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Asymmetric role of the informal sector on economic growth: Empirical investigation on a developing country

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  • Sultana, Nahid
  • Rahman, Mohammad Mafizur
  • Murad, S.M. Woahid

Abstract

The role of the informal sector in economic growth still remains an issue of debate. This study contributes to resolving this by taking into account the asymmetric effect of the informal sector on economic growth. The study applies the Non-linear Autoregressive Distributed Lag (N-ARDL) model to capture the asymmetric relationship between the informal sector activity and economic growth for the period 1982–2018 in Bangladesh. The estimation of the N-ARDL model reveals that the informal sector asymmetrically affects the domestic output and economic growth in Bangladesh for both the short-run and the long run. The study has observed an asymmetrically larger effect on output and economic growth from the falling contribution of the informal sector. Urbanization and capital growth also contribute to an increase in economic growth. Therefore, proper incentives and careful policy measures are suggested to effectively diminish the prevalence of informality and promote its transition towards a more formalized framework.

Suggested Citation

  • Sultana, Nahid & Rahman, Mohammad Mafizur & Murad, S.M. Woahid, 2024. "Asymmetric role of the informal sector on economic growth: Empirical investigation on a developing country," Structural Change and Economic Dynamics, Elsevier, vol. 69(C), pages 96-107.
    • Handle: RePEc:eee:streco:v:69:y:2024:i:c:p:96-107
    DOI: 10.1016/j.strueco.2023.11.015
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    More about this item

    Keywords

    Informal sector; Economic growth; Structural equation model; Nonlinear autoregressive distributed lag; Bangladesh;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • P25 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Urban, Rural, and Regional Economics
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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