Question

What are the implications of the informal economy for firms that operate only in the formal economy?

Answer 1

Formal and informal are both the parts of economy. Just they have entirely different domains for inputs and outputs.

Let's take a simple example of an informal economy. Let's say there is small factory that operates in a town to produce glass bottles and is a micro industry say with an annual turnover of about Rs 2-3 Cr. Now this industry is quite labor intensive and employees majority of labor force in its functioning from nearby area. Its product is can be heavily utilized by many firms like those producing beverges, dairy products, other drinks etc. This is informal because it has least of the government interventions and accordingly it has to avail its resources from its own. No easy availability of any resources. Similarly there might be a wood industry, which might function to fulfil requirements of locality and also a few of large manufacturing firms in Formal sector.

So, in formal sector the firms have easy access to government permissions, capital, technology, resources etc. These have a huge customer base and not retail ones. They might be either capital or labor intensive due to availability of both the resources. They produced standardised products with a high cost of production and also varied products.

So basically we can say that informal economy is less dependent at a subsistence level as compared to Formal economy. Formal is more dependent as resource requirement is more. Both formal and informal work together in day - to - day activities. As we considered above a glass bottles producing factory. Now say if Coca-cola takes bottles from these factories and if these small industries stop functioning, Coca-Cola's business would halt too.

So the informal economy highly influences the formal economy.