Inside the Shadow Economy

In an era of seemingly permanent high unemployment — what some call the “new normal” — the shadow economy is where people end up after having been downsized or forced out of their homes or displaced by globalization. And while the shadow economy does offer opportunities for survival — and even a modicum of upward mobility — for desperate people in desperate times, it’s also proof that capitalism as we know it just isn’t working. Once upon a time, underground economies were seen as a problem for developing nations that hadn’t figured out either democracy or how to manage an economy. But now, increasingly, the shadow economy is a developed world problem — contributing to a growing disenchantment with the political process, and a growing sense that workers are on their own, scrambling for ever smaller pieces of pie at the bottom while those on the top consolidate their gains.

Both the shadow economy’s size and speed of growth, however, are uncertain. When a sector of the economy’s essential attribute is that it doesn’t show up in the numbers collected by government or reported by employers, we’re dealing, right off the bat, with an entity that is fundamentally hard to quantify. We don’t even know, for sure, what the impact of the Great Recession has been on the shadow economy in the U.S. High unemployment has clearly forced workers to do whatever they can to get by, but it has also resulted in a stark decline in illegal immigration — which, in the past, has been considered one of the biggest contributing factors to the growth of the shadow economy.

But most of all, we don’t know exactly why the shadow economy is growing. On the one hand, conservatives and libertarians see the rise of underground economies as a necessary (and justified) response to high taxes and excessive regulation. The bigger the heavy hand of government, the harder people — both workers and employers — will try to escape. The “coercive power of the state,” as Friedrich Hayek liked to say, is the enemy of true liberty.

Progressives and labor organizers have a diametrically opposed view: Globalization and deregulation have smashed the traditional employer-employee relationship, they say. In the dog-eat-dog world of global competition, the rules on the books are no longer being enforced and workers everywhere are getting squeezed. That construction worker willing to cut you a discount if you pay cash for your new porch is in part responding to pressures exerted by China and the global triumph of capital over labor. That shantytown bike mechanic hasn’t been liberated from the state; he’s been cut off from true participation in an economy that will allow him to prosper.

As Peru’s Hernando de Soto, one of the first economists to truly appreciate the importance of the shadow economy, has emphasized repeatedly, the real challenge isn’t necessarily to remove regulations, but to find ways to legitimize what’s already happening, to make it easier for the dispossessed to move out of the shadows.

Watching Washington politicians demagogue about deficits and job creation while they drown the nation in endless partisan squabbling isn’t getting us any closer to understanding what’s really pushing the growth of the underground economy — or pointing us towards a possible solution. Horse-race coverage of the latest government shutdown idiocy seems less and less connected to the everyday challenges of everyday lives. “We have to wake up to the world that we live in,” says Martha Chen, a lecturer in public policy at Harvard’s Kennedy School of Government who has studied the informal economy.

And that means paying attention to the street. So today, Salon, in partnership with New America Media, is launching a new series, “Inside the Shadow Economy.” The first goal is to get a closer look at the people who make up the shadow economy. Their stories, their lives, will help illustrate some of the larger questions — why and how this is all happening.

Beyond that, the greater challenge is to figure out what we can do about it. Resurrecting the power of labor in a globalized world is a monumental task — it is decidedly unclear whether any single nation can do it on its own. But organizing a global worker’s movement seems an equally quixotic enterprise. Refocusing government on the dire situation on the ground will require grass roots pressure and the smashing of outdated partisan paradigms. Finding ways to legitimatize the shadow economy while protecting workers from abuses may even demand that the developed world take some lessons from the experience of emerging nations. With economic growth sagging everywhere, it’s going to be an uphill battle. But that doesn’t mean we should stop looking for solutions, and we’ll be exploring potential paths forward in this series.

Because if there’s one thing that the stories of the shadow economy do tell us, it’s that no matter how dire the situation, people will find a way to make it through the day. Change does happen. It might come from the street, instead of Washington, and it may need encouragement, instead of scorn. But disenfranchised will, eventually, find their voice. The sooner we hear it, and act, the better off we’ll all be.

