[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/cgs/wpaper/103.html
   My bibliography  Save this paper

Inequality, persistence of the informal economy, and club convergence

Author

Listed:
  • Roxana Gutiérrez-Romero

    (School of Business and Management, Queen Mary University of London.)

Abstract
Several new dualistic models have re-examined the causes of the informal economy and have made testable predictions about the long-lasting role of inequality. We test these predictions using historical indicators of inequality, dating back to the 1700s, and data on the informal economy across 138 countries over the 1991–2015 period. We find that past levels of inequality are the most salient factors explaining the size of the informal economy, while improving credit access, reducing tax burden and business costs play a minor role. These results are robust to using alternative inequality measures from various years during the 1700–1992 period, using instrumental variables, and four alternative measurements of the informal economy. Moreover, there is no evidence that the informal economy is converging to the same steady state. Instead, there is convincing evidence of club convergence. Countries with the highest levels of initial inequality are diverging from those that started with lower levels of inequality and those who have made significant redistribution. Results suggest the importance of early conditions in determining the persistence of the dual economy with important policy implications.

Suggested Citation

  • Roxana Gutiérrez-Romero, 2020. "Inequality, persistence of the informal economy, and club convergence," Working Papers 103, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
    • Handle: RePEc:cgs:wpaper:103
    as

