nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2015‒06‒13
seven papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Informal sector and economic development: The credit supply channel By Massenot, Baptiste; Straub, Stéphane
  2. On the Effects of Formalization on Taxes and Wages : Panel Evidence from Vietnam By Amadou Boly
  3. Measuring the Labour Income Share of Developing Countries : Learning from Social Accounting Matrices By Katharina Trapp
  4. The Chinese in Colonial Rabaul: An Informal History By John D. Conroy
  5. Informality and Ôthe Idea of the TownÕ in Hubert MurrayÕs Papua By John D. Conroy
  6. The Hidden Costs of Tax Evasion: Collaborative Tax Evasion in Markets for Expert Services By Balafoutas, Loukas; Beck, Adrian; Kerschbamer, Rudolf; Sutter, Matthias

  1. By: Massenot, Baptiste; Straub, Stéphane
    Abstract: The standard view suggests that removing barriers to entry and improving judicial enforcement reduces informality and boosts investment and growth. However, a general equilibrium approach shows that this conclusion may hold to a lesser extent in countries with a constrained supply of funds because of, for example, a more concentrated banking sector or lower financial openness. When the formal sector grows larger in those countries, more entrepreneurs become creditworthy, but the higher pressure on the credit market limits further capital accumulation. We show empirical evidence consistent with these predictions.
    Date: 2015
  2. By: Amadou Boly
    Abstract: Based on a unique panel dataset consisting of both formal and informal firms surveyed every other year from 2005 to 2013, this paper explores the benefits of formalization to the government and firm employees in Vietnam. We find that formalization benefits the government by increasing the amount and the likelihood of tax payments. Formalization also increases the wage level paid by firms that shift out of the informal sector, as well as the share of wages in value added. Our results are therefore supportive of governments. efforts to reduce the size of the informal sector by promoting formalization.
    Keywords: Income, Informal sector (Economics), Tax evasion, Taxation, Wages
    Date: 2015
  3. By: Katharina Trapp
    Abstract: This paper is the first to address the challenges of measuring the labour income share of developing countries. The poor availability and reliability of national accounts data, and the fact that self-employed people, whose labour income is hard to capture, account for a major share of the workforce and often work in the informal sector, render its computation difficult. I consult social accounting matrices as an additional source of information to construct a labour share dataset backed up with microeconomic evidence. First descriptive results show a significant downward trend in labour shares of developing countries since the early 1990s.
    Keywords: Income distribution, Informal sector (Economics), Labor costs
    Date: 2015
  4. By: John D. Conroy (Crawford School of Public Policy, The Australian National University)
    Abstract: This paper is concerned with the economic history of immigrant Chinese in colonial Rabaul and its hinterland (in German, later Australian, New Guinea) over almost a century to the Independence of Papua New Guinea in 1975. It is a companion piece to another study concerned with how Tolai people of the hinterland accommodated themselves to the colonial market economy (Conroy, forthcoming). Without pretension to novelty in the historical narrative it asserts the value of viewing events through the lens of 'informal economy', as constructed by Keith Hart. The Chinese are shown as operating an informal economy parallel to, and inter-penetrating, the formal colonial market economy. That formal economy conformed with norms of Weberian 'rational-legal' bureaucracy, guided (in the case of the Wilhelmine state) by an ideology of 'national-economic purpose'. Under Australian administration, and after the Pacific War, the prevalent intellectual model became one of 'economic development'. Under both administrations, however, Chinese demonstrated to the Tolai that it was possible to participate in the market economy without complying fully with bureaucratic norms. The Germans found it difficult to confine Chinese to dependent and subordinate roles, and Chinese often colluded with Tolai to frustrate German (and, later, Australian) efforts to regulate economic activity to their own advantage. The paper describes the growth and increasing formalization of Chinese business in Rabaul, while noting a continuing strain of informality in their economic activity right up until Independence. It suggests that knowledge of the history of the early colonial-period Chinese may be useful for understanding the character and trajectory of 'new' Chinese settlement in Papua New Guinea in the twenty-first century.
