IMF: World’s informal economy large but on the decline

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Chandni Chowk is one of the oldest and busiest markets in Old Delhi, India.
Customers drink herbal tea in the street./Getty Images

According to a survey published by the International Monetary Fund (IMF), the size of the informal economy—measured as a share of GDP—has fallen gradually across all regions.

The informal economy is the economic activity that falls outside the regulated economy and tax system. It involves occupations such as street vending or unregistered taxi drivers and is hard to measure.

While reforms to reduce informality, such as reducing the hurdles to registering a business, are working, the shift from informal to formal takes time.

The informal economy is generally associated with low productivity, poverty, high unemployment, and slower economic growth.  However, the informal economy provides employment and income to people who would otherwise not find employment, or it supplements their income from employment in the formal, regulated sector.

Informal economies are also more prevalent in low-income countries. As countries develop economically, it becomes easier for workers to transition to the formal sector and reliance on informal jobs reduces.

The survey indicates that the regions with the highest share of informality during 2010–17 are sub-Saharan Africa and Latin America and the Caribbean—both at 34 percent of GDP.

This compares with 9 percent of GDP for North America. In the Organisation for Economic Co-operation and Development, the informal sector is equivalent to nearly 15 percent of GDP.

The survey points out that the challenge for policymakers is to create an environment where the formal sector can thrive while creating opportunities for people working in the informal sector to maintain or improve their living standards.

Some of these measures include reducing the costs of doing business, tackling corruption, and improving access to finance and services.

 

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