    Download full text from publisher

    File URL: http://cgr.sbm.qmul.ac.uk/CGRWP103.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Peter C. B. Phillips & Donggyu Sul, 2007. "Transition Modeling and Econometric Convergence Tests," Econometrica, Econometric Society, vol. 75(6), pages 1771-1855, November.
    2. Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2002. "The Regulation of Entry," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 1-37.
    3. Andrei Shleifer & Florencio Lopez-de-Silanes & Rafael La Porta, 2008. "The Economic Consequences of Legal Origins," Journal of Economic Literature, American Economic Association, vol. 46(2), pages 285-332, June.
    4. Sarte, Pierre-Daniel G., 2000. "Informality and rent-seeking bureaucracies in a model of long-run growth," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 173-197, August.
    5. Savoia, Antonio & Easaw, Joshy & McKay, Andrew, 2010. "Inequality, Democracy, and Institutions: A Critical Review of Recent Research," World Development, Elsevier, vol. 38(2), pages 142-154, February.
    6. Miriam Bruhn, 2011. "License to Sell: The Effect of Business Registration Reform on Entrepreneurial Activity in Mexico," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 382-386, February.
    7. Rafael La Porta & Andrei Shleifer, 2014. "Informality and Development," Journal of Economic Perspectives, American Economic Association, vol. 28(3), pages 109-126, Summer.
    8. Abhijit V. Banerjee & Andrew F. Newman, 1998. "Information, the Dual Economy, and Development," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 65(4), pages 631-653.
    9. Frédéric Docquier & Tobias Müller & Joaquín Naval, 2017. "Informality and Long‐Run Growth," Scandinavian Journal of Economics, Wiley Blackwell, vol. 119(4), pages 1040-1085, October.
    10. Colombo, Emilio & Menna, Lorenzo & Tirelli, Patrizio, 2019. "Informality and the labor market effects of financial crises," World Development, Elsevier, vol. 119(C), pages 1-22.
    11. de Mel, Suresh & McKenzie, David & Woodruff, Christopher, 2008. "Who are the microenterprise owners ? Evidence from Sri Lanka on Tokman v. de Soto," Policy Research Working Paper Series 4635, The World Bank.
    12. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    13. Galor, Oded, 1996. "Convergence? Inferences from Theoretical Models," Economic Journal, Royal Economic Society, vol. 106(437), pages 1056-1069, July.
    14. Alberto Alesina & Dani Rodrik, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(2), pages 465-490.
    15. Leandro Medina & Mr. Friedrich Schneider, 2018. "Shadow Economies Around the World: What Did We Learn Over the Last 20 Years?," IMF Working Papers 2018/017, International Monetary Fund.
    16. Laurence Ball & Davide Furceri & Daniel Leigh & Prakash Loungani, 2019. "Does One Law Fit All? Cross-Country Evidence on Okun’s Law," Open Economies Review, Springer, vol. 30(5), pages 841-874, November.
    17. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-298, April.
    18. repec:eid:wpaper:13/10 is not listed on IDEAS
    19. Dong Frank Wu & Mr. Friedrich Schneider, 2019. "Nonlinearity Between the Shadow Economy and Level of Development," IMF Working Papers 2019/048, International Monetary Fund.
    20. François Bourguignon & Christian Morrisson, 2002. "Inequality Among World Citizens: 1820-1992," American Economic Review, American Economic Association, vol. 92(4), pages 727-744, September.
    21. Tanzi, Vito, 1999. "Uses and Abuses of Estimates of the Underground Economy," Economic Journal, Royal Economic Society, vol. 109(456), pages 338-347, June.
    22. Chong, Alberto & Gradstein, Mark, 2007. "Inequality and informality," Journal of Public Economics, Elsevier, vol. 91(1-2), pages 159-179, February.
    23. Roland Bénabou, 1996. "Inequality and Growth," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 11-92, National Bureau of Economic Research, Inc.
    24. Julia Passabom Araujo & Mauro Rodrigues, 2015. "Taxation, credit constraints and the informal economy," Working Papers, Department of Economics 2015_43, University of São Paulo (FEA-USP).
    25. Oded Galor & Joseph Zeira, 1993. "Income Distribution and Macroeconomics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(1), pages 35-52.
    26. Baptiste Massenot & Stéphane Straub, 2016. "Informal Sector And Economic Development: The Credit Supply Channel," Economic Inquiry, Western Economic Association International, vol. 54(2), pages 1046-1067, April.
    27. Costas Azariadis & Allan Drazen, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(2), pages 501-526.
    28. Timothy J. Besley & Konrad B. Burchardi & Maitreesh Ghatak, 2012. "Incentives and the De Soto Effect," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(1), pages 237-282.
    29. Bell, Andrew & Jones, Kelvyn, 2015. "Explaining Fixed Effects: Random Effects Modeling of Time-Series Cross-Sectional and Panel Data," Political Science Research and Methods, Cambridge University Press, vol. 3(1), pages 133-153, January.
    30. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July.
