Question

what good impact does informale businesses have on an economies growth

Answer 1

Informal Sector is grey economy which does not form part of economic measurements more importantly GDP. They are neither taxed not monitored by the government.

In developing countries, informal sector forms a major portion. It provides various opportunities to the poor. Informal sector includes unpaid family labour, self employment, street vendors,etc. It is quite a challenging task to estimate size and scale of such shadow economy due to the fact that they are completely unstructured.



The determination of size and scale of informal sector in any economy will only be an educated guess. The date collection will be nearly impossible. However, even if the sector is formalized, there are various pros and cons related to it. They are:

Pros

The tax collection from informal sector will increase the overall collection.

Formalizing the informal sector will lead to fair representation/measurement of economy.

The daily labours and others will be subject to workers regulations.

Skills and education will be more emphasized when formalized.

There will be no child labour when informal sectors are well regulated.

Formal businesses (informal businesses formalized) have better access to bank loans. This will end the money mafias who charge high rates of interest.

Cons

The population of informal sector who will fall under the tax slab will be very less. It is fair estimation to say that the cost of formalizing may exceed the benefits to be reaped.

Once formalized, the workers will be under government regulations. It will lead to rise in cost of products. Imagine a egg street vendor under regulation. He will be obliged to various regulations relating to cleanliness. In doing so, the cost will increase, hence it will give rise to inflation.

Informal sector have various sorts of occupation. Government will face an uphill task to incorporate all sorts of occupation.

Since they are mostly self employed, the risk of paying for sick leave or unemployment pay may increase