Embrace System D? A Royal Society pops the heretical question

One in five owners of businesses in the UK started out in System D/the informal economy, according to a new report by a British NGO. And almost 2/3 of those who ran businesses without getting registered or incorporated reported that they did so to determine if their enterprises were viable--while only nine percent said they turned to the informal sector in an attempt to cheat the government and make more money. What's more, almost half of all merchants polled agreed that working in System D "is often a necessary step as part of the journey towards becoming a successful entrepreneur.”

The study--produced by the Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA) and based on in-depth interviews and a survey of 595 business owners across the UK--concludes that government should take a less punitive approach to System D businesses--and should cajol and encourage firms to formalize rather than prosecuting them for being informal. And it asks the heretofore heretical question of whether governments should learn to live with the informal economy.

Money quote:

can we learn to live with the informal economy?

the informal economy can be the perfect protective environment that many small fledgling micro entrepreneurs need as they make the transition from unemployment to the formal sphere. In this way, it is possible to conceive of the informal economy as a fixed quantum, not to be reduced in size but to be controlled in such a way that individuals flow through it as seamlessly as possible....without going some way towards accepting informality as an integral part of the economy, there is a danger of never being able to fully realise the assets of existing and would-be micro entrepreneurs who depend on this shielding environment.