Exploratory analysis of the determinants of informality in emerging and frontier economies: an institutional approach via PLS-SEM

Abstract

ABSTRACT This study explores the link between informality and institutional quality in 48 emerging economies from 2013 to 2018, using partial least squares – structural equation modeling (PLS-SEM). It delves into the role of informality and the poorly understood drivers in these economies. This study models property rights, public fund diversion, and government transparency. This study explores systemic conditions and finds a complex link between weaker institutions and increased informality. The analysis found an association between lower institutional quality and higher levels of informality, aligning with the theory that more robust institutions are linked to fewer informal activities. However, the analysis also indicated that systemic factors have a significant relationship with the degree of informality. Mediation analysis indicated an association between systemic issues, reduced institutional quality, and increased informality. State legitimacy, inequality, and factionalism have been highlighted as potential areas to address in an effort to decrease informality. Enhancing systemic conditions and public fund oversight may be important considerations. A dual approach to institutional and systemic reforms has been suggested. Regional differences indicate a need for further research on context-specific drivers. This exploratory PLS-SEM study offers detailed evidence to aid formalization policies in emerging economies.