Determinants and Effects of the Informal Economy: Bangladesh Perspective

Abstract

In many emerging economies, informal sector (underground economy) accounts for a third to half of the total economy. Bangladesh has no exception. Large portion of this informal sector is actually legal but remain informal. In this paper, by reviewing past literature and reports, I have accumulated some facts about informal economy of Bangladesh. In the past decade, it has been estimated in various studies that Bangladesh’s informal economy constitute 35%-78% of the total economy. The key reasons behind the large informal sector are bureaucracy and corruption, quality of the legal framework and larger size of tax and social contribution burden. Increase of a shadow economy in developing country is inevitable in many cases due to systematic transformation of the overall economy (Kornai, 1994). Although this sector might help the economic growth in the short run, but in the end, it obstructs the trajectory of development due to less productivity. Moreover, large informal economy is actually exhibits policy failures and significant discrimination. This sector should curbed down by improving information transmission, reducing excessive tax, macroeconomic stabilization, improving regulatory framework etc. for better economic development.

Keywords: Informal Economy, Structural Informality, Red-tapism, Tax Evasion, Corruption.