# **Informal Economy and the World Bank**

# **I. Motivation for studying informal economic activity**

Despite a sense of a growing informal sector in recent years, the extent of it and the main drivers are not necessarily well known. Many countries have expressed an interest in the size, performance and motivation of the informal sector, especially where the informal sector provides the livelihood and employment for a critical segment of the population. This essay reviews recent literature and relevant Bank studies as a way to share information with country teams interested in expanding their knowledge of the informal sector and related policy debates.

The existence of informal businesses is well-known, but the size, nature, sector and employment of their operations is not well-documented. Many Bank clients are seeking to close this information gap in order to better understand a sector that constitutes an important share of economic output and employment. Most studies usefully combine quantitative survey data with qualitative investigations of how the informal sector works, and both types of methods are discussed below. These existing studies indicate the importance of the following issues: governance, business climate, jobs, inclusion, and informal trade.

Research across regions has shown that governance of the regulatory and legal environment regarding commerce and business is critical to informality. The informal sector also reflects a pervasive sense of unequal opportunities; often workers and firm-owners in the informal sector feel they do not have the same options as those who are better-educated and better-placed to operate in the formal sector. At the same time, formal firms feel that informal firms pose unfair competition.

Finally, research in certain regions, West and North Africa in particular, shows that informal cross-border trade is pervasive, a major activity of the informal sector and provides a vital window on governance issues affecting the informal sector as a whole.

This paper collects information on World Bank studies of the informal economy in different regions, including the issues investigated and main findings. It also reviews methodology approaches in different studies as a way to inform future informal sector studies.

The informal sector varies across regions in its share of the total economy, but it has a significant role in the economic development of all World Bank Group client countries. Informality has been shown across regions to be associated with low productivity, and in one informative statistic, the informal sector is shown to have a lower share in high income countries, while counting for as much as 70 percent of low income economies in Africa.

Thus study of the informal sector presents a number of attractions, where its size suggests opportunities to create jobs, raise productivity, and promote growth and fiscal revenues, while the association of less informality with higher income suggests developmental advantages of reducing and formalizing the informal sector over time. At the same time, the sector poses a formidable knowledge gap since, by definition, some or all aspects of informal economic activity is off the formal record. Fortunately, much new work is currently ongoing that should help fill these gaps and aid in the development of policy recommendations.

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