Foreword

It would be nice to pretend that when we sit down to brainstorm new topics, ideas pop into our heads fully formed. Sometimes we are that lucky; in this case, though, we had been dancing around the theme for more than a year. In 1999, one member of the SAIS Review Editorial Board proposed focusing on black markets as models of capitalist entrepreneurship. We liked the suggestion, but thought it was too narrow. Several rounds of broadening eventually comprised the idea of studying informal economies. This process of inclusion cost us any precision we once had, however. No one could pinpoint what the rather innocuous term really meant. Were we talking about illegal but not dishonest activites? Economic practices outside the law that went unprosecuted? Unlawful but not criminal actions? One would think something so large would be easy to label. After all 40 percent of urban workers in Latin America, 61 percent in Africa, and between 40 and 50 percent in Asia operate in the informal sector, as Martha Chen points out in her contribution to this issue. The economies and social systems of the Third World make no sense if we ignore informality.

Fittingly, Jim Thomas devotes his introductory article to defining concepts. He understands the informal economy as consisting of "self-employed agents (other than professionals, such as doctors, lawyers, etc.) and those (including employers) working in small enterprises, many of whom are unregistered with the authorities." Setting a trend that the other authors follow, Thomas admits that the boundary between formal and informal economic activity is blurry. Most informal economic enterprises comply with at least some laws, while plenty of formal businesses skirt at least some regulations.

The informal economy is ubiquitous. Brad Babson spies it operating in both regimented North Korea and anarchic Burma. Kathleen Staudt follows its entrepreneurs back and forth across the U.S.-Mexico border, and Kenneth King traces its allure for African teachers looking to pad their paychecks. For all this activity, though, scholarly interest in the informal sector is relatively new. Modernization scholars dismissed the urban informal sector in particular as a byproduct of the migratory and industrializing processes of the transition from traditional, backward societies to modern economies like those of developed countries. Eventually, went their creed, the street vendor's son would become a bank clerk and the son's daughter an engineer. Thus modernization theorists expected the informal sector to disappear automatically as countries developed. After all, there is no informal economy in developed countries. Or is there?

Colin Williams and Jan Windebank say that, at least in France, informality is actually on the rise. Continued informality has forced us all to reassess what the informal sector really is. Its dynamism and creativity resembles liberal capitalism in its purest forms. Yet, according to Tim Nourse, as informality generates higher levels of uncertainty, informal enterpreneurs tend to diversify rather than specialize and to shun risky, albeit potentially very lucrative, endeavors. Neoliberals have cited the persistence of informality in developing and developed countries as proof that excessive regulation limits formal economic growth. In this issue, Peruvian economist Hernando de Soto expands on the ideas contained in his 1989 landmark book The Other Path. Here he attempts to construct a broader theory, asserting that the main impediment to development in Third World countries is the large quantity of "dead" capital, or rather the lack of access to credit due to weak property rights. If this dead capital could be assigned property rights and used as collateral to secure loans, spirited informal entrepreneurs put it to work to fuel economic growth.

The informal sector should not be idealized, however. Efraín Gonzales de Olarte responds to De Soto by arguing that low human and physical capital, not a lack of property rights, prevent informal workers' transition to formality. Víctor Tokman claims that the same individualistic impulses that De Soto praises are the real obstacles to overcoming informality. Martha Chen draws attention to the over-representation of women in the informal sector. Ratna Sudarshan and Jeemol Unni affirm that in India...