Economic reform, informal-formal sector linkages and intervention in the informal sector in developing countries: A paradox

Arbeitspapier

Within a general equilibrium framework of a developing economy with a foreign owned factor of production, this paper questions whether the informal-formal sector relationship is procyclical/ complementary - expansion or contraction in one necessarily implies an expansion or contraction in the other - when the informal sector is subject to a technological shock. We derive a necessary and sufficient condition under which a positive shock to the informal sector results in a contraction in both the size of the urban formal sector and the informal sector. Thus, although our result shows that the informal-formal sector relationship is procyclical, it nevertheless calls into question the conventional wisdom on the benefits of intervention in the informal sector of developing economies, particularly where multinational corporations sub-contract certain labor intensive stages of production to the informal sector.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 5229

Classification and Topics

• Classification: Wirtschaft ; General Equilibrium and Welfare Economic Analysis of Regional Economies ; Urban, Rural, Regional, Real Estate, and Transportation Economics: Regional Migration; Regional Labor Markets; Population; Neighborhood Characteristics
• Subject: rural-urban migration ; urban informal sector ; technological change ; Informeller Sektor ; Technischer Fortschritt ; Makroökonomischer Einfluss ; Theorie ; Entwicklungsländer

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Arvin-Rad, Hassan ; Basu, Arnab K. ; Willumsen, Maria
• Event: Veröffentlichung
• (who): Institute for the Study of Labor (IZA)
• (where): Bonn
• (when): 2010

Further information

• Handle: http://hdl.handle.net/10419/46179
• Last update: 10.03.2025, 11:43 AM CET