What is the shadow economy?

The standard estimate of the current size of the shadow economy in the United States ranges from around 8-10 percent of total GDP — in 2010, an amount equal to around $1.4 trillion. In California alone, lawmakers are quick to cite numbers that place the underground economy at anywhere between $60 billion and $150 billion. But the critical issue isn’t the overall size, but instead the rate of growth. One influential measurer of the underground economy, Austrian researcher Friedrich Schneider, pegged the U.S. shadow economy at 4 percent of GDP in 1970 and 9 percent in 2000. Others have concluded that the informal economy has been growing at a rate of 5 to 6 percent a year since the early 1990s — faster than the “regular” economy.

Schneider is one of the more vocal advocates of the view that the size of the shadow economy is correlated with levels of taxation and regulation: “Countries with relatively low tax rates,” he writes, “fewer laws and regulations, and a well-established rule of law tend to have smaller shadow economies.”

But that doesn’t quite jibe with historical trends in the U.S. over the past few decades, observes Pascale Joassart, a professor of geography at San Diego State and the co-author of a groundbreaking study of the growth of the “informal economy” in Los Angeles.

“The informal economy is growing,” says Joassart, “but in the last 20 years, our economy has been deregulated and marginal taxation rates have gone down.”

What’s really going on, says Joassart, is that there has been “a restructuring of the economy which, in order to promote flexibility and global competitiveness, has led to greater reliance on part-time and contingent labor.”

“This includes a large informal sector made up primarily of lower-skilled workers who are required to work (such as former welfare recipients) and immigrants who have limited protections,” she says. “I would argue that it is a deregulation of the economy, including a decline in welfare programs and an increase in free trade and global competition, that has led to an increase in informal work in industrialized nations.”

That deregulation, says Sara Flocks, policy director at the California Federation of Labor, goes hand in hand with a failure to enforce the labor laws currently on the books. Flocks acknowledges that one driving force in the growth of the shadow economy has been the desire of employers to avoid profit-cramping requirements like worker’s comp, payroll taxes, minimum wages and overtime. But the difference now is that employers can easily get away with doing so, because no one is minding the store.

A study conducted by UCLA researchers in 2010, “Wage Theft and Workplace Violations in Los Angeles,” reported that between “1980 and 2007, the number of minimum wage and overtime inspectors declined by 31 percent.”

“And that’s while the labor force is growing,” says Flocks. “The labor force grew by 52 percent but enforcement has declined by 31 percent.”

“The underground economy has always existed,” adds Flocks, “and has always preyed on the most vulnerable workers — immigrants, women, young people, and now increasingly seniors. But what’s different now is that there has been a real erosion of the traditional employer-employee relationship. Employers are much more mobile and are using many different tools to make sure that they don’t actually directly employ workers.”

A selection from the wage theft study makes the point in even stronger terms:

Today, at the start of the twenty-first century, the nation is facing a workplace enforcement crisis, with widespread violations of many long established legal standards. The crisis involves laws dating back to the New Deal era that require employers to pay most workers at least the minimum wage and time-and-a-half for overtime hours and that guarantee employees’ right to organize and bring complaints about working conditions. Also violated frequently are more recently established laws that were designed to protect workers’ health and safety, laws that require employers to carry workers’ compensation insurance in case of on-the-job injury, and laws that prohibit discrimination on the basis of age, race, religion, national origin, gender, sexual orientation, or disability.

High unemployment, unsurprisingly, has also been correlated with a larger informal economy. But what’s interesting, says Joassart, is that in the past, the informal economy rose and fell in a cyclical pattern. In a recession, the informal economy would grow, but when the economy returned to health, it would decline. That pattern is no longer visible. Since 1990, the shadow economy keeps growing, irrespective of what’s happening in the business cycle.

Welcome to the 21st century! The bottom line: Globalization has substantially shifted the relative power of labor and capital.

