In fact, we
believe that the very fluidity of the notion of the informal sector is what makes it such a
fascinating–and in a certain sense “post-modern”– field of study: it defies the simplistic
categorization process and throws all definitions into doubt. In other words, it points out that the
distinction between “appropriate” and “inappropriate” economic behavior is not a matter of laws or
rules, but of definition, motives and power. The distinction is above all not one of legality (which is a
purely formal category), but the ability of competing interest groups to impose and enforce their own
perceptions of legality. In this case, informality often appears in the gray area between the imposition
of laws (typically favoring large businesses and well-organized unions) and the lack of enforcement
of those laws due to a combination of the inability of the state to do so and the ability of the poor and
relatively unorganized to thwart enforcement. (See Cross, this volume, for a broader discussion of
the relationship between informal and illegal activity.)

Modernity and Post-modernity: A Rough Sketch

While there is some debate about whether or not it is appropriate to use the term postmodernity to
describe todays world, “At the least it is obvious that the world which for a long time has been
thought of as modern is experiencing a crisis of grave and global proportions.” (Lemert 1997:32)
Lemert associates this crisis with three factors: the collapse of the Euro-American colonial system;
the disappearance of a coherent imperial world center, and; the rise of a global opposition to a
single, unified world culture associated with Euro-American value systems. These broader changes
are also associated with changes in the global economic system that have seriously undermined the
central logic of modernism itselfthe Fordist/Keynesian economic order. This system emphasized,
on the one hand, the centralization of production and distribution in the hands of mega-corporations
built around the theory of economies of scale. On the other hand, it emphasized the regulatory role of
the state in managing relations between workers, managers, owners, and consumers. This regulatory
role is the basis of the massive increase in the size of the state bureaucracy at every level even as it
has intervened into every aspect of social life, a process shown clearly in the historical archaeology
of Michel Foucault.

Obviously, this modern project began long before the advent of Ford and Keynes. Many tie its
origins to the enlightenment (Harvey 1990), but the Fordist/Keynesian approach to economic
management, the former at the corporate level and the latter at the state level, exemplified the
process and theory behind economic centralization and regulation that became a hallmark of the
“modern” world, whether it was capitalist or socialist. While the grand rationale behind modernism
was the creation of more and more “efficient” and “productive” individuals by controlling and
ordering the relations between them, in fact modern efficiency and productivity could only fully thrive
under optimal conditions that had to be molded gradually over time. These conditions not only
required massive changes in state structure, roles and revenues, business organization, factory
structure and market systems, but also in the very culture and social life of individuals, families and
communities. As a total system, it required that every aspect of society should be molded according
to its requirements. Fordism represents above all the formal recognition that mass production
requires a mass market, and that mass markets dont just existthey must be manufactured!

This need to manufacture a “modern” society is best expressed in its ideal version by the height of
modernist architecture and urban planning, which are at the same time of key relevance to the issue
of urban street markets. Long seen as the best representative of modernist design was Le Corbusier,
a French architect who influenced the field greatly in the mid-war period with his emphasis on grand
scale design and planning. In his 1923 keynote text, Towards a New Architecture, Le Corbusier
(1996) expressed the modern focus on the re-creation of society through a planned structure that
would assign each individual to his or her place in life, regulating and caring for each need and
demand:

          “…without plan there can be neither grandeur of aim and expression, nor rhythm, nor
mass, nor coherence. Without plan we have the sensation, so insupportable to man, of
shapelessness, of poverty, of disorder, of wilfulness.” (1996:207)

Thus does Corbusier exhibit the modernist dream of a model society run from above, similar in
scope and design to the model of the “pan-opticon” prison discussed by Foucault and in another
sense to the non-political administration of socialism envisioned by Marxists such as Lenin. One can
imagine that street vending would have little refuge in such a world. In this ideal, everything is
ordered, efficient and structured. Nothing is left to chance. It is little wonder, indeed, that Corbusier,
like many others in Europe during this period of chaos, was attracted to more and more authoritarian
regimes that could put such an order into effect. The result could perhaps be more appropriately
termed the modernist nightmare, as Fascism and Stalinist socialism arose to crash against eachother
and against the more liberal (but no less modern) democracies in the second world war (Harvey
1990:128-9). The same modernist nightmare influenced such novels as Huxleys Brave New World
and Orwells 1984, differing versions of the same theme of modernist utopias gone wild.

