7 Conclusions
Since the initial studies on informality (ILO, 1972) and the influential work of De Soto
(1989), empirical and theoretical findings on the informal economy have been extensive
and often contrasting. Furthermore, the concept of informality has changed over time.
Chen (2007) describes the move from the ‘old’ view of an informal sector to a more
comprehensive concept of the informal economy (i.e. from the characteristics of the firm
to the characteristics of the employment relationship). 28 Open questions on the definition,
methods of estimation, causes and effects of the informal economy point to the need for
more work in the area.
We have reviewed two main approaches. A strand of the informality literature focuses
on the theoretical issues of informality in the credit market. Another strand of theoretical
research investigates informality in the labour market. The two modelling approaches
address many of the stylized fact describes in section 2.4 (SF3, SF4, SF5, SF6, SF7 and
SF8 for the informal employment and SF15, SF18, SF19, SF20, SF21 and SF22 for the
informal credit markets), while others require further development (SF1, SF2, SF13, and
SF14 for the informal employment and SF 16 and SF17 for the informal credit markets).
Clearly, the two views share many theoretical and policy issues. In general, we are left
with few key questions. How effective are government policies in countries with a large
informal (and often) unobservable labour/credit markets? What are the links between
informality and (endogenous) growth? Can informality be good in some respects? What
is the link between informality and gender inequality? Our assessment of the literature is
that most of the existing models, though relevant, share a partial equilibrium approach
to informality. A closer scrutiny of the phenomenon able to capture various aspects of
informality (i.e. multi-informality in the product, labour and credit markets) requires a
dynamic general equilibrium approach in which households’ and producers’ choices over
time are explicitly taken into account.
28See ILO (1972), ILO (2002) and Table 2 for details.
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