Five facts about informal economies

A new paper by Rafael La Porta and Andrei Shleifer:

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.

71 Responses

  1. Would you enter drugs related economies to the informele economies too ?

  2. In general, the main constraint to the growth of the informal sector and even linkage to the formal one is the lack of a specific credit system and of a technological and organizational backup

  3. Guy here has 330 broilers going at $7 a cluck. Has only sold 55 in the first week. Has 500 more ready in two weeks. Told him he better drop his price. Can’t because the costs are $4.69 a bird. Going broke soon. Informal market is full of go broke and start again.

    Btw, to avoid opening up another comment, Volrath on www,growthecon.wordpress.com, which was mentioned recently on this site, under links I liked, has a tremendous post on economic growth and donuts. If only I could understand the maths.