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Future research. Some policy areas remain underexplored in the literature. First, digitalization is a recent development in EMDEs that holds great potential for informaleconomy participants and policy makers. Yet little is known about the impact of digitalization of government services or private economic activity on the informal economy, including relative to the formal economy. The possibility that digitalization will disproportionately benefit formal firms, and thus shrink the relative size of the informal sector, deserves examination. Second, past studies have focused on the impact of policies on formalization without looking into their effects on the resilience of the informal economy. Future studies could examine policies that can improve the resilience of the informal economy and prevent informal participants from being tipped into poverty by negative shocks such as COVID-19. Last, the chapter has not touched upon some emerging ideas regarding how governments can better engage with informal businesses, such as providing a simplified, intermediate, and temporary legal status to informal businesses that could be aligned with both business needs and government goals (Marusic et al. 2020).
ANNEX 6A Policies and informality The link between policies and informality is analyzed via the local projection model. It focuses on showing the cumulative change in informality following policy changes. Definitions Both output informality and employment are considered in the regression analyses here. Output informality is proxied by estimates based on the dynamic general equilibrium (DGE) model in percent of official GDP, and employment informality is proxied by self-employment in percent of total employment. Both measures cover up to 125 EMDEs over the period 1990-2018. For the estimation of the local projection model, all data series are detrended using the Hodrick-Prescott (HP) filter. Policy indicators The following policy measures were considered, covering up to 121 EMDEs for 19902018 (table 6B.2).26 Tax rates. Corporate, individual, and VAT rates from Végh and Vuletin (2015; updated to 2019) using data from the Organisation for Economic Co-operation and Development, University of Michigan, and KPMG.
26 Although the data for some indicators are available for more than 121 EMDEs, the regressions cover up to 121 EMDEs.
