1.1 Share of Informal Employment in Total Nonagricultural Employment

FIGURE 1.1 Share of Informal Employment in Total Nonagricultural Employment

Source: wdi (world development indicators) (dashboard), world bank, washington, dC, https://datatopics .worldbank.org/world-development-indicators/. Note: includes only low- and middle-income countries. EAP = East Asia and Pacific. ECA = Eastern Europe and Central Asia. lAC = latin America and the Caribbean. mENA = middle East and North Africa. SAr = South Asia. SSA = Sub-Saharan Africa.

against in a dualistic economy. In the first view, informal firms choose to remain small and avoid formal regulations and taxation. This may be because informality is better suited to their intrinsic characteristics, such as limited business skills, or because of their preference for flexibility. Clearly, the implication is that these intrinsic characteristics must be changed so that the hindrance to development caused by informality is removed or at least alleviated. In the second view, the characteristics or, rather, the privileges of the formal sector are the problem. High entry barriers in the form of regulatory burdens and above-market wages benefit a relatively small group of insiders, leaving a large group of outsiders with less access to resources. The policy advice deriving from this view is also clear: the removal of the entry barriers to promote deregulation and increased competition should be central in reform.3

These opposite views are influential because they provide unambiguous guidance for government interventions. However, they are also highly stylized and do not consider three features commonly observed in South Asian and other developing economies, as follows:

• The significant heterogeneity of informal firms, ranging from economic activities run by a single self-employed person with almost no other inputs, to small businesses that exclusively employ family members and to slightly larger firms with a few employees and some assets.