“What you have had is a huge labor injection of labor from China and India and all of that,” says Martha Chen, “and you haven’t had a commensurate injection of capital. So the labor-to-capital ratio is at a point where capital is really in the driver seat.”

That’s the ideological mathematics that explains both “the new normal” and the shadow economy.

When capital is in the driver’s seat, government is no longer enforcing labor laws, and unemployment is high, workers have no leverage. Opportunities for jobs with benefits and good pay decrease, and everyone is forced to scramble for whatever is available. Increasingly, that means work that is completely outside the regulated sector. Work that is found in the shadow economy.

More: Dispatches from the shadow economy: An escort’s story.

The word “self-deportation” has an agreeable, voluntary ring to it, suggesting that undocumented workers will happily decide of their own free will to return to their home countries, without the necessity for direct government action by ICE agents. The truth is something different: Self-deportation, as practiced today, is supposed to be the only choice left available to immigrants whose life has been made miserable by new, punitive laws put into place at the state level.

Of course, life in the United States is already extraordinarily difficult for undocumented workers. More often than not, non-citizen workers are the mainstay of the shadow economy, the off-the-books underground world where labor laws are frequently unenforced or ignored. In fact, one claim that proponents of self-deportation make is that by reducing the supply of labor willing to work under such conditions, self-deportation (or any other method of cracking down on illegal immigration) will cause the overall size of the underground economy to shrink, and thereby improve the quality of the U.S. labor market.

The limited data available on the impact of new anti-illegal immigration laws doesn’t support that thesis. In fact, the opposite may be happening. By making it even more difficult for non-citizen laborers to work in the normal economy, the new laws are pushing some workers even further into the shadows. The harder the crackdown, the more people are going underground. Laws aimed at encouraging self-deportation are just ratcheting up the misery.

Here’s what we know. Since the onset of the Great Recession, the number of undocumented workers in the United States has dropped sharply, from a peak of 12 million in 2007 to 11.2 million in 2010, according to the Pew Research Center. At the same time the flow of migrants across the Mexico-U.S. border has severely declined.

There are a number of intersecting explanations for the change in immigration dynamics. The economic downturn is the most obvious — the demand for labor has plummeted. As Kent Wong, director of the UCLA Labor Center observes, “if you look at the history of migration, it has frequently been influenced by the ebbs and flows of the economy. When there is more economic demand for jobs there will be an increase in immigration patterns, and when there is a shortage of jobs there will be a decrease.”

Improvements in the Mexican economy are also probably playing a role in decreasing flows across the border. The enormously stepped up number of deportations under the Obama administration — around 400,000 annually since 2009 — is another huge part of the puzzle.

And then there are the state laws passed in Arizona, Alabama and Georgia. Random identity checks, harsher oversight of employers, the creation of “chokepoints” at access points to services like public schools or medical care, are all combining to have a clear effect — at least insofar as we can tell from such data points as farmers reporting difficulty in finding workers to pick their crops.

Whether those workers are simply going to other states, instead of their home countries, is impossible to know. But on a surface level this is exactly how self-deportation is supposed to work, as spelled out by Mark Krikorian, a longtime anti-immigrant activist,

What would a policy of attrition look like? It would combine an increase in conventional enforcement — arrests, prosecutions, deportations, asset seizures, etc. — with expanded use of verification of legal status at a variety of important points, to make it as difficult and unpleasant as possible to live here illegally.

The new laws in Georgia and Alabama are too recent to provide much in the way of hard data on immigration trends or self-deportation. But Arizona has long had a head start on everyone else. In 2007 the state passed the Legal Arizona Workers Act (LAWA). LAWA mandated the use of the national identity and work authorization verification system E-Verify, and imposed sanctions on employers who continue to hire “unauthorized” workers.

In March 2011, the Public Policy Institute of California published a study of the impact of the law. The authors came to two main conclusions: LAWA did achieve “the intended goal of reducing the number of unauthorized immigrants in the state. However, it also had the unintended consequence of shifting unauthorized workers into less formal work arrangements.”

