THE CHARACTERISTICS AND SPATIAL MODELLING OF INFORMAL ECONOMIES
1,4University of Dschang, Cameroon.
2Professor,University of Dschang, Cameroon.
3Universite des Montagnes, Bagangte, Cameroon.
ABSTRACT
The goal of this study is to identify the characteristics of informal economies. Specifically, we identify the factors that describe informal economies and summarize them into indices measuring informality. We use data on 189 countries and the method used to analyze the data focuses only on the year 2012. We perform an exploratory analysis to identify the variables which structure informal economies and use the scores from a logistic regression to measure the degree of informality of each country. The results show that the degree of informality a country is related to its level of development. Thus, developing countries are generally those where the degree of informality is highest while developed countries are generally characterized by a low level of informality. This study thus enables us to classify countries into groups according to the variables that determine informality and draw a chart representing the countries according to their level of informality.
Keywords:Informal economy, Data analysis, Aggregate index, Logistic regression.
JEL Classification:E26 Informal Economy, Underground Economy
ARTICLE HISTORY: Received: 14 April 2020, Revised: 18 May 2020, Accepted: 22 June 2020, Published: 9 July 2020
Contribution/ Originality: This study contributes to the existing literature by identifing the characteristics of informal economies.
In the majority of African and Latin American countries, Structural Adjustment Programs (SAPs) led to an important reduction of government spending, a progressive stop of investment projects and a rationing of the personnel in the public service (Walther, 2006). Adjustment policies deeply affected the structure of employment, forcing the highly indebted poor countries to go from an organization where the State is the main employer to one where individual and private initiative must take over.
The importance of the informal economy is a growing in certain countries. In Cameroon for example, the resources of the informal sector accounted for 90,4% of the total resources in 2005; this number increased to 90,5% in 2010 1.
Schneider (2004) measures the share of the value-added of the informal economy in the GDP 2 (Gross domestic product) of 145 countries across the world. According to the author, the informal economy averagely accounts for 43,2% of the GDP of African economies; 30,8% of the GDP of Asian countries; 43,4% of the GDP of Central and South America; 40,1% of the GDP of Central and Eastern Europe; and 16,3% of the GDP of OCED countries in 2003. The author combines the Multiple Indicators, Multiple Causes (MIMIC) method and monetary approach to measure the size of the informal economy between 1999 and 2003.
The informal economy refers to the set of economic activities carried out by people not registered with the social security 3. However, the structure of the informal economy depends on the level of development of the country. In developing countries, the informal sector generates the majority of employment in cities, the shantytowns and villages. It offers less expensive goods and services adapted to local realities and the populations needs.
The informal economy includes petty-trading, craftsmen and family small-scale businesses which barely survive in their activities. Informal jobs in developing countries resemble a struggle for survival. For this reason, informal activity refers to the exercise by the poor of jobs that require painful tasks that are not recognized, recorded, protected, or regulated by the public authorities. The role of the State is thus called into question in the development of the informal economy. The deployment of the informal economy is a strategy of survival of the poor and vulnerable. According to Maldonado (2001) informal activity is the only alternative offered to the unemployed and newcomers in the job market in Africa.
On the other hand, in the developed countries the State occupies a dominant position in economic activity. The informal economy evolves according to rules and regulations imposed by the State. The size of the informal economy depends on the level of taxes and other levies deducted from exchange.
According to De Soto (1989) the informal sector is made up of agents who choose to act in an informal manner to avoid the costs, time and effort required to register their activity The analysis of De Soto is valid in developed countries where informal work, also referred to as moonlighting is a risky activity and severely punished by the tax authorities.
According to Maloney (2004) the informal sector is consists of the agents who deliberately seek to flee payments, levies, and other costs associated with economic activity to seek illegal goods and services.
In a general manner, the informal economy has two components: the first refers to illegal and criminal activities (prostitution, drugs) and the second component refers to the production of legal but unregistered goods and services.
