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Questions about the role of the "informal sector" color much of the discussion of urban economic development in poor countries. Why is there an informal sector (and how to define it)? Are informal businesses stagnant or dynamic, and can they contribute to development? In the small Bolivian city of Sucre, site of this study, there is no "informal sector"; rather, the entire economy demonstrates informal characteristics. With a handful of exceptions, businesses are all very small and household centered. Most manufacturing is done by hand or with simple machines, and informal labor and trade relationships predominate. This thesis describes Sucre's producers, especially chocolate-makers and carpenters, and the local organizations which work with them to promote business growth. Despite attempts by local NGOs, grassroots organizations, and business people, Sucre' businesses stay, small and informal. The reasons for this include: (A) the size and composition of the local market; (B) the problems of trust and contract enforcement which raise transaction costs (for hiring workers, contracting distributors and forming partnerships); (C) the inability to "catch up" with more efficient, mechanized competitors in neighboring countries; and (D) a tendency for households to diversify their investments as a response to risk and uncertain markets. The main problem impeding business growth in Sucre is not the businesses' informality (which is principally a result of their smallness), but the local social, economic and institutional environment in which they must work. This is an environment in which business owners have learned to survive and even, occasionally, prosper, but one which they have thus far been unable to change.

This thesis attempts to measure the growth of the Bolivian informal sector. The study estimates the growth of the informal sector by defining it as the difference between the formal sector's reported real gross national product (GNP) and forecasted values of real GNP. The first chapter describes the Bolivian economy, defines its informal sector, and presents reasons for this sector's growth. Related research in informal activity, theoretical discussions, and perspectives are presented in the second chapter. Chapter III describes methodological research used in the analysis of the data. Chapter IV describes the results of the investigation. Conclusions and recommendations for the informal sector are provided in chapter V. The results show that it is possible to measure informal activity in a macro setting