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Is Informality a Barrier to Convergence?

Author

Listed:
  • Ceyhun Elgin

    (Bogazici University)

  • Ferda Erturk

    (University of Maryland)

Abstract

In this paper we ask whether informal economy acts as a barrier to growth of GDP per-capita. Cross-country panel regressions for the period between 1960 and 2012 including 160 countries provide evidence for a robust negative relationship between size of informal economy and relative per capita income. Building on this evidence we simulate a simple two-sector (formal and informal) dynamic general equilibrium model and show that under the presence of an informal sector a larger fraction of the observed per capita income differences across countries can be accounted for.

Suggested Citation

  • Ceyhun Elgin & Ferda Erturk, 2016. "Is Informality a Barrier to Convergence?," Economics Bulletin, AccessEcon, vol. 36(4), pages 2556-2568.
    • Handle: RePEc:ebl:ecbull:eb-16-00667
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    References listed on IDEAS

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    Cited by:

    1. Hermann Ndoya hegueu & Aristophane Djeufack dongmo, 2021. "Urbanization, Governance and Informal Economy: an African Tale," Economics Bulletin, AccessEcon, vol. 41(3), pages 1525-1540.
    2. Ceyhun Elgin & Ferda Erturk, 2019. "Informal economies around the world: measures, determinants and consequences," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 9(2), pages 221-237, June.
    3. Salinas, Aldo & Ortiz, Cristian & Changoluisa, Javier & Muffatto, Moreno, 2023. "Testing three views about the determinants of informal economy: New evidence at global level and by country groups using the CS-ARDL approach," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 438-455.
    4. Mohammed Nayel Abu Alfoul & Ibrahim Naser Khatatbeh & Fouad Jamaani, 2022. "What Determines the Shadow Economy? An Extreme Bounds Analysis," Sustainability, MDPI, vol. 14(10), pages 1-22, May.
    5. Dong Frank Wu & Mr. Friedrich Schneider, 2019. "Nonlinearity Between the Shadow Economy and Level of Development," IMF Working Papers 2019/048, International Monetary Fund.

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    More about this item

    Keywords

    convergence; two-sector DGE models; informal sector; pane data;
    All these keywords.

    JEL classification:

    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models

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