Trade Liberalisation and Its Impact on the Informal Sector-A Study for the BRICS

Abstract

This paper empirically investigates the impact of trade liberalisation on the informal economy for the BRICS. A common criterion for choosing these countries was 1) trade reforms and 2). presence of a large informal sector. While trade liberalisation and globalisation may have propelled economic growth for these countries, their impact on the unorganised sector in these countries is not so straightforward. These countries have witnessed a rise in the incidence of informality, which is concerning, as it may lead to higher inequality, lower efficiency and other development related issues. This paper attempts to investigate if trade reforms undertaken by the BRICS, have impacted their informal economy. There are numerous channels through which trade can affect the informal sector in an economy, as suggested by the Harrod-Domar model or the Harris-Todaro framework. The paper reviews the literature on the theoretical and empirical channels through which trade reforms have impacted the unorganised/informal sector in different countries. Empirical investigations show no uniformity in results across various countries. Using the definition of informality as given by Kauffmann and Kaliberda (1996), this paper attempts to investigate whether trade reforms, measured by the volume of exports and imports of the BRICS, have any impact on the informal sector of these countries. Panel data technique is used to determine the same for these countries. The main conclusion that emerges after empirical investigation is that the relationship between trade and informality is weak. Trade volumes do not have a significant impact on the informal economy in the BRICS.