<H2>INFORMAL CYBERSPACE</H2>

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THE STATE AND INFORMAL ECONOMIC ACTORS

by John C. Cross, Ph.D.

Assistant Professor

American University in Cairo

January, 1994

ABSTRACT

The literature on the informal economy has focused almost exclusively on the effect of informality on economic rather than political and social development. This paper, using evidence from Mexico City, argues that the structural determinants of informality requires analysis of its social and political effects as well. Because of their concentration in the provision of vital goods and services in low-income areas, as well as the high level of organization of many informal operators, these factors combine to provide the potential for informal economic actors to become powerful political actors in developing nations.

Acknowledgements

I would like to acknowledge the help of David Lopez in all aspects of the work leading to this paper, as well as many other people in Mexico who opened up their hearts, offices, streets, etc. for the research project. I also thank the UCLA Program on Mexico and the National Science Foundation for small grants, and the Fulbright and the Organization of American States scholarship programs for financial support during the research process.

Twenty years ago Keith Hart (1970) reported on the presence of systematic patterns of small-scale economic trade among the urban poor in Ghana that had been ignored by official statistics, and that were providing a major source of support for a large percentage of the urban population in that nation. Since then, multiple tracts have confirmed his observations, and much debate has been sparked about whether the informal economy is simply a product of stagnation and super-exploitation as desperate individuals look for money-making opportunities under any conditions, or whether it represents a phoenix among the ashes--a bottoms-up form of regional development.

Yet, surprisingly enough given the fact that a substantial focus of debate about the "informal sector" on the left has been whether informal economic actors are "disguised workers", only recently has the political nature of informal economic activity (IEA) been recognized in the literature. Certain activities that are at times included within the definition of the IEA, such as land-invasion, have been recognized as inherently political (eg Cornelius 1975). But the political nature of other IEA sectors, such as commerce (street vending) and transport (owner-operated mini-vans) have not been studied carefully despite the recognition that such activities could lead to political activism. (Bromley 1978; McGee 1975, among others). Yet street vendors and mini-van operators have much the same relation to the state as land-invaders--they aim to gain access to a public or privately controlled good through frequently "inappropriate" (viz--illegal) means. The land-invader wishes to take over a piece of public or private land that has not been authorized for sale or subdivision1. Likewise, the street vendor and mini-van operator want to take over the street, or to use it for trade, and frequently also to avoid taxes and regulations that push up costs for formal business.2

Sanyal (1991) notes that the perception of "self-employed informal workers" has shifted substantially since the late 50s when they were seen as part of a passive "marginal" population steeped in a "culture of poverty". As the concept of marginality was assaulted on all sides, some argued that these groups could become politicized as part of a revolutionary movement (Walton 1979) while others (Peattie 1968; Pearlman 1976) described them as basically conservative, supporting or coopted by authoritarian regimes. However, the involvement of many such groups in the pro-democracy movements of the seventies belied their conservative image. Rather, Sanyal argues, they were simply responding in each case to their own sets of interests: as authoritarian regimes adopted fiscal austerity measures that reduced subsidies and social spending that benefitted informal workers, these turned against them. Thus, he concludes, "Their political ideology was flexible and pragmatic enough to allow such wide fluctuations in their political behavior." (44)

Using research carried out in Mexico City as well as examples from the literature, this paper will argue that two basic structural factors underlie the political role of informal economic actors. First, it is argued that they tend to dominate the provision of goods and services particularly in low-income areas of developing nations. Second, their informality relative to the state often requires them to act defensively and collectively to protect and maintain a set of de-facto "rights" based upon the avoidance of key regulatory controls of the state. I will argue that these aspects are not simply accidental or "conditional" features of IEA, but are rather due to the structural conditions under which informality exists in modern society.3

One problem with the literature on the "informal economy" that has been noted previously is the lack of definition of the term itself. Peattie (1989) and Bromley (1990) have each noted that the term has perhaps more utility for specific elite groups within academia and the development community than as an academic concept in itself. Many

