The size of the informal sector in Peru: A critical comment on Hernando de Soto's El Otro Sendero

Abstract

In El Otro Sendero, Hernando de Soto presented four statistics concerning (i) the number of workers and (ii) the number of hours worked in the informal sector in Peru in 1984, (iii) total informal GDP from 1951 to 1984 and (iv) the growth of the informal sector from 1985 to 2000. These statistics are being quoted internationally by, for example, the World Bank and The Economist of London. In this paper we demonstrate that there are apparent inconsistencies between (i) and (ii) and that (iii) and (iv) are based on the application of inappropriate models that are econometrically suspect.