Download the January 2019 Global Economic Prospects report.
The informal sector — labor and business that is hidden from monetary, regulatory, and institutional authorities — accounts for about a third of GDP and 70 percent of employment (of which self-employment is more than a half) in emerging market and developing economies. While offering the advantage of employment flexibility in some economies, a large informal sector is associated with low productivity, reduced tax revenues, poor governance, excessive regulations, and poverty and income inequality.
Addressing the challenge of pervasive informality will require comprehensive policies that take into account country-specific conditions. Initiatives to boost long-term development might include measures aimed at reducing regulatory and tax burdens, expanding access to finance, improving education and other public services, and strengthening public revenue frameworks.
One-half of the world’s informal output and 95 percent of its informal employment is in emerging market and developing economies. Both informal output and employment have declined since 1990, particularly in countries with higher output growth, rapid physical capital accumulation, and larger improvements in governance and business climates.
Share of informal output and employment
Download the January 2019 Global Economic Prospects report.
- To broaden and increase the tax base
- To enable firms to access the formal economy and help spur firm growth through the potential benefits of being formal (such as access to financial services and government contracts)
- To increase the sense of rule of law by having the default be that everyone is obeying the law
- To have firms provide information about themselves to the state, which can help the government better understand the structure of the economy and to better target business programs.
The most common way of trying to achieve these aims has been through regulatory reforms that make it easier for firms to formalize. This has taken the form of “one-stop-shops” which have been implemented in at least 115 countries and which enable firms to register both as a business and as a tax entity all at once. However, a number of randomized experiments that have followed such reforms have seen very few informal firms formalize. This raises the question of whether regulatory simplification alone is not enough, and whether trying to achieve all of the above four goals with one instrument causes none of them to be attained.
Separating business and tax registration, and an experiment in Malawi
In a new working paper (replication data) (joint with Francisco Campos), we conducted an experiment with informal firms in Malawi that aimed to test whether governments can bring firms into at least part of the formal system and thereby achieve at least some of the above goals, and whether firms need additional help to realize the benefits of becoming formal.
Photo: Global Environment Facility/Flickr
Waste pickers are the principal actors in reclaiming waste for the recycling industry. Across the world, large numbers of people from low-income and disadvantaged communities make a living collecting and sorting waste, and then selling reclaimed waste through intermediaries to the recycling industry. Where others see trash or garbage, the waste pickers see paper, cardboard, glass, and metal. They are skilled at sorting and bundling different types of waste by color, weight, and end use to sell to the recycling industry. Yet waste pickers are rarely recognized for the important role they play in creating value from the waste generated by others and in contributing to the reduction of carbon emissions.
Fortunately, around the world, waste pickers have been organizing and cities have begun to promote the virtuous circle that comes with integrating waste pickers, the world’s recyclers, into solid waste management.
Brazil was the first country to integrate waste pickers, through their cooperatives, into municipal solid waste management systems and the first to adopt a National Waste Policy, recognizing the contributions of waste pickers and providing a legal framework to enable cooperatives of waste pickers to contract as service providers. The national movement of waste pickers in Brazil was awarded a contract to clean the stadiums during the World Cup.
Given the pros and cons of minimum wages in advanced economies, let alone in emerging markets, what types of information should policy makers be armed with? In this blog, we speak with two experts on the topic – John T. Addison (Professor of Economic Theory, University of South Carolina) and David Neumark (Professor of Economics, University of California, Irvine) – both of whom stress the importance of weighing the trade-offs for their own countries.
In recent years, the minimum wage has become an increasingly popular for reducing inequality in many emerging markets, while others are still weighing whether to adopt one. But a lot of confusion still surrounds the impact of minimum wages in advanced economies, let alone in the emerging markets. In this blog, we speak with two experts on the topic: David Neumark (Professor of Economics, University of California, Irvine) and John T. Addison (Professor of Economic Theory, University of South Carolina). They both point to some job loss, especially for skilled workers, in advanced economies.
In India, the bulk of labor participation is in the informal sector, trapped in a vicious cycle of low skills, low wages, and low productivity. The vast majority of these individuals do not have the basic functional literacy needed for upping their job skills, and leveraging these gains to escape their cycle of poverty.The encouraging news is that there are numerous efforts under way to dramatically turn this situation around — including a successful program of using subtitles for Bollywood movies (see "Better Late than Never" in Education and Skills 2.0: New Targets and Innovative Approaches, 2014).
Mariano Bosch, Carmen Pages, and Angel Melguizo at the Inter-American Development Bank (IDB) are proposing a new approach to expanding the coverage of pension systems in Latin America while helping create more and better jobs. Their ideas are spelled out in a new book "Better Pensions, Better Jobs: Towards Universal Coverage in Latin America and the Caribbean." The book is about Latin America but the problems discussed and proposed solutions are relevant for any middle-income country. I think the IDB's proposal is a great contribution to the debate on pension reform. Below I discuss some of the points they make that I agree with and those where I think other options could be considered.