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Policy opportunities and challenges from the Covid-19 pandemic for economies with large informal sectors

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  • Narula, Rajneesh

    (John H. Dunning Centre for International Business, Henley Business School, University of Reading)

Abstract

In the developing world, the informal economy can account for as much as 80% of the population. I focus on the urban component of informality, where both informal employment and informal enterprises are especially vulnerable to the pandemic-induced economic shock. I explain the complex nature of informality, some of the reasons for its persistence, and its interdependency with the formal economy, especially in the manufacturing sector, through global value chains. Large firms (whether MNEs or domestic firms) sub-contract considerable activity to informal enterprises, but this is precarious in character. I suggest the crisis provides the circumstances for greater active engagement with informal actors, by placing informal enterprises on par with formal firms within industrial policy. I propose integration and registration, as opposed to formalization, and the provision of state support without taxation. The role of the state is also crucial in matchmaking, creating incentives for GVCs to engage with informal actors systematically, and to reduce the transaction costs for informal actors in such engagement. These actions are likely to provide benefits in the longer run, even if they prove costly in the short run.

Suggested Citation

  • Narula, Rajneesh, 2020. "Policy opportunities and challenges from the Covid-19 pandemic for economies with large informal sectors," MERIT Working Papers 2020-024, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  • Handle: RePEc:unm:unumer:2020024
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    References listed on IDEAS

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    1. Rajneesh Narula & André Pineli, 2019. "Improving the developmental impact of multinational enterprises: policy and research challenges," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 46(1), pages 1-24, March.
    2. -, 2020. "Measuring the impact of COVID-19 with a view to reactivation," Libros y Documentos Institucionales, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 45477 edited by Eclac, May.
    3. Alessandro Sforza & Marina Steininger, 2020. "Globalization in the Time of Covid-19," CESifo Working Paper Series 8184, CESifo.
    4. Rajneesh Narula & John Dunning, 2010. "Multinational Enterprises, Development and Globalization: Some Clarifications and a Research Agenda," Oxford Development Studies, Taylor & Francis Journals, vol. 38(3), pages 263-287.
    5. Rajneesh Narula, 2015. "The Viability of Sustained Growth by India’s MNEs: India’s Dual Economy and Constraints from Location Assets," Management International Review, Springer, vol. 55(2), pages 191-205, April.
    6. Rajneesh Narula, 2019. "Enforcing higher labor standards within developing country value chains: Consequences for MNEs and informal actors in a dual economy," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 50(9), pages 1622-1635, December.
    7. Saul Estrin & Tomasz Mickiewicz, 2012. "Shadow Economy and Entrepreneurial Entry," Review of Development Economics, Wiley Blackwell, vol. 16(4), pages 559-578, November.
    8. Erkko Autio & Kun Fu, 2015. "Economic and political institutions and entry into formal and informal entrepreneurship," Asia Pacific Journal of Management, Springer, vol. 32(1), pages 67-94, March.
    9. Douglas Gollin, 2014. "The Lewis Model: A 60-Year Retrospective," Journal of Economic Perspectives, American Economic Association, vol. 28(3), pages 71-88, Summer.
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    As found on the RePEc Biblio, the curated bibliography for Economics:
    1. > Economics of Welfare > Health Economics > Economics of Pandemics > Specific pandemics > Covid-19 > Developing economies

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    Cited by:

