Informality and Inequality in Peru

The prevailing narrative of Peru as a paradigmatic case of economic success in Latin America conceals a deeper structural contradiction: the persistence - and normalisation - of informality. This essay advances a deliberately provocative thesis: informality in Peru is not a failure of the system, but one of its central operating logics. Rather than representing a deviation from formal capitalism, informality constitutes a parallel and indispensable mode of accumulation that sustains both elite interests and mass survival. In this sense, the Peruvian state does not simply fail to eliminate informality; it coexists with, depends upon, and at times actively reproduces it.

From a Weberian standpoint, the modern state is defined by its capacity to exercise legitimate authority through coherent legal-rational institutions (Weber, 1922). Yet in Peru, this ideal remains profoundly fractured. The state’s presence is uneven, its authority frequently contested, and its legitimacy persistently undermined by corruption and inefficiency. However, to interpret this as mere institutional weakness is to overlook a more uncomfortable possibility: that selective enforcement and fragmented governance are not accidental deficiencies, but functional features of a political economy that benefits from ambiguity and informality.

Michel Foucault’s conception of power as diffuse and productive (Foucault, 1977) provides a useful lens through which to reinterpret informality. Rather than existing outside power, informal systems are deeply embedded within it. They generate their own norms, hierarchies, and mechanisms of control, often intersecting with formal institutions in complex ways. In Peru, informality is not the absence of order, but the presence of multiple, overlapping orders - some visible, others obscured - through which economic and social life is organised.

This dynamic becomes particularly evident in the case of informal gold mining in regions such as Madre de Dios. Commonly framed as a problem of illegality and environmental degradation, informal mining is also a highly structured economic system involving local communities, intermediaries, national actors, and global supply chains. It operates within a grey zone where state intervention is inconsistent and often complicit. Efforts to eradicate informal mining frequently oscillate between militarised crackdowns and tacit tolerance, revealing the state’s inability - or unwillingness - to impose a coherent regulatory framework. The result is a form of extractive capitalism that thrives precisely because of its semi-legal status.

A similar logic can be observed in urban contexts such as the Gamarra textile district in Lima. Frequently described as a hub of entrepreneurial dynamism, Gamarra is also characterised by widespread labour informality, tax evasion, and precarious working conditions. While celebrated as a symbol of grassroots economic success, it simultaneously exposes the limitations of formalisation as a pathway to equitable development. The productivity and competitiveness of such spaces often depend on the very conditions - low regulation, minimal labour protection, and flexible arrangements - that formal economic models seek to eliminate. Informality here is not an obstacle to growth, but one of its enabling conditions.

The influential thesis of Hernando de Soto (1989), which attributes informality to excessive bureaucratic barriers, fails to adequately account for these complexities. By framing informal actors as “excluded entrepreneurs” awaiting legal integration, De Soto’s approach assumes that formalisation is inherently beneficial. However, this perspective neglects the structural inequalities embedded within formal institutions themselves. As Acemoglu and Robinson (2012) argue, the distinction between inclusive and extractive institutions is crucial. In Peru, formal systems often exhibit extractive characteristics, concentrating power and resources while offering limited upward mobility. Under such conditions, informality may represent not exclusion from opportunity, but strategic adaptation to an unequal system.

This raises a more radical question: what if informality persists not despite the state, but because of it? The coexistence of formal and informal systems allows for a flexible political economy in which regulation can be selectively applied, rents can be extracted, and accountability can be diffused. For elites, informality can reduce costs and increase margins; for marginalised populations, it provides access to livelihoods otherwise unavailable. The result is a paradoxical equilibrium in which both domination and survival are mediated through informality.

From a critical theory perspective, this arrangement reflects deeper contradictions within contemporary capitalism. Informality blurs the boundary between legality and illegality, inclusion and exclusion, state and market. It challenges the assumption that development follows a linear trajectory towards formalisation, instead revealing a hybrid system in which multiple logics coexist. In this context, calls for formalisation risk functioning as ideological tools that obscure underlying power relations while placing the burden of adjustment on the most vulnerable.

In conclusion, informality in Peru should not be understood as a peripheral problem awaiting technical resolution, but as a central feature of the country’s political economy. The cases of informal mining and Gamarra demonstrate that informality is both productive and exploitative, enabling growth while reproducing inequality. A genuinely transformative approach would require not only the extension of formal systems, but their fundamental reconfiguration. Without addressing the structural conditions that make informality both necessary and advantageous, any attempt at reform will remain superficial. To confront informality, therefore, is not merely to regulate economic activity, but to challenge the very foundations of power and development in Peru.