Monday, March 30, 2009

Informal economy

There is this book written by Mario Vargas Llosa -El pez en el agua- where he describes the approach of his presidential campaign for Peru in the late 80's.

His was a liberal approach to economic policy and civil rights, among several interesting ideas contained on the book, he points out how the so called informal economy -those economic agents performing activities out of the tax system, not necessarily in black markets- is a direct result of the gross bureaucracy and the inability of the State to provide legal certainty at zero costs.

The reading provides a new approach that fits with precision all conditions Mexicans face. It is straightforward to observe that, as Vargas Llosa says, law is a privilege for those go have a high income or political influence.

Can there be a case for defend all Mexicans involved in an informal activity in Mexico? Not for all of them maybe, but certainly for those who make a cost-benefit assessment and conclude that it is not worth it to be fully registered.

Take the following example. It is rather common that an employer offers to a worker a "word" contract instead of a signed one. The incentive for the worker to accept the offer consist of the advantage of not paying taxes, though not having social security, in exchange of a higher monetary wage.

Since public health services are of low quality, the worker of above can easily prefer to buy private insurance with the money he is not paying in taxes or social security.

There are no incentives for an agent to be part of the formal economy, he is not receiving quality services at all, on the contrary he must go through an awful bureaucratic system to get health services.

Welfare states are easily corrupted and transformed to under attain their objectives. It has been seen that Latin American state structures favor only those with political connections. This is, services assumed as public are in practice privatized, just as Hayek suggested in his Road to Serfdom.

The latter is an explanation for the existence of the informal economy. Moreover it attach full responsibility to the state structure for it's existence.


Jav said...

Hola Juan Ramón, me pareció interesante tu blog, lo voy a leer más seguido. En la parte de "is a direct result of the gross bureaucracy and the inability of the State to provide legal certainty at zero costs." no me quedó muy claro que quieres decir con "legal certainty at zero costs".

Creo que, de forma indirecta, la burocracia cumple una función de barrera a la entrada defendiendo los oligopolios mexicanos. Me pareció muy interesante tu ejemplo del empleador y el trabajador, en el que el trabajador decide sacrificar su seguridad social por obtener un salario monetario mayor. Pienso que en la mayoría de los casos, el trabajador se ve obligado a aceptar las condiciones que el empleador impone, tomando en cuenta que somos un país con abundante mano de obra y un constante deseo de producir de forma intensiva en capital.

Juan Ramon Hernandez said...

Legal certainty at zero costs is meant as a form of permanent corruption. If someone wants to be protected by law, he must pay a price for bureaucrats to do their job.

Jav said...

Ok I got that, thanks a lot