One of the authors of the report, Magnus Lofstrom, says that the data show that after the passage of LAWA, there was a substantial increase in the number of low-skilled Hispanic men categorizing themselves as “self-employed.” No longer able to obtain jobs with regular wages or salaries, they were forced to hire out their labor on a more ad hoc basis.

“If we compare Arizona to states that had the same kind of employment patterns prior to the legislation passing,” says Lofstrom, “we see that in Arizona, for this group of likely unauthorized low-skilled men, the self-employment rate almost doubled in a very short period of time. That is consistent with that concern that the law does push unauthorized immigrants into the informal sector.

“What we’ve created here with this kind of legislation,” says Lofstrom, “is an incentive to shift the relationship between the employer and the employee.”

The consequences are unpalatable for anyone worrying about the quality of life of the workers. A higher proportion of low-skilled non-citizen Hispanic men who declare themselves self-employed live in poverty, says Lofstrom, and “a much higher proportion lack health insurance.”

Instead of shrinking the size of the underground economy, the combination of slow economic growth with laws aiming to encourage self-deportation is backing workers into a corner, says UCLA’s Wong.

“The economic recession has on the one hand reduced the number of immigrants coming to this country,” says Wong, “but in many ways it has also heightened the exploitation and abuse that exists in the underground economy, based on complete lack of options for those trapped in the underground economy to find better jobs.”

Timesheet, says the DoL, is an app that will “help employees independently track the hours they work and determine the wages they are owed. Available in English and Spanish, users conveniently can track regular work hours, break time and any overtime hours for one or more employers.”

“This new technology is significant,” reads a DoL press release, “because instead of relying on their employers’ records, workers now can keep their own records. This information could prove invaluable during a Wage and Hour Division investigation when an employer has failed to maintain accurate employment records.”

The Labor Department is putting some muscle behind its digital efforts; under the leadership of Secretary Hilda Solis, Labor has hired hundreds of new enforcement investigators. But one could easily scoff. With unemployment at historically high levels, why is the federal government putting scarce resources to work creating smartphone apps? How many victims of wage theft — typically workers at the lowest end of the economic scale — even own a smartphone?

More than you might think. A smartphone, with accompanying data package, is significantly more expensive than the regular old (soon to be extinct) cellphone or land line, but compared to other ways of getting online — a desktop or laptop computer plus DSL or cable broadband access — the smartphone is the best deal in town. A review of survey data points out a provocative fact: Smartphone adoption is occurring at faster rates among lower-income Americans and minorities. Turns out, there is more than enough room in the shadow economy for smartphones — for many people, they are fast becoming the indispensable lifeline that connects them to the wired world.

We’ve known this for years with respect to the developing world; as Jeffrey Sachs, author of “The End of Poverty,” told CNN last October, “The cell phone is the single most transformative technology for development.”

“Poverty is almost equated with isolation in many places of the world. Poverty results from the lack of access to markets, to emergency health services, access to education, the ability to take advantage of government services and so on. What the mobile phone — and more generally IT technology — is ending is that kind of isolation in all its different varieties.”

But what we haven’t seen, until very recently, is recognition in the United States that the smartphone is a domestically appropriate tool for combating entrenched poverty, employer abuses, and the myriad of constraints that have long prevented some of the most vulnerable Americans from taking advantage of opportunities that may significantly improve their lives.

What’s more, the increasing adoption of smartphones by people whose economic activity often doesn’t register “officially” — thus relegating them to what is variously known as the “underground,” “gray” or “shadow” economy — is creating data trails that can give researchers a good look at what has previously been obscure. The smartphone can illuminate the shadow economy, both for those inside of it, and those who want to understand it better.

“There are so many great tools on the Internet for comparing options,” says Brendan McBride, “whether you are going to a restaurant or seeing a movie. What we are trying to do is bring those kinds of tools to bear on a sector that hasn’t traditionally had this kind of tool.”

