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Informality – a Blessing or a Curse?

Megha Mukim's picture

IN134S06 World Bank Governments (and donors alike) don’t like dealing with informality. It’s messy, dirty, essentially unmeasurable, and its character varies dramatically. From one industry to the next. From one city to the next. It’s also beset with fiendishly difficult problems – informal firms are often household enterprises (employing mainly family labour, and not hired labour). Thus, they have to make impossible trade-offs between production and consumption.
And yet – the size and the importance of the informal sector in most countries shows no signs of abating. On average the informal share of employment ranges from 24 per cent in transition economies, to 50 per cent in Latin America and over 70 per cent in sub-Saharan Africa. In India, employment within the informal sector is growing, while that in the formal sector remains stagnant. Yet - very little is known about the relationship, whether symbiotic or competitive, between the two sectors.
In a new paper, I notice that in India formal firms tend to cluster with informal firms – especially in industries like apparel, furniture and meal-making. The firms coagglomerate not only so that they can buy from and sell to one another – but importantly, also because formal firms tend to share equipment with and transfer technical knowledge to their informal counterparts. Such technical and production spillovers are found in clusters of domestic-foreign, exporter-non-exporter and high-tech-low-tech firms. It is no surprise then that formal and informal activity could be complementary. Informal can also be an outlet for entrepreneurial activity, especially in places with high levels of corruption, or where formal firms are often mired in complex regulations.

What are the Sources of Corruption?

Augusto Lopez-Claros's picture
Also available in: Français | Español

In a previous blog we discussed the factors that have pushed issues of corruption to the centre of policy debates about sound economic management. A related question deals with the sources of corruption: where does it come from, what are the factors that have nourished it and turned it into such a powerful impediment to sustainable economic development? Economists seem to agree that an important source of corruption stems from the distributional attributes of the state. For better or for worse, the role of the state in the economy has expanded in a major way over the past century. In 1913 the 13 largest economies in the world, accounting for the bulk of global economic output, had an average expenditure ratio in relation to GDP of around 12%. This ratio had risen to 43% by 1990, with many countries’ ratios well in excess of 50%.  This rise was associated with the proliferation of benefits under state control and also in the various ways in which the state imposes costs on society. While a larger state need not necessarily be associated with higher levels of corruption—the Nordic countries illustrate this—it is the case that the larger the number of interactions between officials and private citizens, the larger the number of opportunities in which the latter may wish to illegally pay for benefits to which they are not entitled, or avoid responsibilities or costs for which they bear an obligation.

How to Make Difficult Decisions … a bit Easier to Take

Wolfgang Fengler's picture

There is a fine line between legitimate caution and needless un-decisiveness. At work it’s easy and tempting to get frustrated when you feel that colleagues (or worse your boss) simply can’t make up their mind. You feel your work is being delayed for no good reason and there can come a point when a clear-cut “no go” seems better than more waiting and uncertainty.

In his best-selling book, “7 habits of highly successful people”, Stephen Covey identifies the ability to make decisions on time as a key driver of success. Poor performing and unaccountable leaders enjoy living in ambiguity. They don’t disclose the parameters of their decisions either. By contrast, strong performers are those who recognize that there is no such thing as a perfect decision (otherwise there would be nothing to decide about). Michael Joseph, the former CEO of Kenya’s Telecom giant Safaricom, clearly belongs to the latter group. He is a decider. When asked about the secrets of Safaricom’s spectacular success at a meeting with World Bank staff in Nairobi he explained: “You need to make decisions. Even if you only get 7 out of 10 right, you are fine.”

Jishnu and Shanta Talk Transfers

Shanta Devarajan's picture

Shanta:  Jishnu, your blog post and mine on cash transfers generated a lot of comments.  Some people argued that giving poor people cash will not “work” because they will spend it on consumption rather than on their children’s education, which is something we care about.  What do you have to say to that?

Jishnu:  I don’t think the question “does giving cash to poor people work?” is well-defined.  It can only be answered in the negative if we (the donors who give the cash) impose our preferences and judge what poor people spend on relative to those preferences.  But if we give poor people cash so they will be better off, then—by definition—they are better off, regardless of how they choose to spend the extra money.

Why is Corruption Today Less of a Taboo than a Quarter Century Ago?

Augusto Lopez-Claros's picture
Also available in: Français | Español

For those of us who have had an interest in corruption for much of our careers, there is little doubt that sometime in the late 1980s and early 1990s there was a shift in thinking within the development community about the role of corruption in the development process. The shift was tentative at first; continued reluctance to touch upon a subject that was seen to have a large political dimension coexisted for a while with increasing references to the importance of “good governance” in encouraging successful development. What were the factors that contributed to this shift? One that quickly comes to mind is linked to the falling of the Berlin Wall and the associated collapse of central planning as a supposedly viable alternative to the free market. It was obvious that it was not inappropriate monetary policies that led to the collapse of central planning but rather widespread institutional failings, including a lethal mix of authoritarianism (i.e., lack of accountability) and corruption.

