The impact of the informal sector on growth in developing economies: insights from a Kaleckian framework

Henrique Bottura Paiva

Chapter 7 in Income Distribution, Economic Growth and Unemployment, 2025, pp 138-155 from Edward Elgar Publishing

Abstract: The contemporary urban informal economy, which is conceptually distinct from the Lewisian duality, remains underrepresented in growth models applied to the context of developing countries. Given its substantial share of total output and employment, the informal sector might exert significant influence on the macroeconomic trajectories of these economies, particularly in the adjustment process towards long-run equilibrium. In alignment with this perspective, the current chapter introduces a Kaleckian framework that integrates the informal sector as a significant determinant of both aggregate demand and the investment decisions of capitalists. Subsequently, a series of numerical simulations are presented, elucidating the influence of informality on both the long-term equilibrium values and the trajectory of adjustment towards equilibrium. It is demonstrated that the behavior of the informal economy can exert a significant effect on the adjustment process, thereby shaping the path towards equilibrium in a non-negligible manner.

Keywords: Kaleckian Model; Informal Economy; Macrodynamics (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035342556
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