Book Review: Stealth of Nations

Stealth of Nations: The Global Rise of the Informal Economy
By Robert Neuwirth
Anchor Books, New York, 2011

Stealth of Nations is about the “informal” economy – the underground, unregistered, unlicensed, untaxed and often unlawful economy.  Author Robert Neuwirth calls this “System D.”  When you hire a plumber to fix your drains and pay cash to avoid the sales tax you’re participating in the informal economy.   Similarly, when you buy homemade pastries from a baker running an unlicensed business out of her kitchen, or when you buy discounted name-brand sunglasses from a street vendor, your transaction is also part of the informal economy.

For most of us here in North America, these occasional encounters are about the limit of our interaction with the informal economy.

However as Robert Neuwirth shows us, in other parts of the world huge swaths of the economy run this way.  The import, distribution and sale of every conceivable item, from computers to drinking water to cell phone minutes, are handled through the informal economy in many countries.  Bus lines, house construction, waste disposal and recycling are also done informally.  In fact, the total value of all informal transactions in the world each year is nearly $10 trillion.  If the informal economy were a country, its economy would be second only to the United States in GDP.

Neuwirth takes us on a world tour of the informal economy from Lagos, Nigeria, to Guangzhou, China, to Ciudad del Este, Paraguay in the tri-border area of South America.  The scope and scale of this economic underbelly are amazing.  And he makes it personal, showing us what life is like in these places for the “informals” who make their living working long hours, under terrible conditions, for low wages or microscopic profits.

Even here in the US, the informal economy has grown since the Great Recession as people engage in “income patching” to shore up their finances.

The most important message of Stealth of Nations is that while the informal economy is often stigmatized for being illegal and inhumane, in many places it is the only opportunity people have to support themselves and their families.  The informal economy, Neuwirth says,

“… emerges whenever people who have been passed over by the dominant economy start to act.  It emerges from the bottom, starting as a rudimentary economy based on tiny and inefficient increments of profit. But over time, it scales up, creating jobs – 1.8 billion of them and growing, according to the Organization for Economic Co-operation and Development – and offers opportunities to people who have never been wealthy or well-educated.”   p. 179

The best parts of the book are the final chapters where Neuwirth looks into ways the informal economy might be more recognized and supported.

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Neuwirth offers a journalistic look at the informal economy and the people who earn their livelihoods in it.  He does a great job at putting human faces to System D.  And his statistics really do point out the stunning size and scope of the informal economy.

Still I was a little disappointed by Stealth of Nations. My main quarrel with the book is that Neuwirth doesn’t dig deeper to explore the underlying causes of why so much of the world’s economy has become informal.  Corruption, over-regulation, entrenched interests, absence of the rule of law are all factors that contribute.  I would have liked to have seen a more thorough analysis of the root causes and their consequences.

In my opinion, the definitive work on this subject is The Other Path by Peruvian economist Hernando de Soto, first published in 1989.  Neuwirth actually cites de Soto’s work, but points out that de Soto’s prescription – mainly that informals should be given the opportunity and means to join the formal economy – hasn’t produced the predicted benefits.  This may be true, but de Soto’s analysis of the causes and costs to informals remains compelling.

Stealth of Nations does paint a striking picture of the informal economy but I’d have appreciated a few less anecdotes in exchange for a deeper look.

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