Out of the Shadows: Political Action and the Informal Economy in Latin America (review)

In the late 1980s, two landmark empirical studies were published that first brought the informal economy “out of the shadows,” making it a central theoretical and political issue in any discussion of Latin American economic development. These were Hernando de Soto’s The Other Path: The Invisible Revolution in the Third World (1989) and the collection, The Informal Economy: Studies in Advanced and Less Developed Countries, edited by Alejandro Portes, Manuel Castells, and Lauren A. Benton (1989). Since that time, however, a debate has raged over the economic repercussions and policy implications of a growing informal sector in Latin America. This is due to the fact that the two volumes subscribed to generally divergent theoretical explanations of informality’s structural origins, economic functions, and long-term potential. De Soto tended to celebrate the phenomenon of informality as a low cost, grassroots, and potentially revolutionary way to create jobs in the context of what he characterized as an overregulated, even “mercantile” state. On the other hand, Portes and his colleagues were generally pessimistic about the informal sector’s “revolutionary” potential as a generator of employment, wealth, and economic growth since they saw it more often functioning as a way for capital to more effectively discipline and control the working class.

Out of the Shadows successfully goes beyond this 20-year-old debate by bringing both the role of the state and of popular activism to bear on the phenomenon of informality. As Patricia Fernández-Kelly argues in her excellent introduction, understanding how and why both the state and social movements tend to actively maintain economic informality is important since “it is through the interaction between public officials and unregulated actors that the informal economy evolves” (p. 3). Taking a cue from John C. Cross’s Informal Politics: Street Vendors and the State in Mexico City (1998), Fernández-Kelly indicates that informal actors are anything but apolitical and, indeed, that unregulated economic activities have important, if often unintended, political ramifications. The multiple entries in this volume, then, seek to explain the conditions under which state-society compromises happen, the short- and long-term consequences of those compromises, and the extent to which informal actors constitute new economic and political interests that must be taken into account by the Latin American state.

The fact that the informal sector is a key contested space in negotiations between state and society is nothing new. Indeed, in their previous volume, Portes and his colleagues recognized how informality was a political terrain in many of the Eastern European state socialist systems that existed prior to the end of the Cold War. Unsurprisingly, in the illuminating lead chapter in this volume, “The Informal Economy in the Shadow of the State,” Miguel Angel Centeno and Alejandro Portes build upon this incisive line of theoretical reasoning by focusing on the disjunction in the Latin American case between state regulatory intent and state regulatory capacity. When intent is high and capacity is also high, as is the case in socialist Cuba today, “the attempt by a totalitarian government to suffocate any manifestation of popular entrepreneurship ends up, over time, encouraging its proliferation” (p. 31). However, when intent is high but capacity is low, as is the case in the majority of the Latin American case studies highlighted in this volume (Mexico, Costa Rica, Brazil, Argentina, and the Dominican Republic), the result is not a totalitarian state but a frustrated state, which suffers from the “permanent contradiction between the voluminous paper regulations that they spawn and their inability to enforce them in practice” (p. 28). Thus, for Centeno and Portes, the policy recommendation for Latin America is less regulation coupled with better, more efficient enforcement. “A state does not become weaker because it regulates less,” they argue, “it is weakened by the inability to enforce its own rules” (p...