Conclusion

Second, all the correlates are associated with the level of informality in the expected manner (figure 4.9). EMDEs with better governance, a more developed and less agriculture-oriented economy, and stronger human capital tend to have lower informality. In particular, informal output as a share of official GDP is significantly lower, by about 1-2 percentage points of GDP, if the EMDE has 1-standard-deviation better governance, greater economic development, or larger human capital. In addition, tax burdens, measured as the share of government consumption or tax revenue in GDP, are significantly and negatively correlated with the size of output informality.

Pervasive informality is associated with a wide range of development challenges, from extreme poverty to lack of access to basic sanitation services. This chapter documented and quantified the wider gaps, relative to the SDGs, among EMDEs with greater informality. These shortcomings also make EMDEs with widespread informality particularly vulnerable to adverse global shocks, including the COVID-19 pandemic.

The wide range of correlates of informality suggests that informality is a phenomenon that reflects broad-based underdevelopment rather than a challenge that can be considered in isolation. Consequently, policy measures to address informality need to be equally broad-based. They include measures to enhance human capital and lift productivity, streamline regulations, and improve governance and the provision of public services and social safety nets. Policy options are discussed in detail in chapter 6.

Several areas for further development are worth exploring. First, the chapter does not demonstrate a causal link between informality and the various development outcomes. The exploration of causal relationships between informality and these outcomes, in either direction, is left for future studies. Second, because of data limitations, some variables, such as access to paved roads and bank account ownership, that are relevant to informality are not included in the current BMA analysis. Future studies can improve upon the work reported here by incorporating those variables. Third, future research could explore asymmetries in the challenges posed by informality. There may be interactions between country circumstances and worker or firm characteristics that can mitigate some of the challenges posed by informality. For firms, some of these interactions were explored in box 4.2 but other important interactions may yet come to light in future research.