IEA AND THE STATE

In The Other Path, De Soto (1989) argues that the informal economy emerged as a reaction to state regulatory controls that have led to stagnation in the "formal" economy--i.e. that part of the economy that is controlled by the state. Both bureaucratic barriers that hinder licensing of businesses and expensive labor legislation (not just minimum wage laws but also social security benefits, health insurance, etc. that are supposed to be paid by employers) create excessive "costs of formality" that create a disincentive to investment. By avoiding these costs and barriers, small firms are able to be far more productive than large companies that cannot escape the regulatory control of the state. At the same time, however, De Soto argues that the informal economy is restricted in its growth and productivity by the fact that increases in either of these measures would attract the attention of regulators and thus undercut the profitability of the ventures. His solution, therefore, is to reduce state regulation of businesses.

But De Soto uses a simplistic model in which broader economic structural factors are ignored, and state regulation is seen as the only limiting factor on growth. On the other hand, he completely ignores super-exploitation and the lack of worker benefits within the informal economy--precisely the types of evils that state regulation is designed to cure. While avoidance of these "costs of formality" may make informal firms profitable, what are the social costs involved? Furthermore, if these conditions were generalized to the entire economy, as De Soto proposes, would the increase in profitability for small producers offset the increase in worker exploitation?

Castells & Portes (1989) provide a broader assessment of the interaction of the state and informality. While agreeing that informality is an escape from regulation, they see it as part of a restructuring of the world economy as international competition forces employers to push down labor costs. This is achieved by farming out production to subcontractors whose small size enables them to escape government regulation. But this argument only explains a portion of the informal economy--that portion that is explicitly tied to larger firms. It does not explain the informal production of goods and services that are directly marketed.

Like De Soto, Castells & Portes argue that "informal economies of growth" may emerge in which regional informal industries--such as high-fashion production in central Italy, Cuban emigre entrepreneurs in Miami, and export production in Hong Kong--could provide substantial real economic growth. But they argue that very specific conditions must be met for these "informal economies of growth" to emerge, such as lack of dependence upon larger firms, orientation to broad export or internal markets, and the fact that they are not limited to low-technology goods. Also, in direct contrast to De Soto, they argue that government support is crucial for growth.

The authors also agree that the state is not oblivious to the informal economy, and often condones it, either in exchange for partial regulation, as De Soto argues, or because "the loss of formal control over these activities is compensated by the short-term potential for legitimation and renewed economic growth that they offer." (Castells & Portes 1989: 27)

But neither asks whether this loss of control creates any "problems" for the state that may lead to structural conflict between the state and informal economic actors. Portes, Castells & Benton call upon the state to replace the worker benefits lost in the process of informalization by providing a "social wage" to be extended directly to all citizens. (1989: 310) But as a solution, it seems to miss the point: If the economy is progressively informalized, where is the state to extract revenues with which to even maintain the current levels of social expenditures.

In order to discuss adequately the relationship between the state and the economy, we should proceed from an understanding of what that relationship consists of. De Soto's basic argument is that the state should not extensively regulate the economy, but most liberal and leftist theories of the state in modern society presume that such control is required. Either way, the fact that the state is heavily involved in this control indicates that there are structural or functional features of the state that impel it to do so. State economic regulation may be explained in terms of two basic needs of the modern state: to extract revenue, and to provide "services" that justify or legitimize its revenue extraction. In this sense, "services" refers both to direct services and "social" services directed towards maintaining social harmony in general.

In order to extract revenues, the state needs to license and then subject businesses to fiscal laws. The most effective forms of taxation are those in which taxes can be deducted directly at the point of payment. And where payments go through large companies, collection can be enforced very efficiently. As one Mexican economist points out, the reason why income tax evasion rates are so high in Mexico is because only those who are employed by large companies or the state have taxes withheld from their pay, and are thus "held hostage" to income tax laws. (Alba Idunate 1982) Sales taxes are also subject to evasion--particularly for goods that are typically sold by small stores.

Where state legitimation is reinforced by the notion that the state "mediates" between social classes--either explicitly (such as in Mexico where this role was written into the 1917 constitution) or implicitly where the state has taken on this role--an important function of the state is to set up and maintain minimum salary, social benefit, and health and safety standards for workers. These are frequently more extensive in Latin America than they are in the United States, where health insurance is not mandatory. But they are also more frequently ignored, creating a dual system where large companies must pay large amounts to satisfy these requirements, while small firms manage to avoid them by using family or casual labor.