    JEL: F54 J15 N97 O15 O17 Z13
    Date: 2014–06
  5. By: John D. Conroy (Crawford School of Public Policy, The Australian National University)
    Abstract: Without pretension to novelty in the historical narrative, this paper examines how far economic informality emerged among Papuans in Pt. Moresby, capital of Australian Papua. Informal behaviour arises out of inability or unwillingness to conform with what Hart calls 'the institutional effort to organize society along formal lines', where form is 'the rule, an idea of what ought to be universal in social life'. The paper follows my study of informality among Chinese and indigenous Tolai in German New Guinea (GNG), where the goal was to impose conformity with a German ideology of 'national-economic purpose'. In Papua, bureaucratic effort was devoted to organizing society in accordance with a less coherent and compelling ideology, the 'preservation of village life' and, in Pt Moresby, with achieving an 'idea of the town' congenial to Europeans. 'Natives' were excluded from the town, other than as menial workers. The paper considers the bureaucratic effort to realize the 'idea of the town' in Pt Moresby and its impact on the traditional landowners and other Papuans, who proved more acquiescent to bureaucratic suasion than the Tolai in GNG. In consequence, urbanism was retarded and Papuan initiative smothered by paternalism. Much of the narrative revolves around comparisons of GNG, a classic plantation economy, with Papua, seen as an 'unlucky place', lacking natural resources, private investment and government funding, and handicapped (in the eyes of settlers) by undue concern for native welfare. Crucially, the Chinese intermediary class which drew the Tolai of GNG into the monetary economy was absent from Papua. Nor were white traders encouraged to perform this role, while official efforts to engage Papuans with 'the market' were ineffective. Colonial Papua was, as Charles Rowley said, an obsolescent society and economy. The comparatively vigorous economic informality in and around Rabaul before the Pacific War was emblematic of greater progress towards economic development than had proved possible in Hubert Murray's Papua, while Rabaul also expressed a more vigorous urbanism.
    Keywords: informality; urban informal economy; regulation; bureaucracy; plantation economy; colonialism; racism; Keith Hart; Papua; Papua New Guinea; German New Guinea; Hubert Murray; overseas Chinese; Port Moresby
    Date: 2014–11
  6. By: Balafoutas, Loukas (University of Innsbruck); Beck, Adrian (University of Innsbruck); Kerschbamer, Rudolf (University of Innsbruck); Sutter, Matthias (University of Cologne)
    Abstract: We experimentally examine the impact of tax evasion attempts on the performance of credence goods markets, where contractual incompleteness results from asymmetric information on the welfare maximizing quality of the good. Our results suggest that tax evasion attempts – independently of whether they are successful or not – lead to efficiency losses in the form of too low quality and less frequent trade. Thus, shadow economies may reduce welfare not only by inducing agents to incur costs to hide or to uncover taxable transactions, by imposing risk on risk-averse tax evaders and by distorting competition, but also by creating an additional efficiency loss in the underlying market by forfeiting possible gains from trade and by inducing insufficient quality provision. We call this the hidden costs of tax evasion.
    Keywords: tax evasion, expert services, credence goods, fraud, experiment
    JEL: C72 C91 D82 H26
    Date: 2015–05
  7. By: Silviu Ciprian Bucur (Romania)
    Abstract: Drugs have always been a vast global issue involving numerous risks, exercising its effects over all areas of social life. The fact that the drug trafficking and abuse have serious roles in the creation and development of the underground economy does no longer represent a novelty or a question lacking importance. The drug trafficking and abuse lead to money laundering, the development of the underground economy, corruption which spreads to the highest levels of power or to other forms of tax evasion. The drug trafficking and abuse and the underground economy have effects on any society, thus resulting in criminal profits. Romania is not considered a country where drugs are produced, but rather a place of consumption and transit, where the profits gained by the illegal organizations produce a social, economic and even a political impact, such criminal groups being the only one to benefit from their illegal activities, their contribution to the economic and social development of the country being void.
    Keywords: trafficking, abuse, drugs, underground economy.
    Date: 2015–05

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