Modernism did not go wild, however. While its heyday was reached in the 1950s and 1960s, with
rapid economic growth in the United States and, later, Europe and Japan, the 1970s began to show
cracks in the basic economic structure of modernism itself. Not only did growth slow down in the
U.S. as it was faced with increased competition from Europe and Japan, but unemployment and
inflation began to grow in all these areas. Third World growth strategies, built around protectionist
import substitution policies, also began to enter into crisis at this point (Harvey 1990:141).

Even at the height of modernist growth, not everyone was equally privileged. The dynamics of race
and gender in the U.S. meant that white males obtained the best jobs in the factories and corporate
offices that opened by the millions during this period. In Third World nations, growth benefited an
even smaller class of elite workers and managers, leaving most people outside the modernist dream.
Urban redevelopment schemes that attempted to put the modernist vision at the service of the
masses instead created new forms of ghettos devoid of even the ability to control local space earlier
enjoyed by the neglected poor. “Modernism failed as mass-housing and city building partly because
it failed to communicate with its inhabitants and users who might not have liked the style, understood
what it meant or even known how to use it.” (Jencks 1996:475) Thus, those left out of the dream
could neither benefit from it, nor fully escape from its effects.

Nor did the decline of modernism bring the poor any direct advantages. Harvey defines this process
as a shift from Fordism to flexible accumulation. This process “spelled danger for traditionally
organized businesses, sparking a wave of bankruptcies, plant closures, deindustrialization, and
restructuring…” (Harvey 1990:155) The economies of scale sought by Fordist mass production
were supplanted, at least to some degree, by economies of flexibility. In effect the growth of
regulatory and labor power in the first world economies grew to the point that they produced a
competitive disadvantage, leading “either to the rise of entirely new industrial forms or to the
integration of Fordism with a network of subcontracting and outsourcing to give greater flexibility in
the face of heightened competition and greater risks.” (Harvey 1990:155-6) In effect, the modernist
compromise whereby workers gave up control over their labor in exchange for a modicum of wealth
and security unraveled in the face of competitive pressures. Not only were workers paid less in the
aggregate, but they also took greater risks as jobs moved rapidly to find the lowest wages.

The “great sucking sound to the south” that Ross Perot alluded to in the 1992 debate over the
passage of the North American Free Trade Agreement with Mexico and Canada had really begun
decades before as plants and production had relocated to Mexico, Taiwan, South Korea and
myriad other nations (or even poorer regions of the same nation) where labor costs were lower and
regulatory enforcement was less complete.

Postmodernity, then, reflects a stage in economic development in which capital is free to go
wherever profits are higher without the need to worry about the welfare of workers or consumers.
Investment is made based upon the assumption that consumers will be found elsewhere in the world
market, thus escaping from the Fordist need to pay wages and benefits high enough so that the
workers could themselves consume the products they produce.

As far as the Third World is concerned, postmodernism implies business as usual. While new
investment pours in, wages levels remain low for the vast majority of the population. For the first
world, however, the effect is to produce new forms of employment that lack the security and wage
guarantees of modern industry. The result is an increase in the labor market without, however, a
corresponding increase in the average wage. Outside of a few privileged sectors, eople are paid less
for doing more: a violation of the very laws of supply and demand that seems to throw the logic of
classical and neoclassical economics into question.