A third form of government regulation that is also common in the third world but not in the first is control over pricing of "basic" goods that is seen as a significant part of government policy to maintain living standards for the lowest classes.

Given that there are many different types of laws that regulate businesses, it is highly possible for businesses to be "legal" in some ways, but to avoid legal requirements in others. For example, street vendors, taxis, mini-vans, small stores and other small enterprises may be registered correctly with the appropriate government offices, but they may avoid labor laws regarding their employees, paying subminimum wages and zero benefits to employees, failing to accurately (if at all) account for tax liability, violating zoning or health laws, or operating out of the bounds of their licensing.

In the same vein, as De Soto argues, certain activities may be partially regulated by the state in such a way that their legal status is still not clarified. Mini-van committees, which run mini-van routes in major cities, and committees or associations of street vendors are groups which have established semi-formal relationships with many Latin American states by which they negotiate with the state to protect their ability to conduct business on the public thoroughfare, but without necessarily any recognition that the activities themselves are legal.

THE BASIS OF INFORMALITY

Ideally, formal business organizations are those which conform to all of the above criteria of formality. However, such formality is expensive, and De Soto's notion of the "costs of formality" is highly applicable. Many otherwise formal firms may indeed avoid some of these costs through tax evasion, creative accounting and bribery of officials to "overlook" their non-compliance to laws. However, informal practices are limited for firms whose size makes them visible to state officials, and the potential for worker organization in large companies means that workers themselves are able to enforce compliance at least in regard to labor laws. In sum, the argument is not that large companies are saints, but that they are unable to avoid state imposed costs as effectively as the myriad of small and micro enterprises that make up the informal sector.

If we see these costs as additional state imposed expenses that enterprises must bear for the right to conduct business, it is clear that they require an additional measure of gross profitability from any economic transaction in order for that transaction to provide net profits to the enterprise. Whether it takes the form of licensing fees, higher wages, employee benefits, or taxes, these are costs that must be passed on to the final consumer for the enterprise to be profitable. However, there are several conditions under which the imposition of this cost on the final consumer is hampered by the structural condition of the market, or even by government price regulation itself. In these cases, private enterprises, without the input of direct or indirect subsidies on the part of the government, will be unable to operate as "formal" businesses in these markets.

PRODUCTION FACTORS AND INFORMALITY

Factors that would make market segments unprofitable for formal investment could be either production or consumption related. Production related factors are those that would lead to the type of subcontracting discussed by Portes, Castells and Benton. For example, as Sethuraman (1981) notes, the production of certain goods is by necessity labor intensive, due to the lack or expense of alternative capital intensive processes of production. The classic case is the garment industry (Lomnitz 1977). Garbage pickers in developing countries are also protected against formal sector encroachment by the much larger expense that mechanization of their trade would entail (Birbeck 1978). Production may also be highly sporadic, such as in the construction industry, in which case the hiring of workers formally may tie formal companies into long-term contracts that would hurt its profitability during periods of low demand (Lomnitz 1977). In these cases, formal companies may take advantage of the ability of the informal sector to squeeze labor and other costs by buying inputs from informal subcontractors, or using "brokers" or labor subcontractors who themselves hire workers informally. In this way, the formal company is itself protected against charges that it violates labor laws.4

LOW INCOME MARKETS AND INFORMALITY

A very important feature of the vast majority of the informal economy, however, is its concentration in poor, relatively closed market sectors--precisely the opposite type of markets that Portes, Castells & Benton, see as conducive to "informal economies of growth". This concentration and the resultant importance of small, informal operators in poor markets is apparent in many of the poorer areas in Third world cities. Here it is not a matter of a source of income or goods "on the side", but the primary source of food, clothes, transportation and, increasingly, of work for millions of urban residents. In Mexico, the Tianguis (open air markets), covered markets, small, corner shops, and tortillerias far outweigh the importance of modern supermarkets for most residents. Similarly, in terms of transportation one report estimated that 80% of all surface transport in Mexico City alone--some 7 or 8 million a day--are provided by the tens of thousands of mostly owner-operated mini-vans (called "colectivos") that shuttle passengers along scheduled routes in the city. (Excelsior 1/2/89:4A)