    31. Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 1998. "Regulatory Discretion and the Unofficial Economy," American Economic Review, American Economic Association, vol. 88(2), pages 387-392, May.
    32. Straub, Stéphane, 2005. "Informal sector: The credit market channel," Journal of Development Economics, Elsevier, vol. 78(2), pages 299-321, December.
    33. J. Barkley Rosser Jr & Marina V. Rosser & Ehsan Ahmed, 2003. "Multiple unofficial economy equilibria and income distribution dynamics in systemic transition," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 25(3), pages 425-447.
    34. Antunes, Antonio R. & Cavalcanti, Tiago V. de V., 2007. "Start up costs, limited enforcement, and the hidden economy," European Economic Review, Elsevier, vol. 51(1), pages 203-224, January.
    35. Adem Y. Elveren & Gökçer Özgür, 2016. "The Effect of Informal Economy on Income Inequality: Evidence from Turkey," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 63(3), pages 293-312, June.
    36. Era Dabla-Norris & Kalpana Kochhar & Nujin Suphaphiphat & Franto Ricka & Evridiki Tsounta, 2015. "Causes and Consequences of Income Inequality; A Global Perspective," IMF Staff Discussion Notes 15/13, International Monetary Fund.
    37. Dessy, Sylvain & Pallage, Stephane, 2003. "Taxes, inequality and the size of the informal sector," Journal of Development Economics, Elsevier, vol. 70(1), pages 225-233, February.
    38. Enzo Valentini, 2009. "Underground Economy, Evasion and Inequality," International Economic Journal, Taylor & Francis Journals, vol. 23(2), pages 281-290.
    39. Kerui Du, 2017. "Econometric convergence test and club clustering using Stata," Stata Journal, StataCorp LP, vol. 17(4), pages 882-900, December.
    40. Ajit Mishra & R Ray, 2010. "Informality, Corruption, and Inequality," Department of Economics Working Papers 13/10, University of Bath, Department of Economics.
    41. Eilat, Yair & Zinnes, Clifford, 2002. "The Shadow Economy in Transition Countries: Friend or Foe? A Policy Perspective," World Development, Elsevier, vol. 30(7), pages 1233-1254, July.
    42. Schneider Friedrich & Buehn Andreas, 2017. "Shadow Economy: Estimation Methods, Problems, Results and Open questions," Open Economics, De Gruyter, vol. 1(1), pages 1-29, March.
    43. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
    44. Nedra Baklouti & Younes Boujelbene, 2020. "A simultaneous equation model of economic growth and shadow economy: Is there a difference between the developed and developing countries?," Economic Change and Restructuring, Springer, vol. 53(1), pages 151-170, February.
    45. Abhijit Banerjee & Dean Karlan & Jonathan Zinman, 2015. "Six Randomized Evaluations of Microcredit: Introduction and Further Steps," American Economic Journal: Applied Economics, American Economic Association, vol. 7(1), pages 1-21, January.
    46. Ms. Era Dabla-Norris & Ms. Kalpana Kochhar & Mrs. Nujin Suphaphiphat & Mr. Franto Ricka & Ms. Evridiki Tsounta, 2015. "Causes and Consequences of Income Inequality: A Global Perspective," IMF Staff Discussion Notes 2015/013, International Monetary Fund.
    47. Guillermo E. Perry & William F. Maloney & Omar S. Arias & Pablo Fajnzylber & Andrew D. Mason & Jaime Saavedra-Chanduvi, 2007. "Informality : Exit and Exclusion," World Bank Publications - Books, The World Bank Group, number 6730.
    48. Christian MORRISSON & Fabrice MURTIN, 2011. "Internal income inequality and global inequality," Working Papers P26, FERDI.
    49. Rosser, J. Jr. & Rosser, Marina V. & Ahmed, Ehsan, 2000. "Income Inequality and the Informal Economy in Transition Economies," Journal of Comparative Economics, Elsevier, vol. 28(1), pages 156-171, March.
    50. Victor E. Tokman, 2007. "Modernizing the informal sector," Working Papers 42, United Nations, Department of Economics and Social Affairs.
    51. Wai Weng Yap & Tamat Sarmidi & Abu Hassan Shaari & Fathin Faizah Said, 2018. "Income inequality and shadow economy: a nonparametric and semiparametric analysis," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 45(1), pages 2-13, January.
    52. Ihrig, Jane & Moe, Karine S., 2004. "Lurking in the shadows: the informal sector and government policy," Journal of Development Economics, Elsevier, vol. 73(2), pages 541-557, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gutiérrez-Romero, Roxana & Ahamed, Mostak, 2021. "COVID-19 response needs to broaden financial inclusion to curb the rise in poverty," World Development, Elsevier, vol. 138(C).
    2. Colin C. Williams, 2023. "A Modern Guide to the Informal Economy," Books, Edward Elgar Publishing, number 18668.
    3. Rojas Cama, Freddy & Emara, Noha & Trabelsi, Mohamed, 2024. "Financial inclusion and the informal sector," Research in International Business and Finance, Elsevier, vol. 70(PB).
    4. Cui, Wenyue & Tang, Jie, 2023. "Innovation convergence clubs and their driving factors within urban agglomeration," Economic Modelling, Elsevier, vol. 121(C).
    5. Nahid Sultana & Mohammad Mafizur Rahman & Rasheda Khanam, 2022. "Informal Sector Employment and Economic Growth: Evidence from Developing Countries in SDG Perspective," Sustainability, MDPI, vol. 14(19), pages 1-19, September.
