Policymakers’ drive to rationalize and eradicate the informal economy informs rhetoric creating a cyclical expansion of the IE when the federal government gets involved.

The principles of political economy forwarded by the IMF and the World Bank have represented, and still represent, the ideological framework from which the dominant vision of the IE has been structured. The rationale for policy intervention supplied by the Washington Consensus underlies the very explanation of the causes of the IE. An IMF-commissioned Working Paper concludes, ‘An increasing burden of taxation and social security payments, combined with rising regulatory activities, are the major driving forces behind the size and growth of the shadow economy’ (Schneider and Enste, 2000: 44). Similarly, a World Bank-sponsored policy paper on Latin America remarks, ‘The informal economy arises when excessive taxes and regulations are imposed by governments that lack the capability to enforce compliance’ (Loayza, 1997: 30). A further IMF-commissioned study states, ‘Heavy tax burdens and excessive regulation imposed by governments that lack the capability to enforce compliance drives firms into the underground economy’ (Dabla-Norris and Feltenstein, 2003: 3). In summary, the IE is seen here purely in terms of tax evasion or avoidance, and hence as entirely negative economic activity which must be prosecuted, punished and eradicated, a position which remains predominant despite the recent adjustment of the World Bank’s stance on this matter. Advocates of what may be termed the ‘legalist’ deterrent-centred approach sustain that public policy should correct the roots or the fundamental causes of informality by reducing heavy tax burdens and complex state regulatory systems and by enforcing the reign of the law more rigorously (Dabla-Norris and Feltenstein, 2003; McKinsey Global Institute, 2004). This view is informed by a belief that should these legal–regulatory imperfections be corrected, informal economic agents will ‘choose to go formal’. This represents an ‘indirect’ approach towards intervention in which the state, and not the individuals and businesses operating in the IE, is the main policy target. The state’s regulatory framework thus becomes the main cause of the IE as well as its main solution. Ironically, in developing countries this approach has been largely inspired by policies implemented in industrialised countries where the IE is now being increasingly recognised as a problematic feature of the contemporary economic landscape. Closely aligned with the assumptions of the legalist approach are policy approaches intended to streamline business registration, which is considered as a ‘rational first step’ in any serious reform effort aimed at reducing the IE (EC, 1997; ILO, 2002a). The nature of the complexities that businesses face in ‘going formal’ is here the main rationale for policy intervention. Complexities include complicated regulations (‘number of steps’ to get registered), high costs (‘fees’ to be paid), and an excessively bureaucratic implementation of regulations (‘time’ or business days involved) (Jansson and Chalmers, 2001). The self-employed and small businesses, who commonly lack financial resources and time, are the most affected. Business registration constitutes the ‘first encounter’ between entrepreneurs and government and so by lifting these complexities and facilitating initial registration, the tone is set for future relationships between businesses and government on such issues as compliance and law enforcement. During the 1990s numerous developing countries (DCs) undertook processes of reform to simplify the frequently lengthy and complex procedures and regulations (Chile, Mexico and Peru in Latin America), and a similar trend was followed by some Western market economies (including Australia, Canada and Spain). Based on this experience, a study by Jansson and Chalmers (2001) commissioned by the Inter-American Development Bank concluded that a regulatory environment that encourages the ‘voluntary formalisation’ of informal work should become the goal of public policy. To provide a ‘simple’, ‘quick’, ‘inexpensive’ and geographically ‘accessible’ scheme for initial registration (via a one-stop-shop registration service) becomes the key component of such an environment. However, while streamlining business registration provides a clear attempt to address specific ‘obstacles’ that economic agents face in legalising their activities, such an approach does nothing in relation to the attitudes of these agents towards the obstacles they face to ‘operate’ formally. Jansson and Chalmers (2001: 7; emphasis in original) themselves note that although this approach ‘does lower the cost of becoming formal [it] does little to raise the benefits or lower the costs of being formal’. This issue becomes a decisive barrier to formalisation for many economic agents, in both developing and developed countries, that ‘get by’ in the market place on the basis of generating marginal profits (Castell and Portes, 1989; Sassen, 1997).