This study makes a review of the factors which characterize informal economies and summarizes them into indices of measurement of the level of informality in each country. While, the second part will focus on the review of the literature, sections 3 and 4 will successively present the methodology and the results. As for the last section, it will conclude the work.
In the economic literature, three dominant approaches are used to understand the origins and causes of informality (Bacchetta, Ernst, & Bustamante, 2009):
New methods of measurement make it possible to quantify the respective weights of these sectors and analyze the production dynamics.
To measure the size of the informal economy, of many methods and variables are used. Some of these methods include:
The method of latent variables however has some limitations. Firstly, the concept of “tax morality” is difficult to measure in an objective manner. In addition, the results are not very reliable and are unstable. Helberger and Knepel (1988) show that a slight change in the countries used in the example of Frey and Weck leads to very different results. The ambiguity of the data and instability of the results limit the use of the method of latent variables as means of measurement of the underground economy.
The “dualistic” approach of Harris and Todaro (1970) comes to support the idea we have of the shadow economy in developing countries. In fact, the dual model of the job market considers the informal sector as a residual component disconnected from the rest of the economy. It is thus a sector of subsistence whose existence results from the inability of the formal sector to create sufficient jobs.
According to Maurizio (2012) it is possible to establish a relationship between informality and poverty in Latin America. Muheme (1995) holds that the informal economy is a form of disguised unemployment.
The growth of the informal economy is a survival strategy of the poor and the vulnerable. For Maldonado (2001) informal activity is the only alternative offered to the unemployed and new arrivals on the job market in Africa.
De Soto (1989) poses the basis for the analysis of the informal economy. His analysis is rather valid in developed countries where informal activity, also referred to as moonlighting is a risky activity severely punished by the tax department.
Also, the results of Lacroix and Fortin support the ideas of the structural doctrine (Portes, Castells, & Benton, 1989). In fact, the structural approach focuses on the interactions between the informal and formal sectors. The informal sector is a sub-component of the capitalist system and provides the formal companies cheap goods and labor.
Tanzi (1980) proposes an econometric approach to measure the size of the informal economy. The econometric method introduces the tax burden into the equation of the demand for money. Tanzi specifically seeks to isolate the excess demand for currency due to informal transactions. Contini (1981) uses the approach through the rate of participation in the job market to measure the size of the informal economy. This approach uses statistics on to the job market to estimate the size of the informal economy. Kaufmann and Kaliberda (1996) use electricity consumption as a physical indicator of the global economic activity.
According to Frey and Weck (1983) the size of the underground economy can be explained by the effective tax burden, the perception of the tax burden, the unemployment rate, the level of regulation (for example: the number of laws), the attitude with regards to the payment of taxes (tax morality) and the income per capita.
The shadow economy functions partly thanks to corruption and has a cost for the agents. These agents must corrupt tax officials or face penalties and pay fines. De Soto (1989) finds that between 10 and 15% of the income of informal companies is paid in the form of bribe as against only 1% for their counterparts of the formal sector. The level of corruption and the burden of the regulation are thus variables which characterize informal economies 5.
The objective of this section is to characterize the informal economy by presenting a theoretical model, which will later be verified using analytical data
Latent variables are a first attempt to address the problems involved in the use of ordinary least squares in a model whose dependent variable is binary. The latent variable is a continuous non-observable variable which is representative of the studied phenomenon (for example the level or degree of informality of a country can be studied using the fact that certain indicators are related to the risk of informality). Thus, we introduce the latent variable yi∗ (income) and suppose that:
The estimation of the parameters is carried out here using the algorithms of maximum of a log-likelihood function (Thomas, 2002a). Only the signs of the coefficients indicate if the variable acts positively or negatively on the probability It is however possible to calculate the marginal effects (Thomas, 2002b) in order to know the sensitivity of changes in an explanatory variable on the probability The significance of the coefficient is thus appreciated using the ratios known as “Z-Statistics” because the distribution of the ratios of the coefficient on its standard deviation does not follow a Student law as in the general linear model, but a normal distribution.