    1. Chapa Cantú, Joana Cecilia & Saldaña Villanueva, Carlos Emmanuel & Luna Domínguez, Edgar Mauricio, 2023. "“Stay at home (if you can)”: informal employment and COVID-19 in Mexico," Revista Finanzas y Politica Economica, Universidad Católica de Colombia, vol. 15(1), pages 135-155, January.
    2. Claudia C. Colmenares-Mejía & Norma Serrano-Díaz & Doris C. Quintero-Lesmes & Ligia Meneses & Isail Salazar Acosta & Álvaro J. Idrovo & Duván Y. Sanabria-Echeverry & Helmer Cordero-Rebolledo & Víctor , 2021. "Seroprevalence of SARS-CoV-2 Infection among Occupational Groups from the Bucaramanga Metropolitan Area, Colombia," IJERPH, MDPI, vol. 18(8), pages 1-13, April.
    3. Colin C. Williams, 2023. "A Modern Guide to the Informal Economy," Books, Edward Elgar Publishing, number 18668.
    4. Estrin, Saul & Guerrero, Maribel & Mickiewicz, Tomasz, 2024. "A framework for investigating new firm entry: The (limited) overlap between informal-formal and necessity-opportunity entrepreneurship," Journal of Business Venturing, Elsevier, vol. 39(4).
    5. Nga Hong Nguyen & Trang Thi Thu Nguyen, 2022. "Assuring Social Equity and Improving Income from an Assessment of Government’s Supports in a Pandemic and Migrant Workers’ Integration in Vietnam," Economies, MDPI, vol. 10(4), pages 1-22, April.
    6. Kusnandar & Setyowati, Nuning & Wida Riptanti, Erlyna, 2023. "Creating an innovative culture in agribusiness of micro, small and medium-sized enterprises," Agricultural and Resource Economics: International Scientific E-Journal, Agricultural and Resource Economics: International Scientific E-Journal, vol. 9(2), June.
    7. ARAVAMUDHAN Varadaraj & SAI MOHANRAJ Prasanna & SENGODAN Ananth, 2022. "Implications Of Covid-19 On Textiles Industry In India - Discovering Issues And Challenges On Demand And Supply Sides," Eastern European Journal for Regional Studies (EEJRS), Center for Studies in European Integration (CSEI), Academy of Economic Studies of Moldova (ASEM), vol. 8(2), pages 18-29, December.
    8. Suzana B. Rodrigues & John Child, 2023. "The role of corporations in addressing non-market institutional voids during the COVID-19 pandemic: The case of an emerging economy," Journal of International Business Policy, Palgrave Macmillan, vol. 6(1), pages 115-132, March.
    9. Hinrich Vos, . "Implications of the COVID-19 pandemic for human rights and modern slavery vulnerabilities in global value chains," UNCTAD Transnational Corporations Journal, United Nations Conference on Trade and Development.
    10. Faustine Kede Ndouna & Roger Tsafack Nanfosso & Jean Aristide Biloa Essimi & Laurent-Fabrice Ambassa, 2021. "The Informal Sector Facing COVID-19: The Case of Cameroon," Sustainability, MDPI, vol. 13(23), pages 1-17, November.
    11. Sato, Akiko & Panibratov, Andrei, 2023. "Causal mechanisms of COVID-19 disruptive effects on liability of foreignness and the emergence of new firm-specific advantages," International Business Review, Elsevier, vol. 32(4).
    12. Tuan Nguyen‐Anh & Shawn Leu & Anh Nguyen‐Thi‐Phuong & Thanh Ngo‐Dang & Nguyen To‐The, 2023. "Adapting to the new normal: A sustainable livelihood framework for the informal sectors during COVID‐19," Review of Development Economics, Wiley Blackwell, vol. 27(2), pages 1092-1112, May.
    13. Hung Van Vu & Huong Ho, 2021. "Analysis of Factors Influencing Credit Access of Vietnamese Informal Labors in the Time of COVID-19 Pandemic," Economies, MDPI, vol. 10(1), pages 1-11, December.
    14. Nurgun Kul Parlak & Ayse Nur Ciftci, 2022. "Pandeminin Kayit Disi Istihdami Dislama Etkisi: Turkiye’de Formel-Enformel Emek Piyasalarindaki Ayrisma," Journal of Social Policy Conferences, Istanbul University, Faculty of Economics, vol. 0(82), pages 93-135, June.
    15. Nahrin Rahman Swarna & Iffat Anjum & Nimmi Nusrat Hamid & Golam Ahmed Rabbi & Tariqul Islam & Ezzat Tanzila Evana & Nazia Islam & Md Israt Rayhan & KAM Morshed & Abu Said Md Juel Miah, 2022. "Understanding the impact of COVID-19 on the informal sector workers in Bangladesh," PLOS ONE, Public Library of Science, vol. 17(3), pages 1-20, March.
    16. Paraskevi Koufopoulou & Colin C. Williams & Athanassios Vozikis & Kyriakos Souliotis & Antonios Samprakos, 2021. "Estimating Shadow Economy Size in Greece 2000 - 2018: A Flexible MIMIC Approach," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 71(3-4), pages 23-47, July-Dece.
    17. Aliisa Heiskanen & Yannick Galipeau & Marc-André Langlois & Julian Little & Curtis L. Cooper, 2022. "SARS-CoV-2 Seroprevalence in Those Utilizing Public Transportation or Working in the Transportation Industry: A Rapid Review," IJERPH, MDPI, vol. 19(18), pages 1-20, September.
    18. Jisung Yoon & Woo-Sung Jung & Hyunuk Kim, 2022. "COVID-19 confines recreational gatherings in Seoul to familiar, less crowded, and neighboring urban areas," Palgrave Communications, Palgrave Macmillan, vol. 9(1), pages 1-8, December.
    19. Bathula Srinivasu & Shilpa Bhatia & Ankita Gupta, 2024. "Collision of the COVID 19 Lockdown on Women Entrepreneurship in Uttarakhand: A Micro-level Analysis," Arthaniti: Journal of Economic Theory and Practice, , vol. 23(1), pages 118-133, June.
    20. Agus Joko Pitoyo & Bagas Aditya & Ikhwan Amri & Akbar Abdul Rokhim, 2021. "Impacts and Strategies Behind COVID-19-Induced Economic Crisis: Evidence from Informal Economy," The Indian Journal of Labour Economics, Springer;The Indian Society of Labour Economics (ISLE), vol. 64(3), pages 641-661, September.
    21. Kanupriya, 2021. "COVID-19 and the Indian Textiles Sector: Issues, Challenges and Prospects," Vision, , vol. 25(1), pages 7-11, March.
    22. Marcus M. Larsen & Ben Mkalama & Michael J. Mol, 2023. "Outsourcing in Africa: How do the interactions between providers, multinationals, and the state lead to the evolution of the BPO industry?," Journal of International Business Policy, Palgrave Macmillan, vol. 6(4), pages 432-452, December.

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    More about this item

    Keywords

    informal enterprises; dual economies; urban poor; linkages; employment; policy;
    All these keywords.

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy

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