See No Informal Sector, Hear No Grey Economy

Developing countries’ economies are characterised by the existence of a vast but an accounted for informal sector, also called an underground economy. These include economic activities which can be legal or illegal but are not formally registered and hence unknown to the tax authorities.

The underground economy is important in that it employs quite a significant proportion of the labour force and supports the lives of over a million people. However, it is also open to different forms of exploitation and prone to illegal practices and criminal activities.

In fact, most of the activities in the underground economy such as contraband and illegal currency trading affect the diligent tax payers by flooding and distorting the formal sector, the white market.

Arguably, an economy that aspires to get healthier should aim at minimising, as it is impossible to abolish the underground economy altogether.

It was strange, albeit a good reminder for intervention, to see young men in some streets of Addis Abeba asking passersby if they want exchange rates in open day light. Despite the fact that it is illegal to hold foreign currency and exchange it with or through parties other than legally registered financial institutions, these young men do not seem to be perturbed by the law.

I have not seen people do the transaction, but I have been asked if I want to in many instances. I started to wonder if the line between transgressing the financial law and otherwise is so subtle that it is not against the law to ask someone if they want to exchange their foreign currency until they do the transaction.

How would they, otherwise, be able to engage in this business freely? How is it possible for the law enforcement body to not find them?

My concern is that if the transaction is illegal, why are those young men in different corners of Addis allowed to stand there and lure their potential ‘customers’ for the sell of foreign currency?

It is known that the exchange rate in the black market is much higher than one can find in any bank. It is also known that the actual transaction begins with those kinds of verbal or non-verbal offers. A case can be made that those seductive invitations are as illegal as the real transaction that follows suit.

It leaves me puzzled whether it is impossible or even difficult at all to curb this part of the problem. Because other sophisticated ways of bringing the sellers and buyers in the underground are likely to exist, or if whether there is some form of tacit consent or approval to let them do it.

In some way, it may be a relief to the government as many people involved in the underground business will have some source of income. This, however, is by no means a lasting and sustainable solution. In fact, it may grow into a monster that requires a lot of resources to rectify. It may end up instantiating the saying that what is cheap may eventually be costlier than what appears more expensive.

Discouraging the responsible citizen from being one big consequence of the black market is important as there will also be a substantial compromise in the quality of goods and services provided to consumers. Some products and services may have a detrimental effect on the health and overall wellbeing of consumers.

As an example of the latter, it is worth scrutinizing and possibly also seriously monitoring, before it is too late, street food vendors. It is, on one hand, good to see many people selling roasted corn on the street throughout the city. It reminds one of the farmers whose produce has made it to the city, and the middlemen (and women) who have found some source of income, not to mention the producers and sellers of other materials involved.

I do not see any problem with the roasted corn; it rather worries me to see that many cook the corn in a big pot where they also put water and fresh maize ears in plastic bags. My vague understanding of plastic materials is that they produce toxic and cancer-causing chemicals when they are exposed to heat.

It may be that there are special kinds of plastics which do not have this sort of problem. But the public needs to be protected against the potential threats and be informed by the appropriate authority that these practices are monitored and that they meet the minimum health standards. Indeed, I should mention that I saw someone using shopping plastic bags for this purpose.

Let me add a third typical problem related to the informal sector in Addis Ababa. Places like Megenagna are usually crowded with passengers as well as people trying to sell all sorts of items usually at low prices. The congestion in the area makes for a sad scene, potentially a preview of several social problems including poverty, contraband and inadequate control mechanisms.

One who looks at the piles of clothes along the road-side may start to imagine how they might have made it from the borders, usually in the eastern and western peripheries, of the country to the very heart of Addis Abeba. Arguably, this will be possible only if there is none or a weak customs control. Or it could be that there is a tacit consent to tolerate some degree of illegal practices, which I cannot tell.

What causes the most unpleasant feeling is when security forces suddenly show up and the people who sell illegally on the street start running. That could be overwhelming.

How hard is it to trace the problem back to its source?

It has been many years since I saw this situation, and I imagine it had been there before too.

Why would the security forces come with their uniforms on and disperse those doing this illegal business, if it is obvious they would return to sell in the very same place? Why would they let this happen forever?

One possible trick, if there is a genuine will to minimise these practices, is for the regulatory bodies to approach the wrong doers, so to say, as if they were customers trying to get the service, initiate a transaction, show their IDs and hold them in custody. Economically speaking, that would be both effective and efficient.

I am not an expert in law, and I suspect there could be some moral issues, since such an act is entrapment, in the sense that initiating the transaction may be considered as the immediate cause of the illegal sale.

Leaving the question of morality open, I would like to underscore that we need to see the underground economy shrinking and coming to the foreground, not the other way round. I do not expect a complete abolition of the informal sector in the near future, nor ever at all as a matter of fact. Yet, there are many areas where it should be made increasingly difficult to do business in, for otherwise it may grow too complicated and its consequences too severe.

By Aman T. Hailu
Aman T. Hailu ( is an economist by profession and a thinker with a strong conviction that great ideas matter.

Published on Sep 09,2017 [ Vol 18 ,No 906]



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