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Quantifying informality in Latin America

Mohammad Amin's picture

In a series of earlier posts, I discussed a number of findings about informal (unregistered) firms in 6 African countries, including Burkina Faso, Cote d’Ivoire, Cape Verde, Cameroon, Madagascar and Mauritius. These findings were based on Informality Surveys collected by the Enterprise Analysis Unit to better understand the functioning of the informal sector—a large sector for which we have virtually no systematic data. Recent estimates suggest that for the world as a whole, between 22.5 and 34.5 percent of all economic activity occurs in the informal economy; for countries in the lowest quartile of GDP per capita, the estimates range between 29 and 57 percent (La Porta and Shleifer, 2008).

The Informality Surveys have now been expanded beyond Africa, covering the Latin American countries of Argentina and Peru. For data junkies like me, this is exciting for at least three reasons. First, comparing Africa and Latin America and the Caribbean (LAC) provides insights into how the structure, conduct and performance of informal businesses vary with the level of economic development. Of course, region-specific factors other than the level of economic development that may affect informal firms will need to be carefully weeded out.

Second, learning from our experience in Africa, the Informality Surveys in Latin America have been better designed to allow for a comparison of informal businesses across more and less developed regions within Argentina and Peru. For this reason, the sample size of the surveys has been greatly increased from the Africa surveys. Comparison between firms within a country is attractive because this approach removes confounding country-level factors like national economic policies and culture.

Third, to the surprise of many, the survey of formal (registered) firms in LAC conducted by the Enterprise Analysis Unit in 2006 revealed that a large proportion of firms reported competition from informal firms as a serious problem for their business—a strong indicator that informality is a serious (though neglected) issue in the LAC region. This naturally whets my appetite to see exactly what the large chunk of informal firms in LAC look like and how different they are from their formal counterparts.

As of now, the Informality Surveys for two Latin American countries are going through their final quality control checks and should be made public soon. Once the data junkies have had a chance to sort through the data, I’ll be reporting back here on the PSD blog with these new findings.

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Hi, I recently finished my academic master in Center for Regional Development and Planning (Cedeplar)- UFMG - Brazil and my dissertation was about credit constraint to informal sector of brazilian economy. I think that my work can contribute with your researchs. However, I don't know how can I promote it. Below, the abstract: "This paper investigates the existence of credit rationing to informal enterprises in the Brazilian economy. A model of occupational choice developed in Evans and Jovanovic (1989) is adapted for the firm's investment decision, conditional on its budget constraint. One result of this model is that wealth enhances investment particularly in more credit constrained firms. This result motivates our empirical strategy that uses the relationship between wealth and investment to identify whether urban informal enterprises are credit constrained. To mitigate the problem of endogeneity between wealth and investment, we considered only the young enterprises, i.e. those with less than five years of existence, given that these firms have not yet accumulated enough wealth to generate a reverse causality. Using data from the “Economia Informal Urbana” survey (ECINF) conducted by IBGE, for the year 2003, we find evidence that wealth has a significant impact on various investment decisions, marginal effects ranges from 0.002 to 0.03. Furthermore, our estimates suggest that self-employed workers face stronger credit restrictions than employers. Overall, our results corroborate the previous findings of empirical literature."

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