    6. Gutiérrez-Romero, Roxana, 2021. "How does inequality affect long-run growth? Cross-industry, cross-country evidence," Economic Modelling, Elsevier, vol. 95(C), pages 274-297.
    7. Roxana Gutiérrez-Romero, 2023. "Businesses create more jobs in countries with higher share of immigrants because of skill complementarity," Journal of Global Entrepreneurship Research, Springer;UNESCO Chair in Entrepreneurship, vol. 13(1), pages 1-18, December.
    8. Salinas, Aldo & Ortiz, Cristian & Changoluisa, Javier & Muffatto, Moreno, 2023. "Testing three views about the determinants of informal economy: New evidence at global level and by country groups using the CS-ARDL approach," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 438-455.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Aziz N. Berdiev & James W. Saunoris, 2019. "On the Relationship Between Income Inequality and the Shadow Economy," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 45(2), pages 224-249, April.
    2. Gutiérrez-Romero, Roxana, 2021. "How does inequality affect long-run growth? Cross-industry, cross-country evidence," Economic Modelling, Elsevier, vol. 95(C), pages 274-297.
    3. Salinas, Aldo & Ortiz, Cristian & Changoluisa, Javier & Muffatto, Moreno, 2023. "Testing three views about the determinants of informal economy: New evidence at global level and by country groups using the CS-ARDL approach," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 438-455.
    4. Aidt, Toke & Dutta, Jayasri & Sena, Vania, 2008. "Governance regimes, corruption and growth: Theory and evidence," Journal of Comparative Economics, Elsevier, vol. 36(2), pages 195-220, June.
    5. John Bennett, 2010. "Informal firms in developing countries: entrepreneurial stepping stone or consolation prize?," Small Business Economics, Springer, vol. 34(1), pages 53-63, January.
    6. Pablo Acosta & Gabriel Montes-Rojas, 2014. "Informal Jobs and Trade Liberalisation in Argentina," Journal of Development Studies, Taylor & Francis Journals, vol. 50(8), pages 1104-1118, August.
    7. Sangeeta Pratap & Erwan Quintin, 2006. "The Informal Sector in Developing Countries: Output, Assets and Employment," WIDER Working Paper Series RP2006-130, World Institute for Development Economic Research (UNU-WIDER).
    8. Lewis S. Davis, 2004. "Explaining the Evidence on Inequality and Growth: Informality and Redistribution," DEGIT Conference Papers c009_032, DEGIT, Dynamics, Economic Growth, and International Trade.
    9. Capasso, Salvatore & Ohnsorge, Franziska & Yu, Shu, 2022. "From Financial Development to Informality: A Causal Link," CEPR Discussion Papers 17565, C.E.P.R. Discussion Papers.
    10. Norman V. Loayza, 2016. "Informality in the Process of Development and Growth," The World Economy, Wiley Blackwell, vol. 39(12), pages 1856-1916, December.
    11. Dabla-Norris, Era & Gradstein, Mark & Inchauste, Gabriela, 2008. "What causes firms to hide output? The determinants of informality," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 1-27, February.
    12. Roxana Gutiérrez-Romero & Luciana Méndez-Errico, 2017. "Does Inequality Foster or Hinder the Growth of Entrepreneurship in the Long Run?," Research on Economic Inequality, in: Research on Economic Inequality, volume 25, pages 299-341, Emerald Group Publishing Limited.
    13. Zoë Kuehn, 2014. "Tax Rates, Governance, And The Informal Economy In High-Income Countries," Economic Inquiry, Western Economic Association International, vol. 52(1), pages 405-430, January.
    14. Russo Francesco Flaviano, 2018. "Informality: the Doorstep of the Legal System," Open Economics, De Gruyter, vol. 1(1), pages 49-70, June.
    15. Roberto Dell'Anno, 2022. "Theories and definitions of the informal economy: A survey," Journal of Economic Surveys, Wiley Blackwell, vol. 36(5), pages 1610-1643, December.
    16. Semih Tumen, 2017. "Entrepreneurship in the shadows," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 25(2), pages 239-269, April.
    17. Njoya, Loudi & Ngouhouo, Ibrahim & Asongu, Simplice & Schneider, Friedrich, 2022. "The role of economic prosperity on informality in Africa: evidence of corruption thresholds from PSTR," MPRA Paper 119059, University Library of Munich, Germany.
    18. Chletsos, Michael & Sintos, Andreas, 2021. "Hide and seek: IMF intervention and the shadow economy," Structural Change and Economic Dynamics, Elsevier, vol. 59(C), pages 292-319.
    19. Lopez-Martin, Bernabe, 2019. "Informal Sector Misallocation," Macroeconomic Dynamics, Cambridge University Press, vol. 23(8), pages 3065-3098, December.
    20. Vincenzo Lombardo, 2008. "Dual Economy Models: A Primer for…Growth, Income Distribution and Poverty Analysis," Working Papers 12_2008, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.

    More about this item

    Keywords

    Informal economy; Inequality; Club convergence; Institutions.;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cgs:wpaper:103. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Pedro S. Martins (email available below). General contact details of provider: https://edirc.repec.org/data/cgqmwuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.