Pointing out the closure of supermarkets in poor neighborhoods, Tokman (1978) argues that consumption patterns explain the disadvantage of large retail outlets in low income neighborhoods. He argues that low income people tend to purchase items on a day-to-day basis, and are far more likely to purchase goods in small volumes that meet their immediate needs, giving a competitive advantage to small, dispersed shops which can cater to the particular needs of clients in their area.

However, Tokman's argument does not explain how these same markets could support large numbers of small stores, street markets and mini-vans who compete for the small earnings of working class consumers. For example, Alonso counted over 500 businesses in one residential neighborhood in Mexico City--about 8.4 for each square block. (1980: 215)

This enormous informal presence in low-profit sectors is possible for two reasons: On the one hand, polarization of wealth in society creates large market sectors distinguished by the poverty of potential customers, meaning that any enterprise will be constrained in terms of the upper limits they can charge for given quantities of goods and services. This problem may be compounded in many third world nations by price controls on basic goods and services. Thus, the "costs of formalization" will be more difficult to pass along to consumers in these market sectors. Thus, high-overhead, large-capital, regulated organizations may find these sectors unprofitable for direct penetration. Nevertheless, demand for basic goods and services still exists.

On the other hand, small organizations can generally escape overhead costs and lower labor costs through practices associated with informalization--overworking of the entrepreneur and unpaid family workers, and utilization of readily available casual labor in times of higher labor requirements. These practices may include saving on capital costs by "illegally" using family residences as storefronts or workshops (violating zoning, licensing, health and safety laws) or occupying street locations. Thus, by operating "informally", small enterprises can service the demand in these sectors.

To put this another way, the combination of low purchasing power and the "costs of formality" make the demand in certain low-income market sectors ineffective for large firms, thus making them available to smaller firms that can squeeze labor and other costs informally.

At the same time, the imposition of regulatory controls in an incomplete fashion by the state may actually increase the level of informality in low income markets. For example, in Columbia, Whiteford argues that numerous and expensive legal requirements imposed upon workers in order to even apply for a job means that "rather than helping them, the poor feel that many government regulations discriminate against them." Even when government agents enforce laws that supposedly protect workers, it often works against them. For example, a girl earning one third of minimum wage was forced to quit the job by her parents after the Ministry of Labor compelled her employer to arrange for medical insurance. Since part of the payment--supposedly scaled to her income--came out of her salary, which the employer claimed was the minimum wage, a fifth of her salary was deducted for this purpose. (Whiteford 1974: 166)

Informality may also be increased by the application and enforcement of price controls on basic goods and services, an act that is designed to protect the low incomes of workers. Very often, industries based around these types of goods become progressively more informal over time as the controlled prices allow less and less of a profit margin. However, the degree of informalization will depend upon the nature of the industry--whether small and micro producers can produce or distribute the goods--and the importance of the industry to the state--whether the state will let it "go".

When the price crisis may be seen as temporary, large companies may stay in the market, but sell only to "black market" informal distributors who are then able to sell the goods at a higher than legal price. This has often been the case with the recurrent milk crises in Mexico. For example, in the summer of 1983, and again in January 1989, milk was subject to such shortages in most of their usual outlets (bakeries). This, however, did not stop them from being available on street corners and markets, usually at several times the official price. Often, milk was sold in front of bakeries at twice the official price while bakeries themselves, subject to price controls, had none. (Excelsior 1/18/98:E2)

The provision of milk on a large and sanitary scale requires the use of highly capital intensive techniques, and could not be left to the informal sector. Thus, the large milk producers can be fairly assured that the official price of milk will fairly soon be raised to an economically feasible level. Price crises such as these, therefore, can reasonably be seen to be temporary, and large companies will not be forced to leave the market by government pricing regulations.

