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Exploring the Informal Sector in Nepal: Performance Trend, Dualism, and Rural-Urban Dynamics

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  • Sudhir Shrestha

    (South Asia Alliance for Poverty Eradication
    Kathmandu University School of Management)

Abstract

We find the informal sector of Nepal, which employs nearly 60% of non-agricultural labour force, to have underperformed between the period 1995/96 and 2010/11. We locate a large performance gap between the ‘traditional/non-capitalist’ segment, comprising family-based household enterprises that occupy a majority portion of informal sector, and the ‘modern/capitalist’ segment employing wage labour, which shows heterogeneity existent within the informal sector. We find that, by employing an Ordinary Least Squares (OLS) regression of independently pooled cross sections of enterprises over three rounds of Nepal Living Standard Survey (NLSS 1995/96, NLSS 2003/04, and NLSS 2010/11), the performance gap between the traditional/non-capitalist enterprises and the modern/capitalist enterprises did not lessen over time indicating a persistent dualism within the sector. We further explore the rural-urban dimension of informal sector, through the use of a regression-based decomposition exercise, to find that while the rural-urban differential in informal sector shrunk between the period 1995/96 and 2010/11, it is attributed to the underperformance of urban firms and the stagnancy of rural firms over time. The dismal performance of informal sector, particularly the existence of a large (non-declining) proportion of traditional/non-capitalist segment at a meagre income level, raises question on the possibility of transformation in the sector.

Suggested Citation

  • Sudhir Shrestha, 2023. "Exploring the Informal Sector in Nepal: Performance Trend, Dualism, and Rural-Urban Dynamics," The Indian Journal of Labour Economics, Springer;The Indian Society of Labour Economics (ISLE), vol. 66(3), pages 765-791, September.
    • Handle: RePEc:spr:ijlaec:v:66:y:2023:i:3:d:10.1007_s41027-023-00460-7
    DOI: 10.1007/s41027-023-00460-7
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    References listed on IDEAS

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    1. Ranis, Gustav & Stewart, Frances, 1993. "Rural nonagricultural activities in development : Theory and application," Journal of Development Economics, Elsevier, vol. 40(1), pages 75-101, February.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Informal sector; Dualism; Structural change; Rural-urban divide; Nepal;
    All these keywords.

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market
    • P25 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Urban, Rural, and Regional Economics

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