The Impact of ICTs on the Informal Economy

24 Pages Posted: 31 Mar 2014 Last revised: 15 Aug 2014

See all articles by Martha Garcia-Murillo

Martha Garcia-Murillo

Syracuse University - School of Information Studies

Jorge Velez-Ospina

Universidad Católica de Colombia

Date Written: March 30, 2014

Abstract

Economic prosperity is of central concern of society and we assume that over time technological advancement will progressively improve people’s lives. However the evidence in the economic literature shows that our societies are becoming more unequal. One of the relevant populations are those working in the informal sector and, given a common desire to improve people’s lives and the rapid advancement of information and communication technologies (ICTs) we wonder if ICTs help to reduce the size of the informal sector in a country, which we expect would expect in improved living standards.

We believe that information and communication technologies have the potential to reduce the informal economy because of the impact that they have on access. ICTs are multipurpose technologies that can provide individuals with information that can provide education, find formal employment opportunities, and become aware of government services that may potentially allow them to migrate from the informal to the formal sector.

The size of the informal sector, to a certain extent, reflects the economic and political conditions of a country. It is evidence of a government’s inability to reduce poverty effectively. Those in poverty, finding themselves in desperate economic circumstances, feel obliged to engage in economically unproductive activities that generate a minimum survival income or migrate to regions with greater opportunities such as those of North America and Europe. The prospects for personal and professional growth are minimal. Scholars have indicated that people in the informal sector remain poor because the income that they generate from their efforts is low (Charmes, 2000a). This is in part because entities in the informal sector remain small due to the fact that capital intensive firms are more easily detected by law enforcement authorities (Loayza, 1997).

Participating in the informal sector is an attractive activity because barriers to entry are low. It requires little capital and equipment as well as a low skill level of labor in a small operation often involving one person (Charmes, 2000a, Charmes, 2000b ). At the same time we find that high entry barriers further contribute to the problem of the informal economy. In countries that have complex government processes, high taxes and little enforcement it is common to find a large portion of the population being attracted to this informal sector.

The factors easing entry into the informal sector are also the reason why it is not generally desirable for an economy to rely on this type of labor for its economic growth. Informal enterprises do not pay taxes, have little potential for growth and development, and contribute little to capital or knowledge creation. These are mainly subsistence operations. The problem is exacerbated by population growth, migration from rural areas, poverty and indebtedness (Charmes, 2000a, Charmes, 2000b)

We believe that information and communication technologies can help reduce the informal economy. The literature about informal workers indicates that they tend to be information poor. This could in part be due to lack of education or lack of access to technologies that could provide economically relevant information. For example, they may not be aware of legal and social protections or how to access worker benefits (ILO, 2012).

The paper uses multiple indicators and multiple causes (MIMIC) statistical analysis, which is a common procedure to evaluate the hard to measure informal economy (Buehn & Schneider, 2012) . We use a panel data set of 170 countries covering a period of five years.

The model includes variables that researchers have found to contribute to the growth of informality, such as the state of the economy as reflected by GDP per capita, the impact of excessive taxes (Loayza, 1997), the impact of regulation (Mazumdar, 1976) (Loayza, 1997) (De Soto, 1989) the level of poverty and, of course, ICT metrics.

We find that that ICT do have an impact on the informal sector. Cell phones increase the size of the informal economy by making these individual's operations more efficient while broadband reduces it. This, thus led us to recommend governments to continue efforts to expand their broadband access as a tool to allow individuals to move from the informal to the formal economy.

Keywords: informal economy, ICTs, panel data, regulation, information access

JEL Classification: O17, O33, O50, N40, L96, L50, K23

Suggested Citation

Garcia-Murillo, Martha A. and Velez-Ospina, Jorge, The Impact of ICTs on the Informal Economy (March 30, 2014). 2014 TPRC Conference Paper. Available at SSRN: https://ssrn.com/abstract=2417930

Martha A. Garcia-Murillo (Contact Author)

Syracuse University - School of Information Studies ( email )

220 Hinds Hall
Syracuse, NY 13244
United States
(315) 443-1829 (Phone)
(315) 443-5806 (Fax)

Jorge Velez-Ospina

Universidad Católica de Colombia ( email )

Carrera 13 No. 47-49
Av. Caracas 46-72
Bogotá, 11112
Colombia
57 (1) 245 2695 (Phone)
57 (1) 285 3830 (Fax)

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