Street vending, modernity, postmodernity and the informal economy

Street vending usually falls within the category of informal economic activity. This category includes
“the production and exchange of legal goods and services that involves the lack of appropriate
business permits, violation of zoning codes, failure to report tax liability, non-compliance with labor
regulations governing contracts and work conditions, and/or the lack of legal guarantees in relations
with suppliers and clients.” (Cross 1999: 580). This definition does not imply a “black/white”
definition of informality, but rather the possibility of differing degrees of informality, since an
enterprise or business relation could be formal by some criteria, but informal by others. For example,
a workshop or street stall may have a permit, but not pay taxes. Or it may pay taxes but not have a
legal contract with its employees. Another dimension of informality that is little discussed in the
literature but very often important in terms of individual motivation is the actual social relationship
between economic actors: one might compare, for example, a consumer at a Walmart or
McDonalds, who has a purely formal relationship with the enterprise and its staff, and the customer
of a vegetable stall, where interpersonal relations and trust become important, for example, in the
question of whether the produce is fresh or the balance fairly weighted.

The relationship between the informal economy and modernity was obviously problematic from the
start, given the discussion in the previous section. As the states regulatory system expanded to
encompass every aspect of economic activity in order to regulate and order the relations between
owners, employees and consumers, it has become more and more difficult for the poor, in particular,
to establish businesses that met all of the growing legal requirements. Not only are these
requirements costly, they may require the assistance of lawyers, accountants or other
specialistsservices typically out of the reach of the poor. De Soto (1989) argues that this
over-regulation is itself directly responsible for spurring the growth of the informal economy by
creating an entrepreneurial incentive to skirt the regulatory system, thus allowing them to compete
with multi-national corporations. But the problem is a bit more complex.

While the growth of the modern corporation, which used mass production to reduce the units costs
of these requirements, allowed savings to be passed on to consumers, this process is limited in its
capacity to meet the needs of the population. It is only feasible where there is a mass market,
meaning a sufficiently large pool of potential consumers with both the income and the desire to
purchase the product. Luxury niche markets, on the one hand, and mass poverty markets, on the
other, both present problems for mass production and distribution chains. For luxury goods, the
limited market niche itself reduces the benefits of economies of scale. In the poverty stricken areas of
the Third World, and in the inner city areas of the First, the cost of many mass produced articles is
still to high for the consumer market, assuming that all the production and distribution costs of
bringing the product to the consumer are formalized.

This has several repercussions that can be best demonstrated by the use of examples. First,
supermarket chains, which are the quintessence of modernist retailing, are almost always far more
visible in middle class residential areas than in either wealthy or poor neighborhoods. Despite their
efficiency when presented with a mass consumer market able to pay their formal costs, they cannot
compete, apparently, with either the boutiques of wealthy areas nor the small stores and street
markets in poor areas. (Tokman 1978) Where formal regulations are strictly applied, as is more
usually the case in the First World, this has created the curious phenomena that food and other
essential goods are more expensive in poor neighborhoods than they are in middle class areas.
However, where there is an active informal economy, street markets and informal producers can
step in to fill this niche passing on the savings of their lack of formality (and their added flexibility) on
to the poor (or rich) of these areas.

To take another example, many formal products are available in poorer areas, but only because they
are provided by informal stores and stalls. The popularity of Coca Cola, Pepsi and innumerable
other snack and consumer products is made possible in Third World countries by the small-scale
distribution channels of these products that makes ample use of informal and semiformal distributors
and retails outlets that reduce the final cost to the consumer in poor areas. Alonso (1981), for
example, uses his study of neighborhood stores in Mexico City to argue that they are, in fact, a form
of disguised employees of these large corporations. Bromley (1978) makes a similar argument with
respect to some street vendors (particularly ice cream and newspaper vendors) in Columbia.
Whether they are considered employees or independent contractors, the fact remains that their low
overheads allow for a much broader distribution system for such products, and multi-nationals in
these nations have deliberately aimed their distribution strategies to favor such small retailers.

Thirdly, of course, is the production of goods by informal enterprisessmall workshops,
homeworkers and even “sweatshop” factoriesthat either produce directly for consumers or,
because of competitive outsourcing by formal firms fighting to lower their costs, as suppliers of
labor-intensive intermediate goods for formal factories and distributors.

