Informality and SDGs related to human development

of a standard deviation—than for EMDEs with above-median output informality.21 Similarly, the average cost of business start-up procedures amounted to 92 percent of gross national income (GNI) per capita in EMDEs with above-median output informality, significantly higher than in EMDEs with below-median output informality, by about 65 percentage points.

Governance. A large literature has documented the coincidence of poor governance with pervasive informality in many EMDEs, especially in Latin America and the Caribbean (LAC) and Europe and Central Asia (ECA).22 On average, EMDEs with above-median informality have had significantly poorer-quality bureaucracies, by about 1 standard deviation in terms of the rating by the International Country Risk Guide (ICRG), than EMDEs with below-median informality.23 Similar differences pertain to the control of corruption and law and order. There are also country cases suggesting that informality declined faster in the presence of greater improvements in governance and better initial governance (World Bank 2019). For example, in Georgia, during 1996-2016, the transition to a market economy brought significant improvements in government effectiveness, control of corruption, and rule of law. With output growth averaging about 6 percent per year, the share of informal output fell from 66 percent to 57 percent of GDP, and the share of informal employment in total employment fell by a similar magnitude (World Bank 2019).

Greater informality is associated with weaker human development outcomes. People living in EMDEs with more widespread informality suffer from a greater prevalence of hunger, poorer health and education, greater gender inequality, and lower human capital (figure 4.7; Docquier, Müller, and Naval 2017; Maloney 2004).

Hunger. EMDEs with more pervasive informality fared far worse during 1990-2018 in terms of the hunger-related SDGs than those with less pervasive informality. The share of the population suffering from stunting and wasting was significantly higher in EMDEs with above-median informality: more than a quarter of children under five years of age in EMDEs with above-median informality suffered from stunting, with more than 15 percent of the population being undernourished (Sachs et al. 2020). Both shares are significantly higher than in EMDEs with below-median informality, by about

21 Similarly, the Heritage Foundation’s Business Freedom Index was about three-quarters of a standard deviation higher in countries with below-median output informality than in countries with above-median informality. 22 Sarte (2000) suggests that firms operate in the informal sector to avoid rent-seeking bureaucrats. Choi and Thum (2005) and Dreher and Schneider (2010) report an association between higher informality and weaker law and order and control of corruption. Dabla-Norris, Gradstein, and Inchauste (2008) show that the quality of the legal framework is important in determining the size of the informal sector. 23 The measures of institutional quality used here are taken from the International Country Risk Guide (ICRG 2014). A higher value indicates better institutional quality. In the case of bureaucracy quality, high points are given to countries where the bureaucracy has the strength and expertise to govern without drastic changes in policy or interruptions in government services.