However, in industries that may be provided by small units, no such imperative forces the state to keep prices at a level sufficient to create returns on capital comparable with alternative investment alternatives. This is the case with petty transport and, I would argue, small stores and tortillerias (shops that make and vend tortillas, the basic cereal good for low income Mexicans). In each of these cases, the proliferation of small economic units is due to the lack of profitability of larger concerns given both the costs of formality that impinge on them in terms of their operating costs, and the price regulation that limits their ability to pass on these and other costs. These small units, which are distinguished by the fact that they are licensed (and thus subject to price regulation, since they can be located and punished by the state through the withdrawal of their licenses and/or by the impounding of capital goods), are able to survive only in an environment in which they are able to escape the costs of formality in terms of other types of less well-enforced regulation: Labor regulation.

In both Peru and Mexico, mini-vans have taken over a large part of the urban transport system from private and even government sponsored and subsidized bus systems. In Lima, De Soto ties this to the failure of formal bus companies in the face of government regulation and price controls. (De Soto 1989:116) In both nations, government transit systems offer little more than skeletal service in terms of the actual needs of major cities, and the most efficient service--and in many outlying areas the only service--is provided by mini-van routes.

Thus, the combination of regulations that enforce minimum wage and benefit levels for formal businesses and regulations that enforce maximum prices on consumption goods frequently leads to "deformalization" or "informalization" in key markets as large companies that cannot escape either of these costs leave these markets for other, more lucrative, markets.

Since the demand for goods and services still continues in these markets, this gap is swiftly filled by small and micro enterprises that can escape some of these costs. Since these are vitally important market areas for the well-being of the low-income population, the state frequently recognizes this informal activity in exchange for certain controls over it--principally price controls that the state paradoxically enforces at the expense of the low wages in the informal business sector itself.

However, even with their ability to informally squeeze labor costs, the continuation of price controls may create price crises even within the informal sector. For example, in the tortilla industry in Mexico the differential between subsidized inputs and maximum prices was so low in January of 1989 due to the need of the state to maintain prices on this good, that a true price crisis evolved in this industry. Even as the government announced that prices on basic goods would not be raised for six months the crisis led to coordinated action on the part of tortilla vendors in many areas including work stoppages, rate strikes against the government operated utility companies, and the selling of tortillas illegally at the higher price. (Excelsior 1/9/89:E1) The regulation of mini-van fares and routes have resulted in similar strategies as that presented by the tortilla industry as colectivos have collectively raised prices illegally in the face of government attempts to keep prices at the same level.

This example shows that, even after the desertion of controlled commodity markets by large concerns due to profitability problems, the continued downward pressure on prices by the state may still result in price crises even in an otherwise informal market. Faced with decreasing profit margins, formal companies have the option of investing in new areas or, if they are small enough to escape state sanctions, of becoming informal. Both of these options represent a net decapitalization and a lowering of working conditions in the controlled market sector. Once a market sector is informalized, however, by the paying of sublegal wages or the overworking of employees, these entrepreneurial options are narrowed. If the price squeeze continues, small informal units may be forced out of business altogether, since their limited capital, productive only in terms of the skills informal economic actors have amassed in their profession, is less productively put to other uses.

Instead, what seems to have occurred in the tortilla and petty transport industries is that informal producers have adopted a proletarian strategy in opposition to the state. This makes sense if it is considered that the state's actions amount to prescribing a maximum possible level of profits, and thus income, for informal entrepreneurs. Like any piece-rate system, then, agitation is directed towards those setting the rates--in this case, the state. Yet, because it is the state and not a business that agitation is directed against, and because these entrepreneurs provide essential public services, this conflict becomes immediately political. It also provides a dilemma for the state. In a sense it is caught between the interests of informal entrepreneurs such as tortilla store owners and mini-van operators and those of low-income residents for whom these represent the only source of basic goods and services.

