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The causes and consequences of informality in Peru

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  • Norman Loayza

    () (The World Bank)

Abstract

Adopting a legal definition of informality, this article studies the causes of informality in general and with a particular application to Peru. It starts with a discussion on the definition and measures of informality, as well as on the reasons why widespread informality should be of great concern. Then, the article analyzes informality’s main determinants, arguing that informality is not single-caused but results from the combination of poor public services, a burdensome regulatory regime, and weak monitoring and enforcement capacity by the state. This combination is especially explosive when the country suffers from low educational achievement and features demographic pressures and primary production structures. Finally, using cross-country regression analysis, the article evaluates the empirical relevance of each determinant of informality. It then applies the estimated relationships to the case of Peru in order to assess the country-specific relevance of each proposed mechanism.

Suggested Citation

  • Norman Loayza, 2007. "The causes and consequences of informality in Peru," Working Papers 2007-018, Banco Central de Reserva del Perú.
  • Handle: RePEc:rbp:wpaper:2007-018
    as

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    File URL: http://www.bcrp.gob.pe/docs/Publicaciones/Documentos-de-Trabajo/2007/Working-Paper-18-2007.pdf
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    References listed on IDEAS

    as
    1. Barro, Robert J & Lee, Jong-Wha, 2001. "International Data on Educational Attainment: Updates and Implications," Oxford Economic Papers, Oxford University Press, vol. 53(3), pages 541-563, July.
    2. Loayza, Norman V. & Rigolini, Jamele, 2006. "Informality trends and cycles," Policy Research Working Paper Series 4078, The World Bank.
    3. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July.
    4. Loayza, Norman V., 1996. "The economics of the informal sector: a simple model and some empirical evidence from Latin America," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 129-162, December.
    5. Guillermo E. Perry & William F. Maloney & Omar S. Arias & Pablo Fajnzylber & Andrew D. Mason & Jaime Saavedra-Chanduvi, 2007. "Informality : Exit and Exclusion," World Bank Publications, The World Bank, number 6730.
    6. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
    7. Klarita Gërxhani, 2004. "The Informal Sector in Developed and Less Developed Countries: A Literature Survey," Public Choice, Springer, vol. 120(3_4), pages 267-300, September.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Regulation; government performance; economic growth; informal economy;

    JEL classification:

    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • K30 - Law and Economics - - Other Substantive Areas of Law - - - General
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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