Economic Reform, Informal-Formal Sector Linkages and Intervention in the Informal Sector in Developing Countries: A Paradox
AbstractWithin a general equilibrium framework of a developing economy with a foreign owned factor of production, this paper questions whether the informal-formal sector relationship is pro-cyclical/ complementary – expansion or contraction in one necessarily implies an expansion or contraction in the other – when the informal sector is subject to a technological shock. We derive a necessary and sufficient condition under which a positive shock to the informal sector results in a contraction in both the size of the urban formal sector and the informal sector. Thus, although our result shows that the informal-formal sector relationship is pro-cyclical, it nevertheless calls into question the conventional wisdom on the benefits of intervention in the informal sector of developing economies, particularly where multinational corporations sub-contract certain labor intensive stages of production to the informal sector.
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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5229.
Length: 19 pages
Date of creation: Oct 2010
Date of revision:
Publication status: published in: International Review of Economics and Finance, 2010, 19, 662-670
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Other versions of this item:
- Arvin-Rad, Hassan & Basu, Arnab K. & Willumsen, Maria, 2010. "Economic reform, informal-formal sector linkages and intervention in the informal sector in developing countries: A paradox," International Review of Economics & Finance, Elsevier, vol. 19(4), pages 662-670, October.
- J8 - Labor and Demographic Economics - - Labor Standards
- R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
- R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population
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