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The Long Shadow of Informality: Challenges and Policies

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A large percentage of workers and firms operate in the informal economy, outside the line of sight of governments in emerging market and developing economies. This may hold back the recovery in these economies from the deep recessions caused by the COVID-19 pandemic—unless governments adopt a broad set of policies to address the challenges of widespread informality. This study is the first comprehensive analysis of the extent of informality and its implications for a durable economic recovery and for long-term development. It finds that pervasive informality is associated with significantly weaker economic outcomes—including lower government resources to combat recessions, lower per capita incomes, greater poverty, less financial development, and weaker investment and productivity.  

PRAISE FOR THE BOOK

“By definition, the informal economy is hard to study, especially in developing countries. This excellent book uses state-of-the-art methodologies and recently available data to measure and analyze informality in advanced economies and emerging market and developing economies. In particular, it explores the business cycles in the informal sector in 160 countries over the last 30 years; the study is the first one to show that cycles in the formal economy cause those in the informal economy. Contrary to the widespread stereotype that the informal sector is a buffer that helps to mitigate recessions in the formal sector, the informal sector's output moves in sync with the formal one, and informal employment does not increase during recessions. The book also produces the first analysis of the role of informality during the COVID pandemic. Informal economic activity is concentrated in labor-intensive service sectors and thus is especially vulnerable to social distancing and lockdowns. A rigorous, relevant and highly timely must-read for development scholars and policy makers.”

 -- Sergei Guriev, Professor of Economics, Sciences Po, and Former Chief Economist, European Bank for Reconstruction and Development

“Significant data gaps have previously limited our ability to thoroughly study the informal economy until now. The authors construct a novel and comprehensive dataset on informality, which allows them to unpack the complexity of the informal sector and its interaction with the formal sector. This timely book provides an invaluable knowledge resource for researchers and practitioners alike through an approach that balances rigorous quantitative and qualitative methods. The resulting policy recommendations offer compelling pathways for policy makers looking to address some of the main obstacles to formalization of the economies and accelerate economic development in the post-pandemic world.”

-- Brahima Sangafowa Coulibaly, Vice President, Global Economy and Development, The Brookings Institution

“This highly informative and timely book compiles various measures of the informal economy in a comprehensive global dataset. Its analysis of informality’s most important correlates provides important insights and policy implications, written in highly accessible prose. Franziska Ohnsorge and Shu Yu have edited an authoritative source of reference for everyone interested in the informal economy. The questions raised in this book, and the answers given, make it essential reading for academics and policy makers alike.”

-- Axel Dreher, Professor of International and Development Politics, Heidelberg University, Germany

“Informal economic activity has long been recognized as an important phenomenon in developing economies, one that poses a broad range of potentially serious policy challenges for both social and material wellbeing in those countries. Yet, for all the attention that various aspects of the informality phenomenon have received, there is no single comprehensive treatment of the topic that simultaneously considers the challenges of measuring informality, the identification of its causes in diverse settings, its specific social and economic consequences, and the range of context-specific policy measures that can potentially be adopted to address those consequences. Drawing on a comprehensive dataset covering a wide range of countries and time periods, this book fills that gap. I expect it to serve as a springboard for a more systematic and widespread integration of the problem of informality into development economics.”

-- Peter Montiel, Fairleigh S. Dickinson, Jr. '41 Professor of Economics, Williams College

“The COVID-19 crisis has exacerbated development challenges for many EMDEs, including as a result of disproportionate impacts on informal economic activity and therefore women, youth and lower-skilled workers. The Long Shadow of Informality provides important insights as to the extent, impact, and policy challenges posed by informality. By deepening our understanding of a key constraint to development this book can help guide appropriately tailored and comprehensive policy responses required to avoid a great divergence in economic prospects both within and between countries.”

-- Ceyla Pazarbasioglu, Director of the Strategy, Policy and Review Department, International Monetary Fund

“By its very nature, informality is hard to measure and even harder to address with policies. This book provides the most comprehensive treatment to date, combining different estimation methods, covering every developing region in the world, and spanning growth, business cycles, and sectoral issues. Being wide-ranging, the book will elicit debate on various topics.  Thanks to this book, those debates can be based on solid empirical foundations.”

-- Shanta Devarajan, Professor of the Practice of International Development, Georgetown University

 

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