Governance, Corruption, and the Informal Economy

Idrissa M Ouédraogo

doi:10.4236/me.2017.82018

Abstract

This paper uses data from 23 Sub-Saharan countries to analyze the relationship between governance, corruption, and the size of the informal economy. The results show that corruption, the quality of governance, the quality of institutional settings, and the unemployment rates are major determinants of the size of the informal economy. More specifically, it is found that a high level of corruption and poor institutional settings favor an increase of the informal economy. The unemployment rate is negatively related to the size of the informal economy, and greater fiscal freedom and business freedom are associated with a larger informal economy, while monetary freedom reduces the size of the informal sector.

Highlights

Since the concept of the informal sector was first used during the 1970s, it has been admitted that the so-called informal activities in developing countries constitute a major source of employment for those rural immigrants and urban dwellers who were seeking employment in the formal sector and were unable to find any
The regression of our basic model (Column 2 of Table 2) shows that the coefficient assigned to the corruption index has a negative and significant sign, which means that an increase in this index leads to a decrease of the informal economy
As the increase in this index is associated with a relative decrease in the level of corruption in the country, this negative coefficient implies that the decline in the level of corruption is associated with a decrease in the contribution of the informal sector to the formation of gross domestic product (GDP)

Summary

Introduction

Since the concept of the informal sector was first used during the 1970s, it has been admitted that the so-called informal activities in developing countries constitute a major source of employment for those rural immigrants and urban dwellers who were seeking employment in the formal sector and were unable to find any. The term informal economy includes activities of the “informal sector” (casual and survival-type activities), and accounts for new types of informal activities that have been emerging in industrialized, transition and developing economies and being operated beyond the law. They include home working and workers in sweatshops and self-employed in microenterprises

Objectives

Methods

Results

Conclusion