Table-1. Variables retained for an exploratory analysis of informality.
Nature of the Variables | Variables selected | Approach |
Physical variable Electricity | Consumption of electricity in kWh per capita | Kaufmann and Kaliberda* |
Proportion of the population with access to electricity | ||
Monetary variables | Money supply expressed as a percentage of the GDP | Monetary approach* |
Money and quasi money (M2) per capita | ||
Income per head | GNI per capita | Approach by the GDP* |
GDP per capita | ||
Capital per head | Gross fixed capital formation per capita ( current US $) | Variables judged important |
Savings per head | Gross domestic savings per head | |
Expenditure per head | Final consumption expenditure of households per capita | Approach: Direct*, Monetary*, GDP* |
Government final consumption expenditure | ||
Health expenditure per capita (current US $) | ||
gender | Proportion of seats occupied by women in the national parliament | Taking into account of the sex |
Education | Expenditure on education per capita (US $) | Role of education, ILO |
Rate of failures in primary education | ||
Rate of failure in secondary education | ||
Agriculture | Added-value by worker of Agriculture (US $) | Residual approach* |
Unemployment | Unemployment rate | Approaches by employment |
Youth unemployment rate | ||
Dependency ratio (% Of the working-age population) | ||
Burden of the regulation | number of hours to prepare and pay the taxes | De Soto*, method of latent variable* |
Number of days necessary to enforce a contract | ||
Cost of procedures of starting of a company | ||
Quality of the regulation and business environment | ||
Number of day necessary to start a company | ||
Number of procedures to record a new company | ||
Taxation | Total tax rate expressed as a percentage of the trading profits | De Soto*, MIMIC* (latent variable) |
Consolidated rate of customs tariff (%) | ||
Banking environment | Number of adults (on 1 000) that deposit income in banks Share of domestic credit provided by the financial sector (% GDP) |
Monetary approaches* |
We retain some variables that can explain the levels of informality of economies. Table 1 summarizes the variables retained for an exploratory analysis of the dimensions of informality. The variables are selected following the literature on the measurement of the informal economy and depending on the availability of data on the variables. In this table, certain approaches or names of authors are marked by a star because of the existing difference between the variables selected and those presented in the literature.
We add some variables on education because according to the ILO, an easy means of integrating an official employment and have access to a decent job is the elimination of basic illiteracy. Social inequalities are the reflection of differences related to education. It is observed that the illiterate have no other choice than working in the informal economy. Thus, basic education is a good means of entering the formal sector. In fact, 40% of adults in sub-Saharan Africa are illiterate. This is also the case of about half of the adult population in South Asia (ILO, 2002).
Also, the number of women in Parliament takes into account differences in the number of women in decision-making jobs. In mixed organizations, staff positions are affected by gender. Women belong to the vulnerable category and are mainly represented in the informal sector than in the formal sector. According to the exclusion of social protection is a phenomenon strongly related to gender. Women who manage micro-enterprises are confronted with difficulties relating to gender because of social and cultural influences.
The World Bank on its website 9 publishes the macroeconomic indicators of each country. All our data comes from this website. We chose to use data of the year 2012 because they are relatively more available for many countries. Despite the enlightenment that the different approaches to the measurement of the informal economy bring, the data of these studies are different.
Figures 1 10and 2 see Appendices 1 and 2 show the results of a principal components analysis11 on 189 countries. Factorial axis 1 opposes financial variables (domestic credit granted by the financial sector in % of the GDP; number of deposits in banks for 1000 adults;…), welfare variables (GDP per capita; consumption of electricity per capita; final household consumption…) against variables measuring administrative and tax difficulties (total number of taxes as a % of commercial profits; time in hours to prepare and pay taxes; the cost to begin an activity). The other variables that characterize the first factor are the dependency ratio of the elderly; the rate of failure in primary and secondary education. The value-added in agriculture per capita is strongly correlated with the welfare indicators.
