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Informal Sector Dynamics In Times Of Fragile Growth: The Case Of Madagascar

Author

Listed:
  • Michael Grimm

    (Institute of Social Studies, The Hague, DIW and DIAL)

  • Jann Lay

    (German Institute of Global and Area Studies,Hamburg)

  • François Roubaud

    (DIAL, IRD, Paris)

  • Julia Vaillant

    (Université Paris Dauphine, LEDa UMR 225 DIAL, IRD)

Abstract
(english) This paper investigates the dynamics of the informal sector in Madagascar during a period of fragile growth. Overall, the behavior of informal firms in terms of earnings, employment and capital accumulation points to a degree of heterogeneity which goes beyond a simple dualistic model and even a more refined model that would distinguish between an upper entrepreneurial and a lower subsistence tier within the informal sector. However, in line with the dualistic model, the informal sector indeed fulfils a labor absorbing function in times of crisis. During the growth period we see capital accumulation in most of the sectors and lots of evidence that households expand their activities. However, this happens mainly through the creation of new firms instead of the expansion of existing ones, which is consistent with much higher returns at very low levels of capital. More rapid expansion can be observed in sectors that operate with lower capital intensity, which is also consistent with risk or credit constraints as major deterrents to expansion. While there is some indication that total factor productivity increased over time, returns to capital and labor where not higher at the end of the observation period than at the beginning. Returns are also rather low at high levels of capital. These findings point to a limited growth potential of the informal sector as a whole. The heterogeneity in capital returns hints at large inefficiencies in allocating capital across informal firms. _________________________________ (français) Cet article examine la dynamique du secteur informel à Madagascar pendant une période de croissance fragile. Le comportement des firmes informelles en termes de revenus, d’emploi et d’accumulation du capital suggère un degré d’hétérogénéité allant au-delà du modèle dualiste classique, et même d’un modèle plus fin distinguant, au sein du secteur informel, un segment entrepreneurial et un segment de subsistance. Cependant, conformément au modèle dualiste, le secteur informel a absorbé le surplus de travail en temps de crise. Pendant la période de croissance, on constate une accumulation de capital dans la plupart des secteurs d’activité et une expansion des activités des ménages. Ceci se traduit pourtant principalement par la création de nouvelles firmes plutôt que par la croissance de firmes existantes, en lien avec des rendements beaucoup plus élevés à des faibles niveaux de capital. Une expansion plus rapide peut être observée dans les secteurs à faible intensité capitalistique, ce qui tend également à confirmer que le risque et les contraintes de crédit sont des obstacles à l’expansion. Alors que les résultats montrent que la productivité totale des facteurs a augmenté, les rendements du capital et du travail ne sont pas plus élevés à la fin de la période étudiée qu’au début. Les rendements sont également plutôt faibles à des niveaux élevés de capital. Ces résultats indiquent un potentiel de croissance globalement limité des firmes informelles. Enfin, l’hétérogénéité des rendements du capital plaide en faveur d’une allocation sous-optimale du capital dans le secteur informel.

Suggested Citation

  • Michael Grimm & Jann Lay & François Roubaud & Julia Vaillant, 2011. "Informal Sector Dynamics In Times Of Fragile Growth: The Case Of Madagascar," Working Papers DT/2011/10, DIAL (Développement, Institutions et Mondialisation).
    • Handle: RePEc:dia:wpaper:dt201110
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    References listed on IDEAS

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    Cited by:

    1. Adoho, Franck M. & Doumbia, Djeneba, 2022. "Informal Sector Heterogeneity and Income Inequality: Evidence from The Democratic Republic of Congo," Journal of Economic Development, The Economic Research Institute, Chung-Ang University, vol. 47(4), pages 55-77, December.
    2. repec:dau:papers:123456789/12203 is not listed on IDEAS
    3. Chi Huu Nguyen & Christophe J. Nordman, 2018. "Household Entrepreneurship and Social Networks: Panel Data Evidence from Vietnam," Journal of Development Studies, Taylor & Francis Journals, vol. 54(4), pages 594-618, April.
    4. Nordman, Christophe J. & Rakotomanana, Faly & Roubaud, François, 2016. "Informal versus Formal: A Panel Data Analysis of Earnings Gaps in Madagascar," World Development, Elsevier, vol. 86(C), pages 1-17.
    5. Christophe Nordman & Julia Vaillant, 2013. "Inputs, Gender Roles or Sharing Norms? Assessing the Gender Performance Gap Among Informal Entrepreneurs in Madagascar," Working Papers DT/2013/15, DIAL (Développement, Institutions et Mondialisation).
    6. González-Rivera, Gloria & Maldonado, Javier & Ruiz, Esther, 2019. "Growth in stress," International Journal of Forecasting, Elsevier, vol. 35(3), pages 948-966.
    7. Bulte, Erwin & Wang, Ruixin & Zhang, Xiaobo, 2018. "Forced gifts: The burden of being a friend," Journal of Economic Behavior & Organization, Elsevier, vol. 155(C), pages 79-98.
    8. Michael Grimm & Rolph van der Hoeven & Jann Lay & Francois Roubaud, 2012. "Neubewertung des informellen Sektors und Unternehmertums in Sub-Sahara-Afrika," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 81(3), pages 69-83.
    9. repec:dau:papers:123456789/10601 is not listed on IDEAS
    10. Abdel-Latif, Hany & Ouattara, Bazoumana & Murphy, Phil, 2017. "Catching the mirage: The shadow impact of financial crises," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 61-70.
    11. Fox, Louise & Sohnesen , Thomas Pave, 2012. "Household enterprises in Sub-Saharan Africa : why they matter for growth, jobs, and livelihoods," Policy Research Working Paper Series 6184, The World Bank.
    12. Amanda Haarman & Marcus M. Larsen & Rebecca Namatovu, 2022. "Understanding the Firm in the Informal Economy: A Research Agenda," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 34(6), pages 3005-3025, December.
    13. repec:dau:papers:123456789/14463 is not listed on IDEAS

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    More about this item

    Keywords

    Informal sector; microenterprise; firm growth; capital returns; Madagascar; Secteur informel; micro-entreprises; croissance des firmes; rendement du capital; Madagascar.;
    All these keywords.

    JEL classification:

    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis

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