Why Europe needs the informal economy

Few of the surveys used to measure youth unemployment take into account the large portion of the economy that operates in the shadows. By this I mean the informal economy, or black market, and how it feeds into entrepreneurship in Europe.

The informal sector is hard to measure. Comprising activities from babysitting to street-performing, it operates outside institutional frameworks, often undeclared and sometimes illegal. But it is also valuable to the economy as a whole, as it acts as a breeding ground for entrepreneurial ventures.

We hear a lot about the fragile health of the European economy, but little about the power of the informal sector to boost the recovery of the EU’s economic infrastructure – and this without austerity plans or intervention by central governments.

As outrageous as it might sound, formalizing the undeclared economy in a non-punitive manner is worth considering, even if only for the entrepreneurial opportunities it could create. It is, after all, a real economy, and one that functions in a transversal way, across social boundaries and lines of ethnicity, class, age and gender. Estimates of its size are impressive, with several reports pointing to a value of more than $2 trillion in the EU alone.

There are certain factors that inspire entrepreneurial zeal and encourage informal workers to make their enterprises official. These are:

Social recognition and reputation: The activities of the shadow economy are difficult to classify and informal workers aren’t always held in high regard. Formalizing a business as it grows can confer a greater measure of credibility and respectability.

Family structures: In northern economies, young people tend to become independent at an earlier age – living in shared apartments in their first year of college, for example. This creates opportunities for business ideas. In the south, on the other hand, where the tendency is to stay in the family home for longer, young people don’t have the same propensity towards entrepreneurship.

Giving up the day job: New business ideas can pop up anywhere. Holding down a job will furnish an employee with a sense of what works and what doesn’t. If the company isn’t supportive of new ideas and solutions, then an enterprising soul might set out on their own to create a product that solves a problem or answers a demand, and thus become an entrepreneur.

Lack of confidence and failure: The informal economy is a volatile place, with no safety guarantees, and the rate of failure is high. But research has shown that instead of frightening budding entrepreneurs away, this element of risk could in fact be therapeutic for individuals who, perhaps after serious professional or personal loss, saw it as a way to regain confidence.

The informal economy is fertile ground for innovation and a rich source of entrepreneurs. Giving unregulated workers the chance to become a part of the formal economy would not only help them, but help us. Society would benefit from the injection of talent and energy, and become more diverse and integrated.

We can’t remain trapped with of the same labour and fiscal policies that were created when the economic situation was simpler. It’s time to upgrade our ability to recognize patterns of change if we are to ensure economic survival for generations to come.

This blog is part of a series of articles lending context to the World Economic Forum’s work in the field of European entrepreneurship. Click here to read Nicholas Davis’s introduction to the series. 

For more articles on entrepreneurship in Europe, click here.

Author: Mark Esposito is an associate professor of business and economics at Grenoble Graduate School of Business, and founder of the Lab-Center for Competitiveness.

Image: Workers in the informal sector take payment in cash. January 23. REUTERS/David W Cerny