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Policy opportunities and challenges from the COVID-19 pandemic for economies with large informal sectors

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  • Rajneesh Narula

    (University of Reading)

Abstract

In the developing world, the informal economy can account for as much as 80% of the population. I focus on the urban component of informality, where both informal employment and informal enterprises are especially vulnerable to the pandemic-induced economic shock. I explain the complex nature of informality, some of the reasons for its persistence and its interdependency with the formal economy, especially in the manufacturing sector, through global value chains (GVCs). Large firms (whether MNEs or domestic firms) sub-contract considerable activity to informal enterprises, but this is precarious in character. I suggest the crisis provides the circumstances for greater active engagement with informal actors, by placing informal enterprises on a par with formal firms within industrial policy. I propose integration and registration, as opposed to formalisation, and the provision of state support without taxation. The role of the state is also crucial in matchmaking, creating incentives for GVCs to engage with informal actors systematically, and to reduce the transaction costs for informal actors in such engagement. These actions are likely to provide benefits in the longer run, even if they prove costly in the short run.

Suggested Citation

  • Rajneesh Narula, 2020. "Policy opportunities and challenges from the COVID-19 pandemic for economies with large informal sectors," Journal of International Business Policy, Palgrave Macmillan, vol. 3(3), pages 302-310, September.
  • Handle: RePEc:pal:joibpo:v:3:y:2020:i:3:d:10.1057_s42214-020-00059-5
    DOI: 10.1057/s42214-020-00059-5
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    References listed on IDEAS

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    1. Rajneesh Narula & André Pineli, 2019. "Improving the developmental impact of multinational enterprises: policy and research challenges," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 46(1), pages 1-24, March.
    2. -, 2020. "Measuring the impact of COVID-19 with a view to reactivation," Libros y Documentos Institucionales, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 45477 edited by Eclac, September.
    3. Alessandro Sforza & Marina Steininger, 2020. "Globalization in the Time of Covid-19," CESifo Working Paper Series 8184, CESifo.
    4. Rajneesh Narula & John Dunning, 2010. "Multinational Enterprises, Development and Globalization: Some Clarifications and a Research Agenda," Oxford Development Studies, Taylor & Francis Journals, vol. 38(3), pages 263-287.
    5. Rajneesh Narula, 2015. "The Viability of Sustained Growth by India’s MNEs: India’s Dual Economy and Constraints from Location Assets," Management International Review, Springer, vol. 55(2), pages 191-205, April.
    6. Rajneesh Narula, 2019. "Enforcing higher labor standards within developing country value chains: Consequences for MNEs and informal actors in a dual economy," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 50(9), pages 1622-1635, December.
    7. Saul Estrin & Tomasz Mickiewicz, 2012. "Shadow Economy and Entrepreneurial Entry," Review of Development Economics, Wiley Blackwell, vol. 16(4), pages 559-578, November.
    8. Erkko Autio & Kun Fu, 2015. "Economic and political institutions and entry into formal and informal entrepreneurship," Asia Pacific Journal of Management, Springer, vol. 32(1), pages 67-94, March.
    9. Douglas Gollin, 2014. "The Lewis Model: A 60-Year Retrospective," Journal of Economic Perspectives, American Economic Association, vol. 28(3), pages 71-88, Summer.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    global value chains; informal economy; COVID-19;
    All these keywords.

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy

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