Informality and Development
We establish five facts about the informal economy in developing countries. First, it is huge, reaching about half of the total in the poorest countries. Second, it has extremely low productivity compared to the formal economy: informal firms are typically small, inefficient, and run by poorly educated entrepreneurs. Third, although avoidance of taxes and regulations is an important reason for informality, the productivity of informal firms is too low for them to thrive in the formal sector. Lowering registration costs neither brings many informal firms into the formal sector, nor unleashes economic growth. Fourth, the informal economy is largely disconnected from the formal economy. Informal firms rarely transition to formality, and continue their existence, often for years or even decades, without much growth or improvement. Fifth, as countries grow and develop, the informal economy eventually shrinks, and the formal economy comes to dominate economic life. These five facts are most consistent with dual models of informality and economic development.
|Date of creation:||2014|
|Publication status:||Published in Journal of Economic Perspectives|
|Contact details of provider:|| Postal: Littauer Center, Cambridge, MA 02138|
Web page: http://www.economics.harvard.edu/
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- Erik Hurst & Benjamin Wild Pugsley, 2011.
"What do Small Businesses Do?,"
Brookings Papers on Economic Activity,
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- Erik Hurst & Benjamin Wild Pugsley, 2011. "What Do Small Businesses Do?," NBER Working Papers 17041, National Bureau of Economic Research, Inc.
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- de Mel, Suresh & McKenzie, David & Woodruff, Christopher, 2012. "The demand for, and consequences of, formalization among informal firms in Sri Lanka," Policy Research Working Paper Series 5991, The World Bank.
- de Mel, Suresh & McKenzie, David & Woodruff, Christopher, 2012. "The Demand for, and Consequences of, Formalization among Informal Firms in Sri Lanka," IZA Discussion Papers 6442, Institute for the Study of Labor (IZA).
- Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January. Full references (including those not matched with items on IDEAS)
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