|
on Informal and Underground Economics |
| By: | Snigdha Kalra (Indira Gandhi Institute of Development Research); Sargam Gupta (Indira Gandhi Institute of Development Research) |
| Abstract: | This paper explores the possible ways in which the emerging market and developing economies (EMDEs) can improve their tax-to-GDP ratio using a theoretical framework. We do this using a Laffer curve analysis at the balanced growth path. We develop a closed-economy discrete-time neoclassical growth model with heterogeneous agents, and three sectors: households, firms, and the government. This model is calibrated for a typical EMDE and it incorporates two well-documented features that limit their tax capacity. The first feature we model is the presence of a large proportion of the economy that neither pays nor files taxes. To address this, our model includes heterogeneous agents, represented by Ricardian and non-Ricardian households. Non-Ricardian households belong to the informal sector and are entirely exempt from taxes, while Ricardian households may choose to comply with tax obligations, creating a partially endogenous framework for tax evasion. The second critical feature is the relative weakness of institutions in the EMDEs as compared to the advanced economies (AEs). We incorporate aspects such as the probability of audits, penalties for evasion, and the culture of corruption in a minimalist way to capture the essence of the realities of weak institutions. We derive the expression for the Laffer curve for three types of taxes: the labour income tax, the capital income tax, and the consumption tax. We find that the fiscal policies attuned towards bringing a higher percentage of agents under the ambit of tax collection - despite households evading taxes - significantly boost the tax revenues. The model clearly shows that countries with weaker institutions will have a lower tax capacity, as any increase in the tax rates reduces tax compliance and increases tax evasion. Finally, reducing the income tax exemptions, decreasing the share of informal sector firms and employees, and strengthening the institutional quality are essential for improving the fiscal space in the EMDEs. To our knowledge, no coherent neoclassical growth model exists in the literature that effectively captures these features within EMDEs. |
| Keywords: | Laffer curve, Optimal taxes, Growth models, Heterogeneous Agents, Institutions, Tax Evasion |
| JEL: | E02 E13 E62 H21 H26 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2025-007 |
| By: | Tovar Jalles, JoaÞo; Pessino, Carola; Calderón, Ana Cristina |
| Abstract: | Widening income disparities, higher corruption and larger informality in many emerging market and developing economies (EMDE) including Latin America, all with pressing and mounting fiscal problems, have rekindled interest in the empirical analysis of the key factors determining the occurrence of fiscal consolidations. Using discrete choice models, this paper examines the drivers of fiscal consolidation episodes in a sample of 148 EMDE between 1980 and 2019 with a focus on Latin America. Consolidations are more likely during good economic times. Inequality does not seem to drive consolidations in Latin America, while more informality increases the probability of their occurrence, corruption decreases it. In turn, when examining the drivers of successful consolidations, larger income inequality seems to act as a boost for successful consolidations, while informality hinders the likelihood of success. In fact, while the size of the public investment multiplier in Latin America is larger than in other country groups, when informality is high the multiplier effect gets reduced to a much lower and insignificant magnitude. Results are robust to several sensitivity and robustness tests. |
| Keywords: | fiscal adjustments;filtering;Panel Data;binary choice models;local projection;fiscalmultipliers;nonlinearities;corruption;shadow economy |
| JEL: | C23 E21 E62 H50 H62 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:14020 |
| By: | Fietz, Katharina; Lakemann, Tabea; Beber, Bernd; Priebe, Jan; Lay, Jann |
| Abstract: | Informal, low-quality employment in micro, small, and medium enterprises (MSMEs) remains a significant challenge in low- and middle-income countries. We present evidence from an impact evaluation of a light-touch business consulting program with a focus on employment formalization in Côte d'Ivoire. Using a randomized controlled trial with 448 MSMEs and a unique employer-employee dataset, we find that the intervention led to employment formalization, driven by greater reported minimum wage compliance and an increase in written contract provision. We show suggestive evidence that these improvements were driven by selective formalization and increased awareness of regulation. The intervention's financial implications were moderate, with findings indicating that firms partially formalized previously informal payment streams, without a significant increase in total labor costs. |
| Abstract: | Informelle, niedrigqualitative Beschäftigung in Mikro-, kleinen und mittleren Unternehmen (MSMEs) bleibt eine bedeutende Herausforderung in Ländern mit niedrigem und mittlerem Einkommen. Wir zeigen Evidenz aus einer Wirkungsevaluierung eines niedrigschwelligen Unternehmensberatungsprogramms mit Fokus auf die Formalisierung von Beschäftigung in Côte d'Ivoire. Mithilfe einer randomisierten kontrollierten Studie mit 448 MSMEs und einem innovativen Arbeitgeber-Arbeitnehmer-Datensatz stellen wir fest, dass die Intervention zur Formalisierung von Beschäftigung führte, angetrieben durch eine stärkere Einhaltung des Mindestlohns und eine Zunahme der Bereitstellung schriftlicher Verträge. Hinweise deuten darauf hin, dass diese Verbesserungen durch selektive Formalisierung und ein erhöhtes Bewusstsein für Regulierung bedingt waren. Die finanziellen Auswirkungen der Intervention waren moderat. Die Ergebnisse legen nahe, dass Unternehmen zuvor informelle Zahlungsströme teilweise formalisierten, ohne dass es zu einem signifikanten Anstieg der Gesamtarbeitskosten kam. |
| Keywords: | Employment formalization, business consulting, micro, small and medium enterprises(MSMEs), randomized controlled trial (RCT), Côte d'Ivoire |
| JEL: | O12 O17 J46 J81 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:rwirep:315486 |
| By: | Hagen Kruse; Franziska Lieselotte Ohnsorge; Gabriel Zenon Tourek; Zoe Leiyu Xie |
| Abstract: | This paper examines tax revenue shortfalls in South Asian countries. On average during 2019–23, South Asian revenues totaled 18 percent of GDP—well below the average 24 percent among emerging market and developing economies (EMDEs). Econometric estimates from stochastic frontier analysis, which control for tax rates and the size of potential tax bases, suggest that tax revenues in the region are 1 to 7 percentage points of GDP below potential, with shortfalls in five of the region’s eight countries larger than in the average EMDE. Even after controlling for country characteristics, such as widespread informal economic activity outside the tax net and large agriculture sectors, sizable tax gaps remain, suggesting the need for improved tax policy and administration. The paper discusses and provides evidence from international experience with reforms to raise government revenues. |
| Date: | 2025–04–17 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11104 |
| By: | Ally Abubakar Samiji; Darlene K. Mutalemwa |
| Abstract: | The study examines Dar es Salaam's potential as a focal point for structural transformation, highlighting its emergence as a significant economic hub. Through a mixed-methods approach, the research investigates how urban development is shaped by institutional, economic, political, and spatial factors. Findings indicate a shift toward a service-oriented economy, although the informal sector remains dominant, characterized by low productivity. Key challenges include infrastructure gaps, skills shortages, limited entrepreneurial spirit, and bureaucratic inefficiencies. |
| Keywords: | Structural transformation, Informal sector, Urbanization, Political settlements, Tanzania |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:unu:wpaper:wp-2025-23 |