The informal economy in European cities

Remi Dormois, March 2013

The author of this document proposes to define the informal economy as the economy that escapes the control of public authorities (tax authorities, labor authorities, etc.), whether legal or illegal. It will therefore include the « official » informal economy based on demonetized exchanges.

What factors influence the development of the informal economy?

The forms and level of development of the informal economy are, of course, not only correlated with the population size of the city.

The characteristics of national regulations, for example concerning taxes and labor laws, and the ability of administrations to enforce them, are variables that are taken into account to a greater extent by economists who have studied the underground economy.

Researchers also insist on the weight of cultural and political variables in explaining the level of development of the underground economy. In countries with weak states and contested political authority (e.g., as a result of corruption cases affecting the political class), informal practices are more developed. The characteristics of the city’s economic base can also be invoked to understand the weight of the underground economy.

The work of economists has shown, for example, that undeclared work is more developed in construction, restaurants, hotels, leather goods, textiles and domestic services than in heavy industry, aeronautics, chemicals, etc. This work also shows that financial « evasion » (from the point of view of the administrations in charge of collecting taxes) is greater when production is carried out at home or in small units. The spatial concentration of these micro-units of production at the level of a neighborhood or a commune also seems to favor an « industrialization » of illicit production processes.

The general level of development of a country is also an explanatory factor, but the underground economy is not specific to cities located in developing countries. This is what we would like to show through several examples taken from different European cities, without any desire to be exhaustive of course, in order to demonstrate the diversity of these underground economic activities.

The underground economy is not limited to drug and arms trafficking, gambling, etc.

What comes to mind when the term underground economy is mentioned is illicit activities such as drug and cigarette trafficking, arms trafficking, prostitution, gambling, counterfeiting, etc. In all large European cities, these activities tend to be concentrated in certain neighborhoods and then spread to the surrounding areas by capillary action: working-class central neighborhoods and peri-urban public housing areas are the two territorial configurations where this trade is mainly located today. Historically, drugs have only recently appeared in the housing estates of large French cities: 1970 for the Paris suburbs and 1980 for the suburbs of Lille, Lyon and Marseille. But urban renewal and gentrification policies in older neighborhoods have accelerated the polarization of the drug market on low-income housing estates. Ethnographers and sociologists point out that these neighborhoods are now home to a highly diversified local economy, not limited to drugs (cannabis, heroin and a growing penetration of cocaine), which enables households in precarious situations to buy a range of goods at lower prices than in official shops. They also emphasize the role of neighborhood sociability in the integration of young people into drug sales and distribution networks: family-type networks exist, but it is more entrepreneurial forms that are developing and that recruit their « workforce » in the neighborhood. Illicit activity becomes not only a source of income but also a vector of socialization, a means of building an identity and a reputation and of putting oneself to the test. Researchers who have been able to immerse themselves in these neighborhoods tell us that denunciations and disputes are more prevalent than we think, so much so that the dealers are subject to permanent stress (debts to be repaid in particular). At the neighborhood level, the development of illicit activity is accompanied by a paradoxical « pacification »: acts of incivility and brawls with the police are rejected outside of the places where the business is done, but the trafficking generates increasingly violent acts. Michel Kokoreff, in his work on the drug economy in the Hauts-de-Seine region, writes: « When we draw a map of the neighborhoods where these acts of urban violence, which have been in the news for more than twenty years in France, recur, and compare it with the map of places considered to be notorious for drug trafficking, the lack of overlap is remarkable. (…) The establishment of illegal markets implies in the long term a control of the territory, that is to say, a hold on the groups that constitute it, a control of the flow of users living in the city or coming from outside, whose appearance can easily reflect their status and harm these illicit activities "} (Kokoreff 2000, p.404 and 416).

An important part of the underground economy in cities has legal activities but is carried out in an illicit manner. This is primarily undeclared work in establishments that subcontract to other firms. The density of construction sites in the cities is an opportunity for unscrupulous employers who do not declare, or only partially declare, a workforce coming from other countries that can be exploited because they are not always in a legal situation. They directly take charge of building sites in private homes but can also intervene on larger projects as undeclared subcontractors of legal companies. A second example of a legal but illegal activity concerns street trading. This is a very old activity in the big cities, whether it takes place in the public space, on the fair markets or in the back stores. Historically, this activity was often developed by migrants who sold products from their country of origin, or purchased in a nearby country, and who sent the money from their sales to their families either in the form of money orders or in the form of a shipment of consumer goods that were rare in their country.

In the « Case Studies » section, you will find an article devoted to the commercial practices of Maghrebi migrants in Marseille. This commercial activity can be doubly illicit: on the one hand, because the turnover is not declared to the tax authorities and, on the other hand, because the merchandise sold may be contraband or counterfeit.

The informal economy is not always illegal

In the cities, systems of exchange of services on a non-monetary basis are also developing. We can therefore see that this aspect of the informal economy has little in common with what we have seen previously, but since it is demonetized and therefore not subject to taxes, these practices fall within the sphere of the informal economy. The first experiments in this type of exchange were initiated by the associative sector with, for example, the SEL network (local exchange systems). However, since the mid-2000s, there have been initiatives strongly supported by municipalities or EPCIs (public establishments for inter-municipal cooperation) as part of their policy for the social and solidarity economy. Several cities have, for example, set up a local currency with the support of social economy structures (mutuals, cooperative credit). In some cases, the aim is to encourage the networking and development of businesses, associations and organizations that share a collective project: promoting short circuits, integrating disabled people, guaranteeing the ethical and responsible nature of the production process, etc. The inhabitants of Alsace’s cities can thus transform euros into SOLs, which can only be exchanged in establishments that subscribe to a set of human, social and solidarity-based values. Other initiatives relate to the payment of social assistance (outside the general system) in the form of « earmarked » local currency. Low-income households can thus access basic services and products: shows, leisure activities/sports, solidarity grocery stores, driving licenses.


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