Sometimes called the underground or the shadow economy, the informal economy is usually where a majority of firms and households operate in developing markets. Far from being underground, the rapidly growing slums, shantytowns and rural villages where informal economies thrive are the predominant way of life in developing markets. The reasons for informal and extralegal arrangements are not widely understood, but they are worldwide. They're not illegal arrangements, they're simply outside the existing legal structure. There are no laws addressing them as protected entities or criminal entities. They just are. NPR's All Things Considered recently painted a portrait of informality that hits very close to home here in Washington, DC:
Charitable donations have been declining, along with the economy. But one type of giving appears to be on the rise: giving circles. Many people are forming these groups where they pool their funds so they can have a greater impact on a charitable cause. Their growth comes at a time when donors say they want more control over how their charitable dollars are spent.
Aside from the First Amendment Right to Associate, a giving circle doesn't have the full legal structure of a private foundation or grant-making organization - and that's the whole point. Giving circles are flexible and they're based on small, local networks of people with shared interests; adding the lack of legal structure and the desire to avoid "the increasingly bureaucratic world" of fundraising, and you've got every characteristic of an informal enterprise.
The story is about more than informality, of course. It's also a wake-up call to nonprofits. Such informal arrangements are naturally more diligent about where and how they expend scarce resources (the featured giving circle expends volunteer labor, not just money). For organizations hoping to tap every mission-appropriate pool of money, the competitive forces of a growing informal market for giving can be a powerful incentive that shines a light on wasteful habits and missed opportunities to make an impact.