Abstract
The recent emphasis on the role of private enterprise and free markets has been useful. It has been partly a healthy reaction against excessive early faith in the power of governments to direct the economy, to manage businesses, and to correct market failures. But unregulated markets can be both inefficient, and cruel. Joan Robinson once said that the Invisible Hand can work by strangulation. We know that both markets and governments may fail and that the failure of one does not automatically constitute a case for the other. It is now widely accepted that market failure is not necessarily a case for government intervention. It is less generally realized that government failure does not necessarily constitute a case for private enterprise. There is no a priori presumption as to which is preferable.
I am grateful to Ms Marty Chen and Peter Mayer for helpful comments.
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Notes
ILO, ‘Employment, Incomes and Equality, A Strategy for Increasing Productive Employment in Kenya’ (Geneva: International Labour Office, 1972): 6. Among other definitions of the informal sector are the following — self-employment: unpaid family workers, domestic servants and those self-employed who are not professionals and technicians; workers in small-scale units of production, sometimes including domestic servants and casual workers; sometimes also low-wage employees of modern firms; unprotected, unregulated economic activities; illegal, clandestine and unregistered activities; traditional sector; subsistence sector; marginalized mass; very small economic units or micro-businesses; an abnormally swollen, overdistended tertiary sector of minimal productivity; a sector in which wage rates equal marginal productivity.
For sources of these and other definitions, see Michael Hopkins, ‘Comments on Professor S. Kannappan’, in Bernard Salome (ed.), Fighting Urban Unemployment in Developing Countries (Paris: development Centre of the OECD, 1989): 69–73).
For a well reasoned criticism of the concept, see Lisa Peattie, ‘An Idea in Good Currency and How it Grew,’ The Informal Sector World Development, 15, (7) (July 1957): 851–60. Although the critique by Peattie is well argued, I do not think that it necessarily leads to the abandonment of the concept. The exploration of the specific linkages — some positive, others negative — between firms and policies that she asks for can surely be done within the conceptual framework suggested by the informal sector.
See Hernando de Soto, The Other Path: The Invisible Revolution in the Third World (New York: Harper & Row, 1989) and Judith Tendier, ‘The remarkable convergence of fashion on small enterprise and the informal sector: what are the implications for policy?, (1987) (mimeo).
Some caution is necessary. Obviously, not all small-scale, informal sector enterprises are efficient, or economize even in the use of capital. The working capital requirements of small enterprises are often higher than those of larger ones; and even the lower capital-labour ratio, can be bought at the cost of a higher capital-output ratio. But the proposed scheme should ensure that such waste is minimized. For evidence of the efficiency of small-scale industries (overlapping with the informal sector, though not identical), see Carl Liedholm and Donald Mead, ‘Small Scale Industries in Developing Countries: Empirical Evidence and Policy Implications’, International Development Paper, 9, Department of Agricultural Economics, Michigan State University (East Lansing, Michigan, 1987).
David J. Glover, ‘Contract Farming and Smallholder Outgrower Schemes in Less Developed Countries’, World Development, 12 (11–12) (November–December 1984): 1143–57, and ‘Increasing the Benefits to Smallholders from Contract Farming: Problems for Farmers’ Organizations and Policy Makers’, World Development, 15 (4) (1987): 441–88. Also Arthur Goldsmith, ‘The Private Sector and Rural Development: Can Agribusiness Help the Small Farmer?’, World Development, 13 (10–11) (October–November 1985): 1125–38, and the ‘Special Issue on Contract Farming and Smallholder Outgrower Schemes in Eastern and Southern Africa’ of the East Africa Economic Review, Economics Department, University of Nairobi (August 1989).
Sanjaya Lall distinguishes between the following linkages: establishment, locational, informational, technical, financial, raw material procurement, managerial, pricing, other distributional, and diversification, ‘A Study of Multinational and Local Firm Linkages in India’, in Sanjaya Lall, Multinationals, Technology and Exports (London: Macmillan 1985): 269–70.
See Liedholm and Mead, ‘Small Scale Industries’ and Radha Sinha, Peter Pearson, Gopak Kadekodi and Mary Gregory, Income Distribution, Growth and Basic Needs in India (London: Croom Helm, 1979).
S. P. Kashyap, ‘Growth of Small-size Enterprises in India: Its Nature and Content’, World Development, 16 (6) (June 1988): 67–8.
Enyinna Chuta and Carl Liedholm, Employment and Growth in Small-Scale Industry (London: Macmillan, 1985).
See Judith Tendier, ‘The remarkable convergence’; and Charles F. Sabel, ‘Changing Models of Economic Efficiency and their Implications for Industrialization in the Third World’, Department of City and Regional Planning (Cambridge, MA: MIT, 1987) and in ‘Development, Democracy, and the Art of Trespassing’, in Alejandro Foxley, Michael S. McPherson and Guillermo O’Donnell (eds), Essays in Honor of Albert O. Hrischman (University of Notre Dame Press, 1986): 27–55.
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© 1992 Soumitra Sharma
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Streeten, P. (1992). The Judo Trick or ‘Crowding In’. In: Sharma, S. (eds) Development Policy. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-22385-5_6
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