Other markets, however, the state cannot control directly at all. The many tianguis, or rotating street markets, with their low level of economic investment, are a good example of this.5 Not only vendors, but also their distributors (Bunster & Chaney 1985) can easily avoid price controls as well as other "costs of formality" in this market. Controlling wage and benefit levels is patently impossible, and while as in many nations vendors may be required to carry city licenses to vend on the streets, this is either an ineffective measure of control, as it has proved to be in both Peru and Colombia (Bromley 1978), or it is enforced primarily through vendor associations, as in Mexico. This last arrangement leaves the actual control of vendors largely up to these same associations, which gives them substantial power.6

Controlling prices and honest measures is even more difficult, and outdoor markets are infamous for their 700-900 gram kilos. While government crackdowns may occur, they serve to show the extent of the problem more than they serve to diminish it. In Guadalajara, Jalisco, one such crackdown resulted in the confiscation of over 700 sets of altered scales7 (Excelsior 1/29/89:E1), and similar results have been met elsewhere.8

Such regulation of these markets as does exist is generally accomplished through street vendor associations. Originating in vendor organizations organized around defending their "markets" from competitors and from police harassment, these "unions" have developed into well-organized and sometimes massive organizations. By incorporating them into a bargaining relationship the state has attempted to "coopt" them and use the organizations to regulate individual entrepreneurs. However, this system makes these associations into very powerful organizations with their own resource base (fees from members) and autonomous political structure. In Mexico, street vendor's unions hold an enormous potential for political organization since they frequently are the only source of effective regulation in street markets. Even where regulation does not operate primarily through associations, such as in the case of tortillerias who are regulated by state price control officials more directly, organizations may be equally important for the continuous task of lobbying and agitating for favorable price regulation.

The fact that informal entrepreneurs are subject to specific economic and political pressures raises the question of whether they have specific interests or aims that emerge from their very informality. I would suggest that this is true. Since by definition "informality" violates the specified laws of the state, its continued presence requires the constant implicit or explicit "permission" of the state or its agents. Whether this is "turning a blind eye" or the actual sanctioning and partial regulation of informal activity (i.e., giving permits or "tolerances" to vendors, mini-vans, etc), this "permission" never completely removes the informal status of the activity, since such a move--tantamount to what De Soto is proposing--would undercut the negotiated relative protection of workers in formal economic enterprises and thus seriously undermine the legitimacy of the state. The result is that informal entrepreneurs must be constantly organized and politicized since their activity is subject to the constant "re-sanctioning" of their activities by the state, and is very often objected to by large companies who cannot be informal. The effect is that informal entrepreneurs are usually highly organized and constantly prepared to pressure state officials on their behalf.

However, the "objective" interests of informal entrepreneurs do not necessarily include eliminating the basis of their informality as De Soto proposes. Paradoxically, it is the very illegality of the informal tactics that these operators utilize to avoid the costs of formality that protect them from competition from larger, potentially more efficient companies. Released from those very same costs of formality, larger concerns could use their greater capital and capacity for savings from larger scales of economy to centralize production and distribution in these markets without, however, increasing the working conditions of those currently employed.

THE STATE AND THE INFORMAL ECONOMY

By looking at the informal sector in terms of the costs of formality itself, one brings into question the role of the state. It is significant that the two most important sets of state regulations in terms of their direct effects on citizens--wage/benefit controls and price controls--are enforced in different ways and for different markets. As I argued above, where both these controls are exercised to the detriment of profitability, large concerns that cannot escape either will leave the market for more lucrative markets. In their place will step small concerns that could elude some of these controls. In these cases, the state will usually attempt to enforce price controls at the expense of wage/benefit controls, thus creating artificially low prices that benefit workers as consumers even as it penalizes the informal workers in the industries.

This seems to create a paradox in which the state, in its very attempt to improve living standards, actually helps to decrease them in a substantial part of the labor market which is tied to the informal sector. Portes et al argue that the state can solve this problem through the establishment of a "social wage", but it is precisely their inability to autonomously raise living standards among the population that has prompted Latin American states to pass this cost on to the business sector in the form of minimum wage and benefit legislation and price controls that protect "basic" goods. The short-term result has been a decapitalization of markets where these costs cannot be passed along to consumers--either because of low purchasing power or because of price controls--as large companies subject to these costs leave the market. The long-term result has been not only the decentralization of production, distribution and service provision in Latin America, but also barriers against centralization being reasserted--since small enterprises are prevented from growing by the formalization that high visibility would entail, and large companies are prevented from entering these markets due to their inability to operate informally.

