nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2019‒05‒20
five papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Economic Transition, Dualism, and Informality in India By Surbhi Kesar
  2. Wage and labor mobility between public, formal private and informal private sectors in Egypt By Mostafa Shahen; Koji Kotani; Makoto Kakinaka
  3. The costs and benefits of formalization for firms: A mixed-methods study on Mozambique By Berkel Hanna
  4. Nil-Filing in Eswatini: Should the Revenue Administration be Concerned? By Santoro, Fabrizio; Mdluli, Winnie
  5. Tax Compliance under Indirect Rule in British Africa By Bolt, Jutta; Gardner, Leigh

  1. By: Surbhi Kesar (Faculty of Economics, South Asian University, New Delhi, India.)
    Abstract: In much of the literature on economic development, sustained economic growth is expected to be accompanied by several interrelated processes of structure change, which involve a shift in economic activities from ‘traditional’ / agricultural / informal to ‘modern’ / industrial / formal sectors. Such transitions are usually accompanied by a transition in the economic dependence of households towards relatively ‘modern’ and formal segments of the economy, along with a rise in their general economic well-being. In this paper, we examine the Indian economy using the only available household-level pan-India panel data over the high growth period between 2005 and 2011-12, to analyse the patterns and natures of household-level transitions across sectors and identify factors that affected the likelihood and nature of such transitions. We categorize households based on their primary income sources into seven sectors characterised by varying degrees of formality/informality and various production structures and labour processes. We find that while substantial proportion of households have transitioned across these sectors during the period, there has been a continued reproduction of the same economic structure, including a regeneration of dependence on ‘traditional’ informal sector and casual wage employment, which are often expected to dissolve over time with high economic growth. To ascertain the nature of these transitions (‘favorable’ or ‘unfavorable’), we employ a ‘counterfactual’ analysis. Contrary to some recent influential literature, we find that, on an average, the transitions towards informal and ‘traditional’ economic spaces are ‘unfavourable’ in nature in terms of well-being of households. Further, using a multinomial logit regression framework, we find that the likelihood and nature of these transitions are largely dependent on household characteristics like levels of education and social caste, some of which are structurally given and cannot be optimally chosen by households. The results show that despite significant churning in the economy, the structure continues to remain fractured, with substantial ‘unfavourable’ transitions towards economic spaces that are continuously reshuffled and reconstituted.
    Keywords: structural transformation, informality, transition, segmentation, dualism, India
    JEL: O17 J60 O10
    Date: 2019
  2. By: Mostafa Shahen (School of Economics and Management, Kochi University of Technology); Koji Kotani (School of Economics and Management, Kochi University of Technology); Makoto Kakinaka (Hiroshima University)
    Abstract: Wage and labor between public and private sectors are main factors in economies. In developing countries, the private sector is divided into formal and informal private sectors. Little research has addressed temporal changes in wage and labor among public, formal private and informal private sectors within a single framework. We study the temporal wage gap, labor mobility and the impact of changing employment sectors on wages by Oaxaca-Blinder decomposition and difference-in-difference (DID) methods with the Egyptian Labor Market Panel Survey data from 1998 to 2012. The decomposition shows that the wage gap between public and formal (informal) private sectors has remained strong where education, age and working experience are driving forces. The DID method shows that the percentages and wage losses of movers to the informal private sector from the formal private sector are much higher and more significant than that from the public sector. In summary, Egyptian private sector employees face a high risk to unwillingly fall into and stay in the informal private sector, while the highly educated ones are attracted only to and stay long in the public sector. These results can be considered the obstacles for further economic growth and stability of Egyptian economy, which shall be the case in other developing and Arab countries with a sizable public sector. In this case, the government may need to restructure wage systems, employment practices and cultures, considering a balance with private sectors as well as providing people with incentive schemes and education to nurture (formalize) the formal (informal) private sectors.
    Keywords: Wage gap, public sector, formal private sector, informal private sector, Oaxaca- Blinder method
    JEL: J21 J23 J24 J31 O17
    Date: 2019–05
  3. By: Berkel Hanna
    Abstract: This paper is the first to use a panel dataset from the African continent to investigate the relationship between formalization and firm outcomes.Instead of applying a binary formality indicator, it constructs a conceptual framework that regards informality as a continuum consisting of four degrees. The quantitative data includes 516 manufacturing enterprises which are analysed through a matched double difference approach. Moreover, the study explores participant observation as well as semi-structured interviews with government officials, experts, and entrepreneurs to explain the quantitative results and to examine additional effects of formalization.It suggests that the most informal firms do not benefit from formalization due to their underlying conditions. Other, more formal enterprises benefit but there is scope for increasing the benefits and decreasing the costs of formalization. Further, an improvement of the costs and benefits is not enough: better institutions are needed.
    Date: 2018
  4. By: Santoro, Fabrizio; Mdluli, Winnie
    Abstract: The tax-to-GDP ratio in developing countries is still remarkably low for many different reasons. One of the key factors behind poor tax collection is low tax compliance. In this paper we look at compliance with income tax in Eswatini, focusing on one particular dimension – filing of nil returns. Nil-filing represents a sizeable share of returns in many African countries. However, it is largely unexplored in the literature and disregarded by tax agencies, who are more interested in declarations yielding a positive return. For these reasons, we attempt to fill the gap by mapping nil-filing in Eswatini using anonymised administrative data provided by the Swaziland Revenue Authority (SRA). First, we show that over a period of five years about 30 per cent of corporate income tax (CIT) returns are nil every year. This translates into 45 per cent of taxpayers nil-filing in at least one year over the five-year period. Moreover, nil-filing varies a lot within categories of firms: it is much more likely to take place in certain districts and sectors in Eswatini, and is more common for small and younger firms. At the same time, persistent nil-filing is also very common. We also cross-check CIT data with value added tax (VAT) and Pay As You Earn (PAYE) data to monitor the filing behaviour of nil-filers across different tax returns, finding some extent of misreporting – probably due to evasion. After describing the results, we analyse additional qualitative data and provide recommendations for future research.
    Keywords: Finance, Governance,
    Date: 2019
  5. By: Bolt, Jutta (African Economic History Network); Gardner, Leigh (African Economic History Network)
    Abstract: How states acquire the ability to raise taxes is a central question in the study of institutions and economic development in economic history. This paper uses new data on ‘Native Authorities’, or African local governments, to investigate tax compliance under indirect rule in British Africa. In theory, Native Authorities represented the integration of indigenous institutions into colonial rule. However, the relationships of African states with the colonial government varied, and African communities experienced considerable political and economic change during the colonial period. The paper investigates the relationship between tax compliance, the autonomy of African states within the colonial system, local levels of income and education, and Native Authority institutions. Understanding the dynamics of Native Authority tax collection helps address wider questions about African processes of state-building, the emergence of an ‘uneven topography’ of sub-national institutions during the colonial period, and the ways in which Africans shaped colonial rule.
    Keywords: Africa; tax compliance; economic history
    JEL: N01 N27 N37 N47
    Date: 2018–10–10

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