McBride, an affordable housing developer in New York, is talking about Remas, a still-in-beta project that aims to help immigrants find the cheapest, safest way to send money back to their families. Plug in your destination and how much money you want to send, and the app will conduct a price comparison on available money transfer services. On the website Applications for Good, Remas describes the problem it is trying to solve:

One in nine people living in the US was born in another country. In 2009, immigrants in the US sent $38 billion in funds – known as remittances – to their places of origin, mostly through money transfer companies like Western Union, MoneyGram, and dozens more. With variable fees and fluctuating exchange rates, money transfer costs are difficult to decipher and compare, restricting consumers’ abilities to make informed decisions about sending money home. Millions of dollars in savings every year are unrealized—savings that could benefit senders and their families here and abroad.

“With our tools,” declares an explanatory video, “more people will get banked, more money will be left in the pockets of immigrants, and more money will be sent back to support the families and communities immigrants come from.”

McBride says his motivation to found Remas was partly generated by his experience working in a community health center coordinating a program that did outreach to migrant farmworkers. It was clear to him that the driving motivation sending these workers to the U.S. was their desire to support people back home, but their “awareness of their options for doing so was severely limited.” Remas — as a website, smartphone app or simple text messaging service — is designed to solve that problem.

McBride’s project got a big boost when he and his team entered a competition sponsored by Applications for Good, a spinoff project created by One Economy, a nonprofit that works to leverage technology solutions to alleviate poverty. With the help of a broadband stimulus grant from the Obama administration, One Economy set up Applications for Good with the express intention of creating mobile applications that change the world for the better.

Applications for Good offers a concentrated repository for smartphone apps designed to help break down the isolation that so often works as a kind of amplifier of poverty. Another project under way with Applications for Good support is SNAP Fresh, a text-based phone app that locates five nearby grocery outlets that accept food stamp debit cards as payment. There’s also BEE Local, an app that locates public services targeted at low-income people.

The field of shadow economy smartphone apps is clearly in its infancy, but seems certain to grow, either through efforts by developers who want to change the world for the better or via entrepreneurs who recognize that there is a largely unserved market rapidly getting online through their phones. As this market grows bigger, however, it may end up shoving the shadow economy right out of the shadows into the glaring light of mainstream society. When you are online you are no longer invisible. Every tweet, every query, every text is trackable.

At the Price of Weed website, recent purchasers of marijuana are invited to post how much their latest quarter-ounce cost them. A couple of researchers at the University of Kentucky decided to crunch the numbers to see what they could learn about pot market economics. What they discovered was not too startling — prices were lowest near prime cultivation regions and in states with lenient medical marijuana laws. But there was a larger lesson. Self-reported geo-coded data about an off-the-books economic activity ending up describing a market that is often obscured in haze.

In a research paper discussing their findings that is currently under peer review, the authors note that “by measuring a facet of the underground economy never before studied with a national-level dataset … the analysis of user-generated data undoubtedly allows for unprecedented insights into a highly significant component of everyday economic and social life.”

The potential for doing similar research into other hitherto obscure regions of economic activity is huge.

Illuminating the market-based underground economies could be highly beneficial by uncovering facets of the economy such as child labor, slavery and human trafficking that are able to persist in part precisely because they are able to remain unmeasurable and uncodified by traditional data collection methods.

Of course, “beneficial” is in the eye of the beholder. The authors also note that “the increasing information shadows to economic activities raise the specter of state and corporate control into previously unregulated practices of informal exchange (e.g. bartering and gifting practices).”

As one of the authors, Matthew Zook, explained, “You can bypass a lot of traditional ways of doing things,” by jumping into the digitally mediated realm, “but precisely because it is digital technology it can be traced back. The Department of Defense or industry can use social networking data to better understand terrorism cells or how to better sell you a better electronic gadget.”

The smartphone will set us free, and simultaneously suck us deeper into the system.