But if informality represents an escape from state regulation, what effect does this "escape" have on the state? Much of this effect seems straightforward and is represented--even if not the focus of attention--in the literature. For example, it is recognized that informal activities have created some major headaches for the state. Mini-vans present various safety hazards as independent operators rush along their routes to make as many trips as possible. Street vendors provoke problems with urban transit, as public thoroughfares are blocked and obstructed. Formal merchants argue that they present "disloyal competition" (Excelsior 1/18/89:28A; Bromley 1978:1164) since their goods are cheapened by their failure to pay taxes. As a group, informal activities present a large loss of revenue to the state in the form of taxes. The fact that a large proportion of production and distribution is carried out by small and micro firms may also present myriad complications in the battle against industrial pollution and for public sanitation.

However, these "headaches" may be balanced out by the belief that new jobs will be made available in the informal sector. Furthermore, state actors--politicians and administrators may reap short-term benefits by acting as conduits to the sanctioning of informal activity, thus gaining direct public support for their own careers from low income people. Writing about land invasions in Mexico, a similar phenomena, Cornelius argues that state recognition of squatter rights "are designed to prepare for the day when an incumbent government might have to fall back on mass support to withstand a major economic crisis or a challenge from some dissident elite." (1975:229)

But these short-term benefits may be overshadowed by the long-term effects of the growth of informality. As I have argued, the informal sector has grown disproportionately in low-income market sectors, often to the point that collectively they monopolize the provision of vital goods and services in these areas--precisely the areas that Third World states are most anxious to keep pacified. Secondly, because of its informal nature and its need to organize relative to the state, this sector is highly organized and, where substantial regulatory power is handled by vendor unions themselves, wields substantial power over individual members. Taken together, these structural features combine to produce organizations that are emerging as a potential new set of power actors in developing societies. Their monopoly of vital services and their high level of organization may give them a substantial degree of leverage relative to other social classes and the state.

It should be pointed out that this possibility could not hold for informal subcontractors nor "informal economies of growth", both discussed by Portes et al. Subcontractors are typically dependent upon large firms and have limited leverage with them. "Informal economies of growth" are typically directed to export or up-scale markets, and thus have no monopoly over basic goods. Rather, such a possibility requires a certain degree of independence from specific larger firms, while servicing basic needs in areas where formalization is impossible due to the lack of consumer resources to support it.

These conditions arise not simply due to structural economic factors, nor simply due to state regulation. Rather, it is due to the fact that these two factors combine in the creation of vast pools of human demand that simply cannot be met by economic actors who pay all of the "costs of formality." The paradox is that it is precisely the fact that state imposes "costs of formality" that these areas are available for exploitation by micro or "petty-bourgeoisie" at all instead of being gobbled up by the economic rationality of huge national and multi-national corporations. And it is precisely the fact that states are so uneasy about this, and are therefore constantly raising the question of the legitimacy of informal practices, that promotes the high level of mass organization of these same social groups.

IMPLICATIONS FOR THE FUTURE

If it is true that informal economic actors have become politicized by their uneasy relation with the state in Mexico, as is suggested by the high level of political organization of street vendors and mini-van operators, what implications might this have as Mexico goes through the process of opening up its market to foreign capital, foreign goods and foreign commercial chain markets, as has been happening in light of the recent NAFTA accord? While it is unlikely that IEA will disappear any time soon, the opening of new supermarkets and chain stores and the "simplification" of regulatory procedures (Economist 1994) may already be limiting the growth of the vibrant IEA. The question to be answered in further studies is whether this pressure may exacerbate the conflict between informal economic actors and the state beyond the level at which the state is able to manage conflict through its traditional processes of cooptation and compromise. If this is true, informal economic actors may yet play the role that Walton (1979) assigned to them as part of a revolutionary force in society. As a friend who earns his living in a street market in Mexico City commented as he asked me worriedly about the effect NAFTA might have on his profession, "I don't ever want to see the tianguis disappear." The question is how far he and others like him might go to prevent their way of living from being taken out from under their feet.

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