Law-abiding firms in poor countries must push through paperwork and bribes, while unregistered businesses simply skip all of that. This makes the off-the-books economy a major source of enterprise, innovation and self-reliance. Even copied goods sort themselves by quality: makers of good fakes offer guarantees and take back defective products.
Traders who can't rely on police or courts build their own codes for protecting people and property, and these work fairly well. A street vendor pays no rent for a spot but asks the neighbor, 'Can I set up next to you?', and ignoring a no means a fight. Fraud and violence occur, but not obviously more than in the regulated economy.
Where formal systems fail to supply jobs or basic services, informal traders step in. In a city where the government provides almost no infrastructure, private businesses and workers' groups supply power, drinking water and transport with little licensing or oversight.
Pushing informal businesses to register does little for them, because the real barrier is finance. Banks gladly take these traders' deposits but refuse to lend to them. The 'free market' itself is no natural state but an artificial arrangement held together by government.
The unregistered economy deals mainly in ordinary legal goods and services, not drugs, guns or sex work. Counted together, it would be worth roughly ten trillion dollars a year, which would make it the second-largest economy on earth.