The factorial axis 2 is primarily made of variables which characterise unemployment. Certain variables were used for illustrative purposes since their contribution to the independent factors is very low (gross fixed capital formation; time in days to register a good; time in days to enforce a contract; time in days to begin a commercial activity; and the proportion of the women having a seat in parliament). Other variables are also used as for illustrative purposes because they are strongly correlated with other variables measuring the welfare of the populations (final government consumption; gross national income per capita, and healthcare expenditure per capita). These variables are redundant. They contain information which is related to variables measuring welfare (GDP per capita; …).
Figure 2 in Appendix 2 shows the distribution of the countries following the main factorial axes 1 and 2. The first group of countries 12 (Chad; South-Sudan; Democratic Republic of Congo; Liberia; Zimbabwe; Guinea-Bissau; Niger; Togo; Mali; Mozambique; Sierra Leone; Madagascar; Ethiopia; Rwanda; Burundi; …) is made up of very poor countries with very low gross income per capita. These are mostly countries of Sub-Saharan Africa where the cost of regulation and administrative procedures are highest. They are also countries where the rates of failure to in primary and secondary education are highest and where the rate of adult dependency is highest. In these countries, the indicators of welfare are low (GDP per capita, consumption of electricity per capital ;…).
The second group of countries (Namibia; Tajikistan; Algeria; Philippines; Swaziland; Belize; El Salvador; Bangladesh; Nicaragua; Nigeria; Pakistan; Paraguay; India; Ghana; Kosovo) is made up of relatively poor countries where the regulatory burden is particularly high (time to begin a commercial activity and time to prepare and pay taxes).
The third group of countries (Poland; Jordan; Lithuania; Turkey; Hungary; Romania; Maldives; Lithuania; Seychelles; Slovakia; Albania; the Caribbean islands; Georgia; Greece; Armenia; …) is made up of countries with intermediate incomes where the global unemployment rate and youth unemployment are particularly high. In this group of countries, the regulatory burden and tax authorities are relatively low.
The fourth group of countries (Norway; Luxembourg; Japan; Australia; Hong-Kong; Qatar; Denmark; The United States; Sweden; Canada; Austria; Germany; New Zealand; Netherlands; Belgium; Finland;…) is made up of developed and OECD countries. They are countries where the average gross income per capita was about 36 000 US $ during the year 2012. In this group of countries, the population easily has access to electricity, banking services and domestic credit. In addition to these characteristics, it should be noted that in these countries, the regulatory burden and administrative procedures are low; the unemployment rate is also relatively low.
Figure 2 see Appendix 2 classifies countries according to their level of informality; going from the left to the right, we move from countries with a highly informal economy towards countries that are less informal. The grouping of the countries is done according to the criteria which characterize informality.
Each variable of Figure 1 in the appendix describes a dimension of informality. Thus, informality arises in several ways, according to whether one is in the poor countries of sub-Saharan Africa, in countries with intermediate incomes or the developed countries of the OECD. According to the exploratory analysis, the traces of informality are more present in the poor countries of sub-Saharan Africa than in the developed and OECD countries.
In addition, we build for each variable characterizing a dimension of informality, an elementary indicator of informality. The elementary indicators are then too assembled to build an aggregate index of informality.
Table 1 gives a list of variables that describe informality. In this paragraph, we only retain the variables that are most significant in the exploratory analysis. These are the variables 15 best represented on the main factorial axes or which contribute the greatest shares to the formation of the factors. Among the variables likely to increase informality, we can cite: total taxes as a percentage of commercial profits; the cost to start a commercial activity; the rate of failure in primary education; the adult dependency ratio; and the youth unemployment rate. In fact, these are globally the variables of Figure 1 that are directed to the left or upwards.