Finally, in reference to luxury markets, the growth of the informal economy in Southern Italy and
Miami has been tied to the growth of luxury niche markets in these areas (Portes et al, 1989). In the
case of street vending this is most apparent in the growth of “Farmers Markets” in the United States
and their equivalents in other First World nations that sell high priced vegetables and fruits to
consumers willing to pay more for organic foods or the assurance or at least belief that their produce
is fresh.

Going back to Le Corbusiers modernist vision of urban space, the informal economy, and street
vending in particular, would very much provoke in the modernist that “sensation, so insupportable to
man, of shapelessness, of poverty, of disorder, of wilfulness.” To the extent that the modernist ideal
was shared by elites in the First and Third Worlds alike (particularly in as much as Third World elites
considered “modernization” to imply the approximation of the western modernist ideal in external
form), the presence of large street markets was the clearest sign of the “disorder” and “wilfulness” of
the informal economy that needed to be stamped out.

In his classic study Peddlers and Princes (1963) the anthropologist Clifford Geertz reflected the
belief shared by most scholars at the timethat street markets and bazaars were part of a romantic
past that had little place in the “modern” world. According to the modernist developmental vision that
permeated the scholarship of the 1950s and 1960s, these forms of commerce were seen as
backward, inefficient and detrimental to national development schemes, taking up and wasting
resources that could be better spent in more productive fashion. From a cultural perspective, Geertz
argued that the “bazaar economy” hampered the development of a western-style “firm-centered”
economy. For example, he argued that .the practice of haggling that he saw as typical of bazaar
settings focuses competition onto the relationship between the vendor and the buyer over the value
of the goods involved rather than between vendors themselves. This, he argued, leads traders to act
speculatively and opportunistically, since,”…the aim is always to get as much as possible out of the
deal immediately at hand. The (bazaar) trader is perpetually looking for a chance to make a smaller
or larger killing, not attempting to build up a clientele or a steadily growing business” (35). Even
though it employs huge numbers of individuals, Geertz maintained that this system, “has the
disadvantage that it turns even the established businessman away from an interest in reducing costs
and developing markets and toward petty speculation and short-run opportunism” (28-29).

Similarly, Bairoch (1973) lamented the development of an “over-distended tertiary”encompassing
services and commerce–that threatened to undermine national development plans by placing a drag
on the economy. Why this growth was occurring despite expectations to the contrary was little
considered, however, beyond suggestions of cultural and educational backwardness.

It is interesting to remark on McGees (1973) study on street vending in Hong Kong, a rapidly
industrializing colony at the time. He notes that industrialists appealed to the colonial administration to
repress street vending because of a labor shortage in the growing industrial sector at the time,
attacking vendors for their “laziness” in choosing street vending over factory work. The fact is,
McGee points out, that street vendors simply felt they could earn more on the streets than in the
wage sector. In my own research vendors have many times claimed that street vending is also a life
style choice, allowing them greater personal freedom and flexibility.

Street vending thus came under savage attack throughout the modernist era. While one of the
criticisms lodged against this activity was its purported inefficiency, the real problem was it was too
competitive with formal retail outlets, unless they were located in optimal “modern” areas. Since
supermarkets could not put street vendors out of business through market mechanisms, they had to
use the police system to do it. The solution, therefore, was to ban or over-regulate street vendors
while at the same time redesigning urban spaces in which they could no longer exist. Suburban
subdivisions, urban decay, and urban renewal projects were all a vigorous part of this process in the
First World. In the Third World, the same processes were obviously put in place, but with varying
success due to the lack of modernist penetration of society and the increased power of those in the
informal economy themselves to evade or resist the modernist encroachment on their livelihoods. In
Mexico City, for example, an extraordinarily expensive program of repression and market
construction managed to banish street vending for just under a decade in the 1960s, but it
subsequently reemerged stronger than ever (Cross 1998). In Los Angeles, California, on the other
hand, where street vending was also effectively banished in the late 1950s, it didnt become a
significant factor again until the 1980s.

