Informal economy, competitive advantage for exporters

The health crisis has caused a dramatic decline in international trade. However, upon closer examination, the extent of this reduction was not the same in developed countries (-22% between January and April 2020) and emerging countries (-7% over the same period). This resilience of exports from emerging economies facing the health crisis is part of a broader trend in the 2010s for these exports to catch up and overtake developed economies.

The dynamics of this export from emerging economies can be partially explained by the role played by the informal economy, which gives them a competitive advantage.

The informal economy consists of workers who do not have employment contracts with companies that are not registered with the authorities. Therefore, the legal production of goods and services hidden from public authorities for financial, regulatory or institutional reasons will help build a competitive advantage for certain emerging exporters. ..

According to the latest estimates from the International Labor Organization (ILO), the informal economy is of considerable weight at the global level. That is, about one-third of wealth production and more than two-thirds of employment. The numbers are higher in some emerging economies, especially in sub-Saharan Africa. The informal economy accounts for 62% of official GDP and informal employment accounts for 90% of total employment.

A recent journalized empirical study of the population of thousands of Mexican companies Industrial and corporate changesCheck the impact of the informal economy on export performance.

Mexico is a relatively representative of this phenomenon as it is a major exporter of Latin America, but it is also a country where more than 50% of workers are informally active.

Cost and flexibility

Our results show that the more formal companies source from higher informal levels of industry, the more likely they are to export and generate large quantities of exports. In fact, when sourcing from the informal economy, formal companies can benefit from their competitive advantage in terms of cost and flexibility by activating several mechanisms.

First, formal businesses can directly benefit from production costs from the savings they get from sourcing from informal businesses that pay no (or almost) any taxes or social costs.

Second, formal companies are more bargaining and can impose pricing conditions on informal suppliers. Informal suppliers often rely on a single client.

Third, the downward pressure on prices caused by competition among many informal companies has forced formal suppliers in the same industry to lower prices. This may even lead them to hire informal workers to stay competitive with informal suppliers.

Formal providers may be forced to hire informal workers to stay competitive.
Julio Cesar Aguilar / AFP

Fourth, dealing with informal economy suppliers is inexpensive and flexible because there are no contracts.

Fifth, using informal suppliers gives you greater flexibility in terms of production. They find it easier to increase the number of hours they work or hire new employees to meet the surge in demand.

Regulatory pressure

Benefits in terms of costs and flexibility associated with these mechanisms and reliance on the informal economy are documented in most emerging economies and some export sectors. These include, for example, the fruit sector in Chile and South Africa, leather in Kenya, mobile phones in China and India, clothing in Thailand and the Philippines, and soccer and sporting goods in China, India and Pakistan.

However, in the international context of trade regulation, which, like other emerging economies, is becoming more and more integrated in Mexico, exporters from emerging markets are non-governmental organizations, especially in developed countries. Is under increasing pressure from customers, regulators and governments. ..

Currently, exports are often subject to strict traceability mechanisms against labor law compliance and the non-use of the informal economy in the country of origin of the exporting country. This will change the economic relationships between the formal and informal economies of these countries, gradually leading to a global value chain restructuring, especially affecting the most vulnerable emerging economies.