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Entrepreneurship in the informal sector during transition: causes, specific features, socio-economic effects
The initial hopes that the emergence of market economy will lead to a ride of entrepreneurial activity of population and enhance possibilities of primarily innovative new ventures failed in most transitional countries. After a significant but short period of entrepreneurial boom, in most of them the dynamics of entrepreneurship development declined. Some smaller Eastern European countries show the density of entrepreneurship comparable with old European countries, but the most of the bigger CIS economies are characterized by very low level of entrepreneurship (TEA level, in terms of the Global Entrepreneurship Monitor – see f.ex. Chepurenko et al., 2010) and a very small portion of the entrepreneurial firms which are really engaged in high-tech innovative business.
On the other side, evidence of some labour market research projects (Gimpelson, Zudina, 2011) show that the employment in informal economics is growing – at least, in Russia. Moreover, it is growing faster than the economic growth and than the incremental dynamics of jobs in formal economic activity. It seems that most of such informally acting persons are sole proprietors or self employed of different types.
There are several reasons for choosing informal entrepreneurial activity according to the mainstream literature. First, lack of resources and credibility pushes some entrepreneurs into shadow economy where only informal activities are possible. Second, the state regulation level as well as administrative burdens nay lead to the same result. Third, there are some ‘avoidable markets’ where informal activity only is possible. Fourth, some freelance activities can be started only as a second job realized on informal manner.
In some weaker transitional economies, there are some additional reasons which lead to the growing number of business deals done informally.
The paper examines some cases of different forms of informal entrepreneurial activity in Russia and Ukraine (Williams & Round, 2007) which lead the authors of the paper to the conclusion that there are following additional reasons for informal entrepreneurship in some transitional countries:
- low level of income shrinks the demand of population – hence, only informally acting enterprises with low level of transaction costs may fit the demand in low quality cheap goods;
- the ‘circle of informality’: the already high impact of informal economy (subsistence economy in villages and small towns, services for households done informally etc) are producing a significant amount of informal incomes which may be realized in buying informally produced and distributed goods.
Besides, the paper gives a typology of informal entrepreneurs in transitional countries.