The Global Informal Economy: Large but On The Decline

IMF Blog, October 30, 2019

Source details

The informal economy is economic activity that falls outside the regulated economy and tax system, such as street vending or unregistered taxi drivers.
People and companies engaged in the informal economy usually operate on a small scale, resulting in no official statistics on the informal or shadow economy.
Economists estimate its size using techniques such as surveys or indirect indicators such as the demand for currency.

The Chart of the Week is based on an updated version of earlier IMF research and measures the size of the informal economy as a share of GDP.
Measurement approaches discussed include survey-based methods and indirect indicators; new technologies (see IMF Statistical Forum note below) such as night lights from satellite images are being explored to better capture informality.
Timeframe cited for regional comparisons: 2010–17.

The size of the informal economy—measured as a share of GDP—has fallen gradually across all regions.
Regional shares of informality during 2010–17:
- Sub-Saharan Africa: 34 percent of GDP.
- Latin America and the Caribbean: 34 percent of GDP.
- North America: 9 percent of GDP.
- Organisation for Economic Co-operation and Development: nearly 15 percent of GDP.
The shift from informal to formal sector activity is occurring but takes time; reforms to reduce informality, such as reducing the hurdles to registering a business, are working.

The informal economy is generally associated with:
- Low productivity.
- Poverty.
- High unemployment.
- Slower economic growth.
Prevalence by income level:
- More prevalent in low-income countries because as countries develop, it becomes easier for workers to transition to the formal sector.
Role of informality:
- Provides employment and income to people who would otherwise not find employment.
- Can supplement income for those also employed in the formal, regulated sector.

Policymakers face the challenge of creating an environment where the formal sector can thrive while enabling people working in the informal sector to maintain or improve living standards.
Measures highlighted to reduce informality and ease transition to the formal sector include:
- Reducing the costs of doing business.
- Tackling corruption.
- Improving access to finance and services.
Reforms are effective but gradual; sustained policy effort and measurement improvements are needed.

This year’s topic of the seventh IMF Statistical Forum—Measuring the Informal Economy—will review the definition of “informal” and explore new technologies, such as using night lights from satellite images, to capture the true size of the informal economy.
Improved measurement will help policymakers better address the challenges of persistent informality.

Source: Thomas F. Alexander, October 30, 2019.