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Regulation, governance and informality: an empirical analysis of selected countries

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  • Roychowdhury, Punarjit
  • Dutta, Mousumi
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    Abstract

    The Informal Economy provides employment to more than 60 per cent of the labour population in the developing world despite being a site unfettered by regulations and social norms of fairness governing pay and work conditions. In assessing the factors behind an informal agent’s decision to formalize, it is asserted that rigidity in regulatory mechanism is the primary cause that impedes the process of formalization. However whether flexible regulations can encourage formalization by making gains of formalization more accessible and certain remains a question. In this paper we argue that flexible regulations does not necessarily manifest into the incentives that are essential for formalization. Reducing rigidities in regulation has a significant pay off only in the ambit of good governance. More specifically we hypothesise that degree of intensity of regulation will hardly matter in containing informality; rather what matters is the quality of governance and capability of the institutions to put the regulations into effect. Using secondary data for 46 countries over the period between 1980 and 2008, we empirically investigate into the linkages between governance, regulation and informal employment by developing static and dynamic panel data models and establish that in curbing informality what turns out to be crucial is the interaction between quality of governance and regulation.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 33775.

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    Date of creation: 27 Sep 2011
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    Handle: RePEc:pra:mprapa:33775

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    Keywords: Formalization; Governance; Informal Economy; Panel data; Regulation;

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    1. Schneider, Friedrich & Klinglmair, Robert, 2004. "Shadow Economies around the World: What Do We Know?," IZA Discussion Papers 1043, Institute for the Study of Labor (IZA).
    2. Axel Dreher & Friedrich Schneider, 2006. "Corruption and the Shadow Economy: An Empirical Analysis," CREMA Working Paper Series 2006-01, Center for Research in Economics, Management and the Arts (CREMA).
    3. Sugata Marjit & Saibal Kar & Hamid Beladi, 2007. "Trade Reform and Informal Wages," Review of Development Economics, Wiley Blackwell, vol. 11(2), pages 313-320, 05.
    4. R. Hirschowitz, 1989. "The Other Path: The Invisible Revolution in the Third World," South African Journal of Economics, Economic Society of South Africa, vol. 57(4), pages 266-272, December.
    5. Kanbur, Ravi, 2009. "Conceptualizing Informality: Regulation and Enforcement," Working Papers 48926, Cornell University, Department of Applied Economics and Management.
    6. Marjit, Sugata & Kar, Saibal, 2011. "The Outsiders: Economic Reform and Informal Labour in a Developing Economy," OUP Catalogue, Oxford University Press, number 9780198071495.
    7. S. Boragan Aruoba, 2010. "Informal Sector, Government Policy and Institutions," 2010 Meeting Papers 324, Society for Economic Dynamics.
    8. Marjit, Sugata & Maiti, Dibyendu S., 2005. "Globalization, Reform and the Informal Sector," Working Papers RP2005/12, World Institute for Development Economic Research (UNU-WIDER).
    9. Dibyendu Maiti & Sugata Marjit, 2008. "Trade liberalization, production organization and informal sector of the developing countries," Journal of International Trade & Economic Development, Taylor and Francis Journals, vol. 17(3), pages 453-461.
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