A large percentage of workers and firms operate in the informal economy, outside the line of sight of governments in emerging markets and developing economies. This may hold back the recovery in these economies from the deep recessions caused by the COVID-19 pandemic—unless governments adopt a broad set of policies to address the challenges of widespread informality. The World Bank Group recently released a book, which is the first comprehensive analysis of the extent of informality and its implications for a durable economic recovery and long-term development. It finds that pervasive informality is associated with significantly weaker economic outcomes—including lower government resources to combat recessions, lower per capita incomes, greater poverty, less financial development, and weaker investment and productivity.
This book presents an analysis of the evolution of informality over the past three decades, the wide swath of development challenges associated with informality, the behavior of the informal economy over the business cycle, and a range of policy options to address the challenges associated with informality.
With a large presence in the services sector, the informal economy has been hit hard by the pandemic. The study documents how informality may now hold back the recovery, in part by reducing the potency of fiscal and monetary policies. Informal sectors have often expanded or contracted with the formal economy, but in a more muted manner. This has dampened recessions, but it also held back recoveries. Over the longer-term, pervasive informality has been associated with significantly weaker economic outcomes, including lower government resources, shallower financial systems, greater poverty, weaker investment and productivity, and less progress towards the Sustainable Development Goals.
The study expands on previous work in its wide-ranging scope (structural and cyclical features), the breadth of its approaches (macroeconomic, worker-level, and firm-level), and the implications of the pandemic. It is accompanied by a large dataset of twelve commonly used measures of informality for up to 196 countries for 1950-2018.
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