Excessive informal sector: a drag on productivity



By Aleksander Surdej, Poland’s Ambassador to the OECD

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Photos by Victor Jiang / Shutterstock

The informal economy remains a problem when we discuss the prospects of economic development. It is perceived as a hindrance to economic progress because the informal sector does not pay taxes, does not include its employees in social insurance schemes and does little to offer labour law protections. Increasingly, various researchers (La Porta1, Shleifer2, 2014) and international organisations, like the OECD, converge in seeing the informal economy as an obstacle to economic development due to its imminent low productivity. Indeed, informal businesses are concentrated in low productivity sectors. They are, on average, smaller and hence less productive. They generate lower value added. They pay lower wages to their employees and do not train them. And the owners of informal businesses manage their firms less efficiently than their better educated formal sector counterparts.

The informal sector is hence both a symptom of economic backwardness and a drag on economic development. But, can this apparent vicious circle be broken, or is it an economic policy donquichottean task?

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