Informality and Development

Rafael LaPorta and Andrei Shleifer
Authors registered in the RePEc Author Service: Rafael La Porta

Scholarly Articles from Harvard University Department of Economics

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.

Date: 2014
New Economics Papers: this item is included in nep-dev, nep-gro and nep-iue
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Citations: View citations in EconPapers (573)

Published in Journal of Economic Perspectives

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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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