Informality, Development, and the Business Cycle in North Africa
Departmental Papers, June 9, 2022
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Bibliographic details
- Authors: Roberto Cardarelli, Hippolyte W. Balima, Chiara Maggi, Adrian Alter, Jérôme Vacher, Matthew Gaertner, Olivier Bizimana, Azhin Abdulkarim, Karim Badr, Shant Arzoumanian, Mahmoud Harb, Mariam El Hamiani Khatat, Priscilla S Muthoora, Aymen Belgacem
- Published: June 9, 2022
- Series: Departmental Papers
- DOI: https://doi.org/10.5089/9781513591773.087
Overview
- North African economies have a significant share of informal activity and employment: about two-thirds of workers in North Africa operate without any formal arrangement and social protection.
- About 30 percent of GDP is estimated to be produced by informal workers and firms.
- The paper distinguishes between “normal” informality explained by structural characteristics and “excess” informality explained by policy distortions.
Key findings
- Structural factors account for part of high informality in the region:
- Relatively lower level of human capital contributes to higher informality.
- A younger population helps explain higher informality, as low-skilled and young people generally find it more difficult to operate in the formal sector.
- Policy and institutional gaps explain a large share of excess informality:
- Gaps in the quality of governance explain about half of the excess informality experienced in North Africa compared with advanced economies.
- Cross-country patterns since the mid-2000s:
- Expansion of the informal sector in Algeria and Tunisia from the mid-2000s partially reflects deterioration in a few indicators of their governance and regulatory frameworks.
- Decline in informality in Egypt, Mauritania, and Morocco over this period reflects improved business regulations, governance, and tax systems, in addition to continued progress in economic development.
Informality and the business cycle
- Historically, informality has buffered regional labor markets against recessions, producing relatively stable unemployment rates even during downturns.
- The COVID-19 crisis deviated from past patterns:
- Informal employment has fallen significantly in North Africa during the pandemic, as lockdown measures particularly affected high-informality service sectors.
- As the pandemic subsides and lockdown measures are removed, the recovery of regional labor markets could exhibit a stronger-than-usual rebound of informal employment.
Policy implications and recommendations
- To ensure an inclusive recovery from the pandemic, renewed efforts are needed to:
- Construct more modern (digitalized) systems of social protection.
- Build more efficient systems of social protection.
- Build fairer systems of social protection.
- Policy reforms that would reduce excess informality include:
- Strengthening governance and regulatory frameworks (given that governance gaps explain about half of excess informality relative to advanced economies).
- Improving business regulations and tax systems (as evidenced by declines in informality in Egypt, Mauritania, and Morocco).
- Leverage progress made during the pandemic in extending safety nets to informal workers to move toward more comprehensive coverage and formalization incentives.
Informality, Development, and the Business Cycle in North Africa — Departmental Paper 2022/011