In South Africa, Nesvag (2000) notes that street vending was particularly harassed by the apartheid
regime as a way of preventing Africans from taking control of public space, and the collapse of these
controls beginning in the 1980s formed in some sense a spearhead of economic resistance to the
White-controlled government economic and political system.

But reemerge they did, as the modernist dream crumbled into postmodern reality. In doing so,
however, they did not simply signal a return to a romanticized past, but created a rational reaction to
the economic, cultural and social world of today. Postmodernism as a movement, if we can think of
it as such, is concerned first and foremost with the individuals attempt to regain control over their
livescontrol that is lost in todays society of mass-production factories and corporate offices. This
is reflected in the renewed growth of small businesses since the 1980s, as the middle class seeks to
avoid the control of salaried labor. But many are finding that the burden of regulations means that
they have simply exchanged one form of control for another (Kuratko et al 1999).

Turning to the Informal Sector as solution

Another option is the informal economy, particularly for the poor of the Third World. Street vending,
since it takes advantage of public spaceand this is in fact where most of the struggle
liesminimizes overhead costs of rent and utilities, and is thus ideally suited for informal growth, to
the extent that it can withstand hostile attempts to over-regulate or eliminate it, either through
evasion, negotiation, or conflict. While this re-emergence creates problems for urban planners and
city officials, it should be kept in mind that a good part of the problem lies not in the phenomenon
occurring in their streets, but in their preconceived notions of the “appropriate” use of public space.
Street stalls get in the way of traffic precisely because city planners have left them with no other
viable place to go.

The paradox is that, despite these problems, the informal sector is now often called upon by todays
development experts to take over where the formal sector has failed (Peattie 1987; Cornwall 1998).
Throughout the third world and increasingly in the first government and non-government (NGO)
development agencies have turned to what is euphemistically called the “micro-business” sector to
absorb excess unemployment and pick up the slack on economic growth. The most popular
mechanism of “supporting” this sector is the use of micro-loans: small amounts of money lent out for
relatively short periods of time for use in establishing or expanding a small business.

While earlier attacks on the informal sector were rooted in an erroneous belief that they were
parasitic because they did not fit in to the “modernist” vision of the economy, this new belief in the
informal sector repeats the error of thinking about the informal economy simply in negative terms:
that is, in terms of how it is not formal. I call this “formalomorphism”. While anthropomorphism
projects human traits onto non-human objects or beingsfor example, calling a dog good or bad
based on an assumption of human motives–formalomorphism is the tendency to analyze the
“problems” of the informal sector as if it were a bad copy of the formal. For example, as Rakowski
(1994) points out, the vast bulk of the economic literature on the informal sector emphasizes what it
lacks with respect to the formal sector (Sethuraman 1981; PREALC 1988). It is smaller (less
efficiencies of scale); it is undercapitalized (lack of machinery and/or inventory); it is underskilled
(lack of managerial skill, credentials), and it is not growth oriented (Yusuf and Schindehutte 2000).

What this perspective tends to overlook are the features that actually make the informal sector
successfulthe spirit of survival and flexibility that attracted the attention of anthropologists to this
activity in the first place (Hart 1973; Birkbeck 1978). They also overlook problems related to
unequal access and exploitation that plague ethnic minorities and the poor. Unfortunately, while
governments and NGOs pay a lot of lip service to anthropology, managers and boards are far more
impressed by neat economic models and spreadsheets (Raheim et al 1996; Woller et al 1999). It is
probably natural, to put it another way, for formal organizations to look for formal criteria, and thus
for what is lacking in the informal sector, rather than the positive elements that exist.

As I argue elsewhere (Cross 1998:33;1999), one way to look at the difference between formality
and informality is as a different mix of costs and benefits. Formal firms pay the costs of formality
(taxes, fees, higher labor and regulatory costs, etc.) but get benefits that protect their capital
investment and allow them to focus on producing for the mass market. Informal firms have different
costs: they must avoid harassment from the authorities and lack legal protection, but they are able to
save on labor and regulatory costs and can be more flexible in their approach to the market because
of their small size and because their overarching motive is simply to provide subsistence for the
family. Typically, formal firms are capital intensive because their capital is protected and their labor
costs are higher. Informal firms are labor intensive because their capital might be seized and their
labor costs (of the individual or family involved) are lower because of the lack of alternatives. This
means that there is a substantial gulf between fully informal and fully formal sectors. However I also
note that many enterprises are in fact “semi-formal” because some rules and regulations may be
imperfectly enforced, allowing formal firms to act informally in some cases, or allowing some informal
firms to act more formally.

