Economic Reform, Informal-Formal Sector Linkages and Intervention in the Informal Sector in Developing Countries: A Paradox

Hassan Arvin-Rad (), Arnab Basu and Maria Willumsen ()
Additional contact information
Hassan Arvin-Rad: University of Illinois at Urbana-Champaign
Maria Willumsen: Florida International University

No 5229, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Within a general equilibrium framework of a developing economy with a foreign owned factor of production, this paper questions whether the informal-formal sector relationship is pro-cyclical/ complementary – expansion or contraction in one necessarily implies an expansion or contraction in the other – when the informal sector is subject to a technological shock. We derive a necessary and sufficient condition under which a positive shock to the informal sector results in a contraction in both the size of the urban formal sector and the informal sector. Thus, although our result shows that the informal-formal sector relationship is pro-cyclical, it nevertheless calls into question the conventional wisdom on the benefits of intervention in the informal sector of developing economies, particularly where multinational corporations sub-contract certain labor intensive stages of production to the informal sector.

Keywords: Within a general equilibrium framework of a developing economy with a foreign owned factor of production; although our result shows that the informal-formal sector relationship is pro-cyclical; it nevertheless calls into question the conventional wisdom on the benefits of intervention in the informal sector of developing economies; this paper questions whether the informal-formal sector relationship is pro-cyclical/ complementary – expansion or contraction in one necessarily implies an expansion or contraction in the other – when the informal sector is subject to a technological sho; particularly where multinational corporations sub-contract certain labor intensive stages of production to the informal sector. (search for similar items in EconPapers)
JEL-codes: J8 R13 R23 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2010-10
New Economics Papers: this item is included in nep-dev
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Published - published in: International Review of Economics and Finance, 2010, 19, 662-670

Downloads: (external link)
https://docs.iza.org/dp5229.pdf (application/pdf)

Related works:
Journal Article: Economic reform, informal-formal sector linkages and intervention in the informal sector in developing countries: A paradox (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp5229

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().