Abstract
Over the past decade or so, there has been widespread recognition that a large and growing proportion of the global workforce is employed in informal sector enterprises. To explain this, neo-liberals contend that enterprises operate in the informal sector due to high taxes, public sector corruption and too much state interference in the free market and that the remedy is therefore to reduce taxes, public sector corruption and the regulatory burden via minimal state intervention. To evaluate critically this neo-liberal policy approach, this paper explores whether cross-national variations in the share of the workforce in informal sector enterprises are associated with cross-national variations in the level of tax rates, corruption and state interference. To do this, International Labour Organisation data on the share of the workforce in informal sector enterprises in 43 developing and transition economies is compared with cross-national variations in tax rates, corruption and levels of state intervention using World Bank development indicators. The finding is that there is little or no evidence to support the neo-liberal policy approach that decreasing tax rates, public sector corruption and the regulatory burden via minimal state intervention, reduces the share of the workforce in informal sector enterprises. Instead, higher tax rates and levels of regulation and state intervention are found to be associated with lower (not higher) levels of employment in informal sector enterprise. The paper concludes by discussing the theoretical and policy implications.
Highlights
Over the past decade or so, there has been growing recognition that enterprises which operate in the informal sector are not some minor residue leftover from a pre-modern mode of production existing in a few marginal enclaves of the global economy (Geertz 1963; Lewis 1959) but are a pervasive and expanding feature of the global economy employing some one-third of the global non-agricultural workforce (Williams 2013)
In the 43 developing and transition economies for which International Labour Organisation (ILO) data is available on the share of the workforce in informal sector enterprises, the finding is that the unweighted average is that two in five (40.6 per cent) of the non-agricultural workforce have their main job in informal sector enterprises
This, does not take into account the variable size of the workforce across these economies. When this is done by taking the weighted average, the finding is that just under one in three (31.5 per cent) of the nonagricultural workforce are employed in their main job in informal sector enterprises in these developing and transition economies
Summary
Over the past decade or so, there has been growing recognition that enterprises which operate in the informal sector are not some minor residue leftover from a pre-modern mode of production existing in a few marginal enclaves of the global economy (Geertz 1963; Lewis 1959) but are a pervasive and expanding feature of the global economy employing some one-third of the global non-agricultural workforce (Williams 2013). Revealing that there have been no evaluations of the validity of this neo-liberal approach in relation to developing and transition economies, the second section introduces the methodology here employed to do so This investigates whether there is a correlation between the cross-national variations in the share of the workforce in informal sector enterprises and cross-national variations in tax rates, corruption and state interference in the market. The fifth and final section draws conclusions regarding both the validity of the neo-liberal approach and tentatively calls for greater rather than less regulation of the economy and state intervention to protect workers in order to reduce the level of informality
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