ECONOMIC GEOGRAPHY: GOG202

Lecturer details:

Ms M. Makhathini
107 Archive building
[email protected]
Announcements

1. Test 2 – Monday 2 October

Time: 13:00
Venue: TBA
Scope: L9 to L14
2. Assignment 2 - 9 October
Groups
Recap

• Local Economic Development

• an approach towards economic development which allows and encourages
local people to work together to achieve sustainable economic growth and
development thereby bringing economic benefits and improved quality of life
for all residents in a local municipal area.
• Questions???
1. Examples of any LED programmes in SA
2. What are some challenges commonly faced in LED projects?
Learning Outcomes

Aim:
Understand the dynamics that are linked with the ‘Shadowed ‘economy
in development
Learning Outcomes:
After the lecture students should be able to:
1. Differentiate the formal and informal sector
2. Identify the informal economic activities
What is the shadow economy?
• The shadow (underground) economy plays a major role in many countries. People evade taxes
and regulations by working in the shadow economy or by employing people illegally.
• The shadow economy refers to all work activity and business transaction that occur ‘below the
radar’; economic activity that is undeclared and for which taxes that should be paid are not.
• Also known as the informal sector, the black economy, the underground economy, or the gray
economy, the shadow economy includes criminal activities such as drug dealing and smuggling, as
well as legal jobs, such as gardening, working in construction, or selling products to car drivers at
traffic lights.
• This part of the economy also includes situations where individuals are forced to work as slaves
with no pay, or where work is carried out in exchange for things other than money.
• When economists are calculating the GDP (gross domestic product) of a country, they do not
include what goes on in the shadow economy. This means that every country across the world is
probably considerably wealthier than official statistics suggest
Examples:
Examples:
• Unregulated street vendors.
• Unregulated food sales
• llegal drug (and/or alcohol) trade
• Prostitution and sex work
• Illegal arms deals
• Wildlife trade, including items like ivory, rhino horns, and pangolin scales
• Protection racket (taking money from others in exchange for no violence or
property damage)
• Sale of counterfeit (fake) goods
• Gambling
• Slavery and the slave trade
Why do people even participate in the
informal economy, to begin with? What
are the causes of the informal sector?
• People are unwilling to participate in the formal economy (desire to avoid
taxes).
• The nature of the activity is casual/unofficial (lemonade stand in a
suburban neighbourhood).
• The local community has adopted an informal attitude toward economics.
• People are unable to participate in the formal economy (undocumented
immigrants; children below working age).
• The activity is illegal, so it cannot legally be part of the formal economy.
• The local government lacks the infrastructure or willpower to enforce
formality in economics.
Cons
• The shadow economy is hard to measure, and different methods yield different results. Some
measurement difficulties occur because the shadow economy is not clearly defined.
• By worsening fiscal deficits and reducing infrastructure investment, the shadow economy
reduces welfare and economic growth.
• The shadow economy can undermine state institutions, leading to more crime and less
support for institutions, ultimately threatening economic and political development.
• Trying to reduce the shadow economy through punitive fines and tighter controls is costly
and not very effective.
• Taxes are not being fed into any government system, reducing a government's ability to
provide any social services or public programs to its citizens.
• Complete lack of third-party scrutiny or accountability, leaving informal economy employees
vulnerable to exploitation.
• Black market employees (especially prostitutes and sex workers) are particularly vulnerable to
manipulation because they are, in the eyes of the law, criminals, so they cannot seek outside help if
they are being exploited or endangered.
• The lack of formal health inspection of food vending means food in the informal economy is
not guaranteed to be safe for consumption.
• Spread of illegal goods and activities that can bring harm to society
 Questions
1. What is the difference between formal and informal economy?
2. What are examples of the informal sector?
3. Why is the informal economy important?
4. What are the reasons for the informal economy?