Chapter

The Informal Sector in Developing Countries: Output, Assets, and Employment

Sangeeta Pratap and Erwan Quintin

in Personal Wealth from a Global Perspective

Published in print October 2008 | ISBN: 9780199548880
Published online January 2009 | e-ISBN: 9780191720765 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780199548880.003.0018

Series: WIDER Studies in Development Economics

The Informal Sector in Developing Countries: Output, Assets, and Employment

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This study documents four key facts about informal economic activities: (1) the size of the informal sector varies greatly across nations; (2) this size is strongly correlated with economic development, the tax burden, and the rule of law; (3) the informal sector emphasizes small‐scale, self‐financed, and unskilled labour- intensive economic activities; and (4), while financial markets are generally segmented along formal/informal lines in developing nations, there is no compelling evidence that this is true for labour markets. The chapter reviews the existing theoretical literature on the informal sector and describe a simple model with a trade‐off between tax evasion and access to formal sources of outside finance that is consistent with much of the existing evidence. Finally, the study discusses the challenges associated with measuring informal sector assets.

Keywords: informal economic activities; tax burden; rule of law; segmented labour markets; informal sector

Chapter.  9135 words.  Illustrated.

Subjects: Economic Development and Growth

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