As a result, projects designed to develop the informal sector tend to ignore the benefits of informality
or semi-formality and underestimate the difficulties of making micro-businesses more like formal
enterprises. Entrepreneurs are taught accounting, project goals focus on loan repayment, businesses
are encouraged or required to conform to existing regulations, all goals that look great from a formal
point of view. But this is exactly the danger: They potentially undermine the very factors that make
many informal enterprises successful while imposing formal rules that they are unable to deal with.
From engaging in a flexible and evolving economic activity focused on family subsistence needs (and
often involving the avoidance of control by authorities), they are sucked into a rigid set of rules that
they can barely understand and even less likely to be able to challenge or manipulate. While their
businesses may be more “accountable” they may in fact be less successful.

Is there a solution to this dilemma? Can formal organizations help the informal sector without
destroying its advantages? I believe there is, and the solution is not at all new or radical: it is simply to
focus on expanding zones of informality or semi-formality, rather than expanding specific informal
enterprises. The idea would be to create specific geographic areas and/or economic sectors in which
small, low capital, individual or family-run firms are allowed to operate under a self-regulating system
with tax and regulatory enforcement reduced to the bare minimum. In other words, to recognize a
system of semi-formality on the level of entire low-income neighborhoods, focusing on goods and
services that can be provided by micro-enterprises.

Street markets are an excellent example of the benefits of this approach. Where street markets have
become vibrant sources of economic growth, it is due to the fact that they have been able to avoid
rigid regulatory control and regulate themselves. Mexico City provides one example of this (Cross
1998), but another is given by the growth of flea markets and farmers markets in the US. These
became popular precisely because they exist in a form of suspended space with regard to regulatory
control. The rules still exist, but it is understood that enforcement would be limited. Often, flea
markets regulate themselves to avoid the perception that they were conduits for illegally obtained
goods. Particularly in the third world, the suspension of regulations often occurs due to the ability of
street vendors to avoid regulatory control and the inability of the authorities to enforce them rather
than some sagacious government plan.

The advantage of making such a policy official is that it is already occurring unofficially and therefore
there would be minimal actual effect. By allowing micro-firms to remain largely informal within certain
broad guidelines (and making sure that broad public health concerns are met), the only negative
effect is to recognize a “fait accompli”. On the positive side, however, more people would be
encouraged to open up micro-businesses within these sectors while enforcement resources could be
focused on key issues such as public health concerns (Adeoti, John O. 2000; Blackman and
Bannister 1998). Finally, such an environment would allow at least some informal firms to naturally
grow until the point at which it makes more sense to become formal in order to protect their capital
and resources.

Conclusion

The informal sector has grown in recent decades because it has successfully avoided control by a
“modern” state apparatus focused on the needs and concerns of large business enterprises. But as
the modernist dream has faded into a postmodern reality, with greater flexibility in the economy and
an attempt to use the informal sector to step in where the formal sector has failed, there is a danger
that attempts to “formalize” the informal sector will threaten the very factors that made it successful.
The solution, therefore, is to take advantage of the postmodern emphasis on multiple layers of reality.
Rather than lowering the formal system to the level of the informal sector, as some have advocated
(De Soto 1989), or raising the informal sector to the level of the formal sector, as many development
projects focusing on the micro-business sector seem to attempt, our suggestion is that policy makers
create ways in which formal and informal sectors can exist side-to-side. Continue to maintain and
support the “modern” formal system, but also allow spaces, or massive micro-business incubators, in
which those overlooked by the formal sector can develop their own solutions to the poverty within
which they live.

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