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Hidden Potential: Rethinking Informality in South Asia

May 3, 2023

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Join us at the "Hidden Potential: Rethinking Informality in South Asia" event as we discuss the role of regulations, taxes, and digital platforms in the informal sector. This event is hosted by World Bank's Poverty and Equity Practice Group, the South Asia Region Chief Economist's Office (SARCE), and the Finance, Competitiveness, & Innovation Global Practice.

Informality remains widespread in South Asia. Being associated with low earnings and high vulnerability, informality is a major development issue. Yet, there is no consensus on its causes and consequences, with the debate polarized between a view that informality is a problem of regulatory evasion and should be eradicated, and another which equates informality with economic exclusion, blaming a small group of privileged insiders as the main cause for the backwardness of the informal outsiders.  These views are at odds with the heterogeneity observed among informal firms. Recent advances in analyzing informality as the outcome of firm dynamics in distorted economic environments can help reconcile them.

Building on these advances, the approach adopted in “Hidden Potential: Rethinking Informality in South Asia” clarifies that there are different types of informality, with different drivers and consequences. Using this approach, the papers in this volume revisit old questions about the relationship of informality to regulation and taxation, and also pose new ones, such as how digital technologies and multi-faceted policy designs can improve prospects in the informal sector. Rather than trying to identify a single major driver of informality and its associated silver bullet policy remedy, this volume presents new evidence on the heterogeneity of informality in South Asia and offers a guide to policy making by discussing how the effectiveness of interventions (taxation, education, investment) is affected by this heterogeneity.