PISA 2012: Central Europe and the Baltics are Catching Up – but Fast Enough?

Christian Bodewig's picture

9th Grade student Shahnoza School. Tajikistan When the Organization for Economic Cooperation and Development (OECD) launched the results from the most recent assessment of mathematics, reading, and science competencies of 15 year-olds (the Program for international Student Assessment, PISA) last December, it held encouraging news for the European Union’s newest members. Estonia, Poland, Slovenia, and the Czech Republic scored above the OECD average and ahead of many richer European Union neighbors. Compared to previous assessments, the 2012 scores of most countries in Central Europe and the Baltics were up (as they were in Turkey, as Wiseman et al highlighted in this blog recently). Improvements were particularly marked in Bulgaria and Romania, traditionally the weakest PISA achievers in the EU, as well as well-performing Poland and Estonia. Only Slovakia and Hungary saw declines (see chart with PISA mathematics scores).

To Maximize the Gains from Trade - Focus on Firms and Cities

Megha Mukim's picture

Trade and growth go hand-in-hand. When the 2008 global financial crisis hit, both collapsed.

Since then both have steadied somewhat. But recovery has been jobless in many countries. The biggest challenge that developing countries will face: sustaining economic growth, while maintaining their focus on reducing poverty and inequality. Trade can be an important weapon in the policy-maker’s arsenal to help tackle these dual objectives.

Broadly, economists agree that declining levels of poverty have been accompanied by sustained periods of rapid growth and openness in all countries. In India, there has been a wealth of econometric work that demonstrates the links through which openness to trade has contributed directly to poverty alleviation – via growth and employment. More recently, Arvind Panagariya and I measured the impact of trade on poverty across different social groups – castes and religions – in India. We found that trade openness lifts all boats, for schedules castes and tribes, and for marginalized communities. Interestingly, the impact was especially strong in urban regions.   Other research finds that states whose workers are on average more exposed to foreign competition tend to have lower rural, urban and overall poverty rates.

The Regional Dynamics of Economic and Population Growth

Wolfgang Fengler's picture

ML085S03 World BankAs many across the world entered the New Year in a celebratory mood, others are still struggling to recover from the effect of the recent economic downturn. Five years ago began the worst economic recession the world has experienced in generations. With life support by Governments and Central Banks, the global economy seems to have stabilized, but the ‘patient’ is still weak. In 2013, the global economy is estimated to have expanded at a modest 2.2 percent rate (despite a contraction in the Euro zone) and for 2014 the World Bank and IMF project a slight uptick to 3.0 percent.

But what do these numbers actually tell us about the well-being of people? Does economic growth capture what really makes a difference in peoples’ lives?

What Can the EU Learn from Poverty Maps?

Mamta Murthi's picture
Also available in: Română

“A picture says a thousand words.”  This old adage came to mind the other day when we presented poverty maps on Central and Eastern Europe to the European Commission.  Technically speaking what we presented are small area poverty maps which give a more reliable estimate of poverty at county or local administrative unit level than would have been possible using national household surveys alone.

So what’s new?  The World Bank has been drawing poverty maps for some years now, as have some governments. What’s new is that the European Union, which redistributes resources from richer countries to poorer ones, is in the process of finalizing its programs for the next financing period, 2014 to 2020. These programs are aimed at reducing disparities in standards of living.   Being poorer on average than the rest of Europe, countries in Central and Eastern Europe will receive significant resources for investments to raise their standard of living.

Future Development Forecasts 2014

Shanta Devarajan's picture

We asked our bloggers and guest bloggers for their predictions for 2014. Here is a summary of seven main themes, which we will re-visit in late 2014 to see how well we did.

1. Global growth will remain robust and tapering by the U.S. Fed will be less consequential to emerging markets than expected (Bhaskaran, Zaman, Raiser).  China will do better than markets predict (Huang), and East Asia will continue to grow with relative stability (Quah). At the same time, the economic policies of some Latin American countries will bring their economies to a breaking point, causing political chaos as well (Gonzalez).  Political turmoil and conflict in the Middle East and North Africa will continue to weigh heavily on these economies, with average growth for the region below 3 percent (Devarajan). 

2. For Europe, 2014 will be a better year. 100 years after the beginning of the First World War, the Balkans will again be the focus of attention but for better reasons. A more pro-European outlook in Germany and a successful launch of negotiations with Serbia will bode well for the EU. Bosnia and Herzegovina, the scene of the assassination of heir apparent Franz Ferdinand which triggered the beginning first world war, will do surprisingly well at the World Cup in Brazil, for which it qualified for the first time ever. The joy, however, will only be short-lived because political infighting will continue to make it one of the least governable states in Europe (Fengler).