These fruit sellers are just one example of the numerous jobs in the informal sector, or "off the books." Photo: S.Raj (flickr)

In developing economies, the "informal sector" is full of babysitters, maids, gypsy cab drivers and gardeners. These workers do everything from selling food to stitching pants to making bracelets to selling wine from roadside stands. They're paid in cash so their income is not reported to the government, and no taxes are paid.

The Wall Street Journal explains that contrary to conventional wisdom, the informal economy could be what's saving developing countries from financial ruin.

Traditionally, the informal sector "is not something to be cheerful about," as Nancy Birdsall of the Center for Global Development puts it. The Journal explains:

Economists have stressed the negative aspects of informal trade for decades. Informal businesses often don't pay taxes, and they routinely lack the capital and expertise to be as productive as big enterprises, leading to less innovation and lower standards of living. Since informal workers lack health benefits and other safeguards, they have to save more for emergencies, resulting in less casual spending that further drags down growth.

In the current financial crisis, the Journal notes, the informal sector may actually be the saving grace of developing economies. With demand for export goods falling, many workers are being laid off from their formal sector jobs in factories and are turning to creative alternatives for income. Without these informal opportunities to make and sell products — at the market, on the roadside, or as street vendors — many would be destitute.

The WSJ article, "The Rise of the Underground," highlights several of these informal workers, including a laid-off factory worker who built her own roadside stand to sell homemade medicinal wine to truckers. She now makes $3 more per day than she did at the factory.

Photo: Tatiana Cardeal (flickr)

Peru has one of the fastest growing economies in Latin America. Over the past six years, the country’s GDP has grown more than 6 percent annually. This is largely due to high market prices for mineral exports, increases in private investment and liberal economic policies that have been put into place by President Alan Garcia and his predecessor Alejandro Toledo.

Yet Peru’s economic growth is having a limited impact on poverty rates. While the capital, Lima, and the northern and coastal regions are flourishing, over 70 percent of the Andean region still lives in poverty. A major factor in this persistent poverty is the fact that many Peruvians continue to work in the informal sector of the economy, writes the Economist:

These unwaged people are often more or less cut off from the market economy. And it is market connections that make economic growth “trickle down” to the poor, points out Richard Webb, a social researcher and former central-bank governor. Enabling that to happen is thus a job for public policy. Better roads, education and social policy are all needed.

President Garcia has worked to increase social spending on anti-poverty programs, and staunchly advocates market-based solutions to Peru’s poverty problem. However, Garcia’s ability to combat poverty continues to be hampered by his unpopularity (his latest approval rating is only 26 percent), his lack of a legislative majority, and fears of corruption in lower levels of government. Unless Garcia can find a way to make Peru's growth work for more Peruvians, his liberal economic policies may lose support from those who aren't seeing the benefits of market capitalism.