Informal Economy and the World Bank

Abstract

Many countries have expressed an
 interest in the size, performance and motivation of the
 informal sector, especially where the informal sector
 provides the livelihood and employment for a critical
 segment of the population. This essay reviews recent
 literature, methodologies, and relevant Bank studies as a
 way to share information with country teams interested in
 expanding their knowledge of the informal sector and related
 policy debates. Research in a number of regions points to
 four main areas where development policy can be improved by
 taking the informal sector into account. First, improvements
 should be made along a continuum; the heterogeneity among
 informal firms points to different policy approaches for
 different types of firms. Second, there should be
 public-private collaboration on mutual reforms. Many efforts
 to improve firm performance focus on elements of the
 production function (labor skills, credit) while treating
 government mainly as a cost (taxes, cost of compliance with
 regulations). Yet research reveals that many characteristics
 of the public regime strongly influence the decisions of
 firms regarding informality. Third, research indicates a
 strong relation between basic skills and labor outcomes,
 particularly in the informal sector, despite the
 sector's lower average returns. Research also indicates
 the benefits of targeted training programs. Business
 services programs have a decidedly mixed record, yet ongoing
 research is refining results on what works best. Fourth,
 informal trade is pervasive in developing countries and the
 networks developed in informal trade -- wholesalers, credit
 suppliers and money-changers, transporters -- are a strong
 presence in the informal sector. Yet these kinds of complex
 and nontransparent trading systems can be discouraging to
 foreign investors and can otherwise undermine trade policy
 and the international competitiveness of developing
 countries. The paper concludes with recommendations.