The economics of the informal sector : a simple model and some empirical evidence from Latin America
The economics of the informal sector : a simple model and some empirical evidence from Latin America
An increase in the size of the informal sector hurts growth by reducing the availability for public services for everyone in the economy and increasing the number of activities that uses ome existing public services less efficiently or not at all.
Loayza presents the view that informal economies arise when governments impose excessive taxes and regulations that they are unable to enforce.
Loayza studies the determinants and effects of the informal sector using an endogenous growth model whose production technology depends essentially on congestable public services. In this model, changes (in both policy parameters and the quality of government institutions) that promote an increase in the relative size of the informal economy will also generate a reduction in the rate of economic growth.
Using data from Latin American countries in the early 1990s, Loayza tests some of the model's implications and estimates the size of the informal sector in these countries - identifying the size of the informal sector to latent variable for which multiple causes and indicators exist.
The results suggest that:
This paper - a product of the Macroeconomics and Growth Division, Policy Research Department - is part of a larger effort in the department to examine the determinants of economic growth. Copies of this paper are available free from the WorldBank, 1818 H Street NW, Washington, DC 20433. Please contact Rebecca Martin, room N11059, telephone 2024739026, fax 2025223518,Internet address rmartin1@worldbank.org. (52 pages)
The full report is available on the World Bank FTP server