nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2023‒09‒18
five papers chosen by
Catalina Granda Carvajal, Banco de la República

  1. Rethinking Formalisation: A Conceptual Critique and Research Agenda By Gallien, Max; van den Boogaard, Vanessa
  2. On Trade Policy and Workers’ Transition between the Formal and Informal Sectors: An Application to the MENA Region in the Time of Covid-19 By Fida Karam; Chahir Zaki
  3. How to Fund Unemployment Insurance with Informality and False Claims: Evidence From Senegal By Abdoulaye Ndiaye; Kyle F. Herkenhoff; Abdoulaye Cisse; Alessandro Dell'Acqua; Ahmadou Aly Mbaye
  4. Technology Evolution and Tax Compliance: Evidence from Rwanda By Hakizimana, Naphtal; Santoro, Fabrizio
  5. Côte d'Ivoire: Report on Observance of Standards and Codes—FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism By International Monetary Fund

  1. By: Gallien, Max; van den Boogaard, Vanessa
    Abstract: The concept of ‘formalisation’ has been ubiquitous in development discourse and policymaking. It has underpinned policy interventions and proposals from tax registration to property titling, and a range of measures intended to connect informal entities with state institutions or formally structured markets. Despite the policy enthusiasm, however, the outcomes of formalisation policies have frequently been disappointing. Summary of Working Paper 127.
    Keywords: Finance,
    Date: 2023
  2. By: Fida Karam (Gulf University for Science and Technology); Chahir Zaki (Faculty of Economics and Political Science, Cairo university, Egypt)
    Abstract: This paper looks at the transition of workers in the MENA region between formal and informal jobs during the COVID-19 pandemic, and investigates whether trade policy could be used as a measure to enhance the transition of workers from the informal to the formal sector. We use the Combined COVID-19 MENA Monitor Household Survey constructed by the Economic Research Forum for 5 MENA countries and 11 sectors. We obtain the following results. First, fewer trade restrictions are associated with an increased probability for the worker to become formal and this effect is more pronounced post-pandemic relative to before February 2020. Second, fewer trade restrictions are linked to an increase in the probability of becoming formal for blue collar workers only, with an insignificant effect on white collar workers. Third, fewer trade restrictions are associated with an increase in the probability of men to become formal, with an insignificant effect on women. Last but not least, the effect of trade policy on job formality depends on the sectoral occupation of the individual with the effect being more pronounced in agriculture and manufacturing relative to services sectors.
    Date: 2023–03–20
  3. By: Abdoulaye Ndiaye; Kyle F. Herkenhoff; Abdoulaye Cisse; Alessandro Dell'Acqua; Ahmadou Aly Mbaye
    Abstract: This paper studies the welfare effects of unemployment insurance (UI) in low-income countries characterized by high levels of informality, weak enforcement of UI claims, and job search frictions. We assess the impact of UI on workers’ welfare in the presence of moral hazard and liquidity constraints. Our analysis highlights the significance of the UI scheme design on workers’ welfare and identifies potential funding constraints in implementing UI in imperfect labor markets. Using a custom labor force survey conducted in Senegal, we estimate the key parameters of an extended Chetty (2006) model incorporating an informal sector, and we evaluate the welfare implications of three different UI schemes with varying degrees of enforcement and funding sources. Our results demonstrate that workers respond to UI benefits and that welfare gains depend on the design of the UI system. We find that broad-based taxation through a VAT, inflation tax, or external funding can compensate for weak enforcement (i.e., high false UI claim rates), leading to substantial and quantifiable welfare gains. Moreover, safety net expansions reduce loan default rates, potentially fostering greater credit access. This study suggests that increasing the prevalence of UI in low-income countries could raise standard measures of consumer welfare.
    JEL: E0 E24 H21 J65 O10 O55
    Date: 2023–08
  4. By: Hakizimana, Naphtal; Santoro, Fabrizio
    Abstract: Information technology (IT) has great potential to help increase taxpayer compliance and revenue collection. Despite the increasing use of IT solutions by African tax administrations, evidence on its effectiveness remains limited. In Rwanda, the Revenue Authority introduced a more advanced version of its electronic billing machines (EBM) to enhance its ability to track business transactions remotely and to improve taxpayers’ experience of using the machines. Using a wealth of administrative data collected by the Revenue Authority, this paper evaluates the impact of the adoption of EBM2 on the ways in which firms file their tax returns. In particular, we are able to compare first-time users of EBM2, who are mostly new taxpayers, with ‘shifters’, who moved from the old EBM1 to EBM2. We looked first at value added tax (VAT). Overall, the adoption of EBM2 resulted in significant increases in reported business turnover, non-taxable sales, taxable sales, VAT inputs and VAT due. There was also a reduction in the proportion of completed VAT returns that implied zero VAT liabilities. Unsurprisingly, there was no significant overall change in the VAT returns from ‘shifters’. They had probably internalised the benefits of electronic billing machines when using the earlier EBM1 version. The effects of the adoption of EBM2 on income tax returns are less positive. Overall, no increase in income tax liability is reported. These results suggest that taxpayers do not believe that the Revenue Authority will attempt to reconcile their (separate) VAT and income tax returns. Taxpayers probably provide more reliable VAT returns because they believe, on the basis of the installation of electronic billing machines, with upgrades, that the Revenue Authority is focusing more on VAT. The main policy implication is that the Revenue Authority should make more effort to reconcile firms’ separate VAT and income tax returns, so that the positive effects of the new electronic billing machines on VAT compliance will spillover into income tax compliance.
    Keywords: Finance, Technology,
    Date: 2023
  5. By: International Monetary Fund
    Abstract: Côte d’Ivoire has achieved progress in countering money laundering and terrorist financing (ML/TF) since the 2012 mutual evaluation, particularly with the adoption of the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) Law in 2016, the drafting of a national risk assessment (NRA) and a national strategy, as well as awareness-raising among various actors regarding AML/CFT issues. The effects of this endeavor have begun to materialize, notably with the new impetus provided to judicial investigations and proceedings related to financial crime. As long as they are sustained, strengthened, and based on a deeper understanding of risks, these reforms should bear more fruit in the coming years. Nevertheless, certain structural elements, such as the prevalence of cash and magnitude of the informal sector to the country’s economy, the cross-border nature of offenses, as well as corruption, continue to challenge the effectiveness of the AML/CFT regime.
    Date: 2023–08–23

This nep-iue issue is ©2023 by Catalina Granda Carvajal. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.