October 2010
IZA DP No. 5229: Economic Reform, Informal-Formal Sector Linkages and Intervention in the Informal Sector in Developing Countries: A Paradox
published in: International Review of Economics and Finance, 2010, 19, 662-670
Keywords
- Within a general equilibrium framework of a developing economy with a foreign owned factor of production
- although our result shows that the informal-formal sector relationship is pro-cyclical
- it nevertheless calls into question the conventional wisdom on the benefits of intervention in the informal sector of developing economies
- this paper questions whether the informal-formal sector relationship is pro-cyclical/ complementary – expansion or contraction in one necessarily implies an expansion or contraction in the other – when the informal sector is subject to a technological sho
- particularly where multinational corporations sub-contract certain labor intensive stages of production to the informal sector.