For many economists, labor organizers, government leaders and law enforcement officers, those numbers represent a huge problem: a tragic panorama of exploited workers, criminal activity and crippling shortfalls in government revenue. But where others see darkness, Neuwirth — reporting from China, Brazil, Nigeria and elsewhere — witnesses something more promising. In a world of growing inequality and faltering “real” economic growth, the shadow economy is where job creation is actually happening. Calling upon the most meager of resources and without any government assistance, people are somehow finding a way to survive, and even prosper.

“Stealth of Nations” makes a provocative argument: Instead of demonizing the informal economy, we should embrace it. Left to their own devices, people are finding ways to create jobs for themselves. The informal economy may ignore borders, trample over intellectual property laws, and thrive on bribery and other rule-bending behavior. To a mainstream economist, it may represent a fundamentally inefficient way of organizing economic behavior. But to Neuwirth, the informal economy is something we’ve got to learn from, coexist with and possibly even nurture. Because the world needs all the avenues for upward mobility that can possibly be mustered. “Employment,” he writes, “has more value than efficiency.”

Neuwirth’s new book serendipitously arrived at Salon just two weeks after we began the “Inside the Shadow Economy” series, and I immediately seized upon the chance to call the author and talk to him about his work.

The “shadow” or “informal” economy gets a lot of bad press. Your book pushes back on the negativity, to the point that you even eschew the terminology most people are using to describe the phenomenon — gray, black, underground, shadow. Maybe a good place to start is with an explanation of why, throughout your book, you choose to call the informal economy by the name “System D”?

Sure. I pirated it from Francophone Africa and the Caribbean, where the French word “debrouillard” means a person who is self-reliant. To say a man or woman is a debrouillard is to say that they know how to survive all sorts of difficult and sticky situations. That has been modified to fit the post-colonial reality of the Caribbean and Africa so that what we call the informal economy or the shadow economy comes to be known as “l’economie de la debrouillardise” or “the economy of self-reliance.” The short, street version is “System D.” For me, that’s a much less pejorative term, because self-reliance is something that is good — we are not casting aspersions on it even through its name.

A lot of the academic literature on the informal economy suggests that its growth is a reaction against high taxes or regulation, but the people you profile in your book seem to exist in a world where those concerns are almost irrelevant; they’re starting out so low on the economic totem pole that the notion of getting a license or paying taxes is inconceivable.

I don’t think people are turning to the so-called economic shadows because of any fear of regulation. It’s just not something that has even crossed their minds. Even here in the United State when I interviewed people who had businesses without licenses and registration, it wasn’t that they were avoiding anything, it was just that there was no way to start a business in the way that the legal requirements would suggest.

In the developed world, most economists seem to treat the informal economy as a stage on the way to something else — as a kind of transitional phenomenon. The U.S. went through its wild and woolly period in the 19th century, but now it has matured, so the expectation is that China will do the same, and maybe even, eventually, Nigeria. But at one point, you write that “the time for System D is now” and you seem to be referring to both the developed and the developing world. You even observe that there is some preliminary evidence that the countries with the most robust informal sectors recovered most quickly from the Great Recession. So should we be actively encouraging the informal economy?

In today’s economic system it is definitely something to be encouraged. I think the age of large industrial powerhouse corporations that are going to provide the majority of jobs is winding down. That is not even the way that things happen all that much in the United States anymore, and certainly not in the developing world. It seems to be anecdotally true that where there is a robust System D in the developed world there is a better cushion for surviving the economic shocks in the formal economy.

So how can governments support the informal economy?

I think we have to come up with in-between strategies that allow for System D to exist. System D needs government, it needs stable currency exchange rates. Businesses need electrical grids and public utilities. But it works both ways: I would argue that governments also need System D, because it provides employment generation and is the incubator of business ideas. Maybe there can be a meeting in the middle; maybe there are ways to experiment with how to encourage the robustness of System D while also helping some of the larger System D firms to enter the formal economy.

