What reduces informal economies?

Informal economies all go back to inequality

Large informal economies pose a challenge to economic and democratic development. The informal sector earns less than the formal sector, offers no pension or other protections, and cuts into the tax revenue needed for development and service provision. In the past, the expectation was that the informal sector would formalize over time. However, research of 138 countries finds that having a large informal economy is predicted by past inequality, and that countries with histories of high inequality may be stabilizing with persistently large informal economies instead of continuing to shrink their informal economies. This research suggests that, to address informal economies, it is insufficient to focus on laws and incentives to encourage formalization, but instead requires addressing the consequences of past inequality.

Can e-government technologies reduce the informal economy?

Research into the persistence of informal economies have noted that informal economies are common with low levels of democracy, high levels of corruption, and inefficient governments, among other conditions. One strategy to combat informal economies is through implementing e-government technologies to improve service provision, improve rule of law, limit corruption, and detect tax evasion, among other benefits. But does e-government also reduce the size of informal economies? A study of data from 146 countries suggests that incorporation of e-government technologies may play an important role in reducing the size of informal economies. These results also emerge when focusing specifically on developing countries.

Do you have a study we should share for a future Facty Friday? Send an email to drg.el@usaid.gov!