Read the following excerpt and answer the questions 6 and 7 and fconamic Develop
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Read the following excerpt and answer the questions 6 and 7 and fconamic Development Informal Work and Dead Capital Hernando de Soto's term for an asset that cannot easily be bought, sold, valued or used as an investment. Despite obvious poverty in the informal sector in Peru, de Soto's work the shows that even those who live in slums possess far more capital than anyone realizes. In fact, informal economy is so large in Peru thot almost 70 percent of the working population work in informal arrangements.... Possessions., are not represented in such a way as to make them fungible (ie. eosily exchangeable) assets. Dead copital cannot, therefore, create value for the poor What you're really leaving behind is the world of legally enforceable transactions and property rights. The developed world has devised a formal property system of titles, title registries, and inclusive property law that includes real estate used for homes or businesses. De Soto shows that says: With titles, shares and property laws, people could suddenly go beyond looking at their assets as they are - houses used for shelter - to thinking about what they could be-things like security for credit to start or expand a business The moment Westerners were able to focus on the title of a house and not just the house itself they achieved a huge advantage over the rest of humanity. When purchasing a home, an open records system enables buyers and sellers not only to gauge the value of homes in nearby areas, but to set reasonable prices based on comparative values. Clear titles and title insurance give buyers the confidence they need to complete a purchase. No clear title? No sale. The system also gives banks the assurance they need to offer a mortgage. It represents a real house (house, land a factory, a car, etc.) from http://www.thepowerofthepoor.com/concepts/c6.php Many of the owners of houses in 'shanti towns' in the outskirts of Peru's capital Lima, are happy that they do not have to pay land taxes, or municipal rates, as we do in Australia. Is this an advantaeous situation to be in for the poor in Peru? Explain your answer. 6. 7. Would the informal economy hinder or promote economic growth in Peru? Explain your answer. Hint: look at "New Growth Theory" and the case study on Botswana on p. 380-381 to answer this question.Explanation / Answer
Most of the people in Lima, have lots of assets but they rarely have title over them, because of which they are unable to use them as collaterals and raise money. In countries like Peru, the informal economy is bigger than the formal one, which makes it a difficult to formulate strategies and take decisions to improve the economy.
The policies which give the tax exemptions, especially in the Nations like Peru, maybe advantageous because of the following:
- By providing the tax exemption and allowing subsidies, the housing becomes cheaper and encourages everyone to have a title on their property.
- It increase the supply of rental accomodations.
- Taxes on land can discourage the holding of land and hence increasing the suppy and theirby reducing the price of land. This leads to a negative impact of infrastructure development.
Also, considering a fact that it is a majr informal economy, having tax exemptions maybe advantageos for these people. Its is a trail to encourage to have a title over their property and move the housing system from informal to formal.
Informal economy has its effect in both positive and negative ways:
Advantages:
-Due to easy tax obligations that the company enjoy, they can pay more wages to the employees in an informal economy
- Informal economy is not recognised and therefore there are no rules or regulations surrounding it.
- It makes it easy to do business.
Disadvantages:
- Too many illegal activities, drug dealing etc.
- No labour laws, no pensions to the people, no health insurance.
- Difficulty to make savings.
In countries like Peru, where the informal economy in agriculture is over 60% today and more than 75% of the employees are employed informally. The economic activities are less productive in Peru as the companies have less access to credit and government services. Some key reasons why there exist informal economy in Peru are the labour regulations and laws, government transperency, eductation, infrastructure etc. The is not a significant growth in the Peru's economy due to all these factors. Hence, the informal economy is an hurdle to the economic growth in Peru.
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