Informal Economy and the World Bank

36 Pages Posted: 20 Apr 2016  

Nancy Benjamin

World Bank; U.S. Department of Agriculture (USDA)

Kathleen Beegle

World Bank - Development Research Group (DECRG)

Francesca Recanatini

World Bank - Global Governance Group; World Bank Institute

Massimiliano Santini

World Bank Group

Date Written: May 1, 2014

Abstract

Many countries have expressed an interest in the size, performance and motivation of the informal sector, especially where the informal sector provides the livelihood and employment for a critical segment of the population. This essay reviews recent literature, methodologies, and relevant Bank studies as a way to share information with country teams interested in expanding their knowledge of the informal sector and related policy debates. Research in a number of regions points to four main areas where development policy can be improved by taking the informal sector into account. First, improvements should be made along a continuum; the heterogeneity among informal firms points to different policy approaches for different types of firms. Second, there should be public-private collaboration on mutual reforms. Many efforts to improve firm performance focus on elements of the production function (labor skills, credit) while treating government mainly as a cost (taxes, cost of compliance with regulations). Yet research reveals that many characteristics of the public regime strongly influence the decisions of firms regarding informality. Third, research indicates a strong relation between basic skills and labor outcomes, particularly in the informal sector, despite the sector's lower average returns. Research also indicates the benefits of targeted training programs. Business services programs have a decidedly mixed record, yet ongoing research is refining results on what works best. Fourth, informal trade is pervasive in developing countries and the networks developed in informal trade -- wholesalers, credit suppliers and money-changers, transporters -- are a strong presence in the informal sector. Yet these kinds of complex and nontransparent trading systems can be discouraging to foreign investors and can otherwise undermine trade policy and the international competitiveness of developing countries. The paper concludes with recommendations.

Keywords: Labor Markets, Economic Theory & Research, E-Business, Microfinance, Banks & Banking Reform

Suggested Citation

Benjamin, Nancy and Beegle, Kathleen and Recanatini, Francesca and Santini, Massimiliano, Informal Economy and the World Bank (May 1, 2014). World Bank Policy Research Working Paper No. 6888. Available at SSRN: https://ssrn.com/abstract=2440936

Nancy Benjamin (Contact Author)

U.S. Department of Agriculture (USDA)

1800 M. Street NW
Room N5142
Washington, DC 20036-5831
United States

World Bank

1818 H Street, N.W.
Washington, DC 20433
United States

Kathleen Beegle

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/kbeegle

Francesca Recanatini

World Bank - Global Governance Group ( email )

1818 H Street, N.W.
Washington, DC 20433
United States
202-473-1557 (Phone)

World Bank Institute ( email )

1818 H Street
Washington, DC 20433
United States
202-473-1557 (Phone)

Massimiliano Santini

World Bank Group ( email )

1818 H Street NW
Washington, DC 20433
United States

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