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The Unofficial Economy and Economic Development

Author

Listed:
  • Rafael La Porta

    (Dartmouth College)

  • Andrei Shleifer

    (Harvard University)

Abstract

In developing countries, informal firms account for up to about half of all economic activity. Using data from World Bank firm-level surveys, we find that informal firms are small and extremely unproductive compared with even the small formal firms in the sample, and especially relative to the larger formal firms. Formal firms are run by much better educated managers than informal ones and use more capital, have different customers, market their products, and use more external finance. Few formal firms have ever operated informally. This evidence supports the dual economy (“Wal-Mart†) theory of development, in which growth comes about from the creation of highly productive formal firms. Informal firms keep millions of people alive but disappear as the economy develops.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Rafael La Porta & Andrei Shleifer, 2008. "The Unofficial Economy and Economic Development," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 275-363.
    • Handle: RePEc:bin:bpeajo:v:39:y:2008:i:2008-02:p:275-363
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    References listed on IDEAS

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    More about this item

    Keywords

    macroeconomics; economy; economic development; formal firms; informal firms; finance;
    All these keywords.

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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