But how do you do that and still ensure that government can keep operating? Isn’t one of the problems with the informal economy the fact that it deprives governments of revenue while still leaving them on the hook for services?

Yeah, that’s true, but remember, all that money that is earned sub rosa ends up getting spent in the economy in all sorts of ways, so it’s not entirely true that there isn’t any benefit to government from the continuation of System D. But beyond that I think that governments have to start figuring out how to privilege employment and job creation through System D. Those things are social goods. So the same way that a formal business might get certain tax advantages for adding employees, informal firms should be looked on with that same kind of eye: that they are adding jobs and keeping people employed, and maybe they can be legitimized in some way without being forced to pay the kinds of taxes that every other business would. I know that that is a controversial statement — because it seems like it is unfair to the formal businesses. But I think we have to start looking at what an economy is for. What is a market system for? Is it is purely for corporate protectionism, something that favors the already existing businesses and shuts everyone else out, or are we looking at something that is a bit more egalitarian and fair? Something that privileges job creation and diversifying wealth and bringing sort of traditional disenfranchised communities into the market system. System D is very efficient at doing that and should be rewarded for that.

But isn’t there going to be push-back on that? You spend a lot of your book in Nigeria, but I think to many Americans, the capital city, Lagos, is the very definition of third-world squalor. Why would we want to nurture that?

The post-colonial reality is really difficult. I’m certainty not arguing that there isn’t squalor in Nigeria. But it is a tremendously entrepreneurial place and people are establishing businesses and making ends meet in ways that are necessary for the survival of the population — all without the assistance of government. In some ways it is more entrepreneurial than the United States is.

You note several times in your book that the informal economy has always existed and predates the formal economy. But what seems really important now are the ways in which modern globalization fosters the informal economy — and appears to be undermining the formal economy in the developed world. You write about a Spanish company, Zara, that outsources production of cut-price high fashion to a global network of informal textile workers. Isn’t that just another step in the downfall of textile workers in the developed world? Labor has lost whatever bargaining power it once had, in large part because globalization allows anyone with capital to tap networks of workers who will work for rock-bottom wages.

Every attempt to change a business model has a downside. In the United States, the Northeast in particular used to have a huge textile industry, and then the firms all ditched Lowell, Massachusetts, and Lawrence, Massachusetts, and moved down to South Carolina where they had more flexible labor rules. So what’s happening now globally is not all that different from what our own firms did.

I think there are ways in which System D is exploitative too and the more that we can find solutions for those forms of exploitation, the better. But you can’t put the genie back in the bottle. It has just become so much easier to move things around the world — the world is dizzy with goods moving from here to there and all over the place — it’s impossible to keep track. So yes, it’s much harder for labor when the supply chains are global; that’s absolutely true. But pragmatically speaking, supply chains are global.

I think that there are still tremendous opportunities in the System D trade networks that exist within global trade. If that can be scaled up it becomes a way for the developing world to skip the middle man. They won’t need Sony or Nokia if they can do it themselves. Of course the downside of that, you might argue, is that it would be bad for Nokia or Sony. And I suppose that if System D producers get that strong, it would be. But it would also be good for their native countries. So then we have to look at globalization in terms of global equity.

Looking at the world, the question is: How do people survive? In researching my book, it just became obvious to me that outside of the U.S. and Western Europe, and certain Asian countries, it is the informal economy where people survive. And if the world is getting by on System D, then we can’t keep on demonizing or disparaging it. Because for most people and particularly for most people struggling to get a foothold it’s a necessity.

Even in the West, informal economies are growing. How do you see the future? Will the West regroup or will the future be increasingly informal?

I think that what’s going to happen is that things are going to be fluid: People are going to move back and forth. I won’t predict that the world is going to be completely informal. I think it would be silly to predict that. But I do think that there is going to be continued growth in System D and it is going to be the dominant economic system of the developing world — and so we are going to have to come up with some kind of mediating structures in which we recognize it as a legitimate part of development.