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On The Size And The Evolution Of The Informal Sector In Developing Countries: The Case Of Turkey

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  • Saracoglu, Durdane Sirin

Abstract

This paper studies a three-sector growth model with households differentiated in their factor endowments, resulting in asset and income inequality among the households. Production occurs in agricultural, formal, and informal sectors. In particular, household preferences display Engel effects in two of the goods: agricultural and informally produced goods. Income elasticity of demand for formally produced goods, on the other hand, is equal to one. The model is calibrated to Turkish National data for 1997, and the simulation results indicate that as the economy transitions into the long-run equilibrium with the process of capital accumulation, the importance of agricultural and informal sectors diminish, and that of the formal sector increases, given any degree of inequality. However, with higher degrees of asset inequality, the results show that in the long-run, the economy ends up with a larger informal sector output and a smaller formal sector output. Furthermore, it is shown that lowering the labor taxes in the formal sector yields favorable results in terms of capital stock, income, and formal sector output in both transition and the long-run.

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Bibliographic Info

Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2003 Annual meeting, July 27-30, Montreal, Canada with number 22211.

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Date of creation: 2003
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Handle: RePEc:ags:aaea03:22211

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Keywords: Consumer/Household Economics;

References

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  1. James Tybout, 1998. "Manufacturing Firms In Developing Countries: How Well Do They Do, And Why?," Development and Comp Systems 9805004, EconWPA.
  2. Rosser, J. Jr. & Rosser, Marina V. & Ahmed, Ehsan, 2000. "Income Inequality and the Informal Economy in Transition Economies," Journal of Comparative Economics, Elsevier, vol. 28(1), pages 156-171, March.
  3. Loayza, Norman A., 1997. "The economics of the informal sector : a simple model and some empirical evidence from Latin America," Policy Research Working Paper Series 1727, The World Bank.
  4. Kelley, Bruce, 1994. "The informal sector and the macroeconomy: A computable general equilibrium approach for Peru," World Development, Elsevier, vol. 22(9), pages 1393-1411, September.
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  8. Grigorian, David A. & Martinez, Albert, 2000. "Industrial growth and the quality of institutions : what do (transition) economies have to gain from the Rule of Law?," Policy Research Working Paper Series 2475, The World Bank.
  9. Ira N. Gang & Shubhashis Gangopadhyay, 1990. "A Model of the Informal Sector in Development," Journal of Economic Studies, Emerald Group Publishing, vol. 17(5), pages 19-31, December.
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  11. Gangopadhyay, Shubhashis, 1998. "Persistence of Dualism in a Closed Economy," Review of Development Economics, Wiley Blackwell, vol. 2(1), pages 11-30, February.
  12. Friedrich Schneider & Dominik Enste, 2000. "Shadow Economies Around the World," IMF Working Papers 00/26, International Monetary Fund.
  13. Aaron Tornell & Philip R. Lane, 1998. "Voracity and Growth," NBER Working Papers 6498, National Bureau of Economic Research, Inc.
  14. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
  15. Edgar L. Feige, 2003. "Defining And Estimating Underground And Informal Economies: The New Institional Economics Approach," Development and Comp Systems 0312003, EconWPA.
  16. Easterly, William & Levine, Ross, 1997. "Africa's Growth Tragedy: Policies and Ethnic Divisions," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1203-50, November.
  17. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, vol. 7(3), pages 207-227, November.
  18. Colombatto, Enrico, 1998. "An Institutional View of LDC Failure," Journal of Policy Modeling, Elsevier, vol. 20(5), pages 631-648, October.
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