Informality and Development

Rafael La Porta and Andrei Shleifer

No 20205, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: O17 (search for similar items in EconPapers)
Date: 2014-06
New Economics Papers: this item is included in nep-dev and nep-iue
Note: DEV EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (553)

Published as Rafael La Porta & Andrei Shleifer, 2014. "Informality and Development," Journal of Economic Perspectives, American Economic Association, vol. 28(3), pages 109-26, Summer.

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Journal Article: Informality and Development (2014)
Working Paper: Informality and Development (2014)
Working Paper: Informality and Development
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