1 Introduction
Informality, usually regarded as an economic activity that is neither taxed nor monitored
by the government, is common in emerging markets and developing countries where bur-
densome regulations and taxes coexist with poor public services and government’s weak
enforcement capabilities. From this perspective, informality is often the result of ineffi-
cient public policies and the presence of an informal sector ultimately reflects the failure
of political institutions to protect and promote an efficient and equitable market economy.
That said, there is disagreement over the definition of informality; whilst we refer to
it in a general way above, in fact it is a changing term with a focus on either the firm
(ILO (1972)) or the worker (ILO (2002)).1 Furthermore, in some countries, i.e. India, the
informal sector is identified with the unorganized sector whilst in advanced economies the
term usually refers to the ‘hidden’ economy implying some kind of tax evasion. Finally, it
is also evident that informality is a general term and it needs to be defined with respect
to both product and factor markets.2
Is informality actually good or bad? The evidence is mixed. On the one hand, in-
formality is often viewed as bad for a number of reasons: It leads to inferior working
conditions, social vulnerabilities, low productivity, unfair competition, disrespect for the
rule of law, erosion of the legitimacy and integrity of public institutions, corruption, and
last but not least, low fiscal revenues. The latter in turn prevent improving public ser-
vices and strengthening institutions in charge of tax and regulation enforcement, making
it harder to get rid of informality in the first place. Importantly, as reviewed in section
6.2, informality has been found to be negatively correlated with economic growth by com-
pressing productivity and restricting access of informal firms and workers to necessary
public services. The costs of informality appear even larger considering that the inability
of enforcing environmental, workers’ welfare and consumers’ protection eventually hinders
the integration of many developing countries into the global market in various ways.
On the other hand we report evidence revealing that informal credit markets are as-
sociated with positive growth rates (see section 6.2). In a world with imperfections in
1See Chen (2007) for a description of the move from the ‘old’ to the ‘new’ view of informality (Table 2
in this survey) as well as section 2.1 and Table 1 of this survey for the problems encountered in measuring
informality given the lack of a unified definition.
2 See Table 5.