Among the variables likely to decrease the level of informality, we can cite: GDP per capita; the consumption of electricity per capita; the domestic credit granted by banks as a percentage of GDP; the value added in agriculture per capita; and per capita money supply. These are generally the variables in Figure 1 that are directed towards the left. Thus, the basic index of informality for a country and a criterion is always between 0 and 1. The basic indices are built so that their increase increases the risk of informality. When a basic index of informality is close to 0, this means that the traces of informality for this criterion are weak; when it is close to 1, then the traces of informality are high for this criterion.
We say that the economy of a country is a priori informal for the criterion X if its basic index of informality for this criterion is higher than the median. The economy of a country is a priori informal if it is informal for more than of the selected criteria of informality 16. Table 2 gives an alphabetical list of the most informal countries a priori. The score 1 for a criterion means that the country is a priori informal for this criterion; 0 mean that the country is not a priori informal for the indicated criterion. For the 10 criteria selected, the countries that carry more than 5 times the score 1 are a priori informal.
Table 2 shows that in the a priori most informal countries, the youth unemployment rate is generally low. Generally, these countries are a priori informal for all the criteria, except the youth unemployment rate. The least a priori informal countries for the criteria selected are: Brazil, Canada, Chile, Denmark, Dominican Islands, Hong-Kong, Iceland, Korean Republic, Luxembourg, Malaysia, Netherlands, Qatar, Singapore, Switzerland, Turkey, United Arab Emirates, and the United States. These are mainly countries located in the South-east of Figure 2.
Tablea-2. The a priori most informal countries.
Country Name | GDP per capita |
Electric power (kWh per capita) |
Agriculture value added per worker |
Age dependency ratio |
Money (M2) per capita |
Cost of business start-up procedures |
Domestic credit provided by financial sector |
Repeaters primary school |
Total tax rate (% of commercial profits) |
Unemployment, youth total |
Number of informality scores |
A Priori informality |
Benin | 1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
0 |
9 |
1 |
Burkina Faso | 1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
0 |
9 |
1 |
Cameroon | 1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
0 |
9 |
1 |
RCA | 1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
0 |
9 |
1 |
Chad | 1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
0 |
9 |
1 |
Comoros | 1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
0 |
9 |
1 |
Democratic Republic of Congo | 1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
0 |
9 |
1 |
Cote d'Ivoire | 1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
0 |
9 |
1 |
Guinea | 1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
0 |
9 |
1 |
Guinea - Bissau | 1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
0 |
9 |
1 |
Haïti | 1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
0 |
9 |
1 |
Kenya | 1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
0 |
9 |
1 |
Mali | 1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
0 |
9 |
1 |
Mauritania | 1 |
1 |
1 |
1 |
1 |
1 |
1 |
0 |
1 |
1 |
9 |
1 |
Small states | 0 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
9 |
1 |
Togo | 1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
0 |
9 |
1 |
Republic of Yemen | 1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
0 |
1 |
9 |
1 |
The logistic regression is done with version 8.0 of the “Eviews” econometrics software. The variable to be explained is informality. The explanatory variables are: GDP per capita; the consumption of electricity in kWh per capita; the value added in agriculture; the rate of dependence of adults; money and quasi money per capita; the cost of procedures to begin an economic activity; domestic credit granted by the financial sector as a percentage of the GDP; the rate of failure in primary education; the global rate of taxation as a percentage of commercial profits; and the youth unemployment rate.
Table 3, gives the results of the logistic regression on the set of 189 countries selected. Note that the coefficients of this regression can be interpreted as the weights of the variables which are associated to them. Knowing the coefficients of the model, it becomes easy to envisage the probability (which we call also degree) of informality of a country given its characteristics. If a country does not form part of our sample, we can, knowing its characteristics (GDP per capita, consumption of electricity per capital, …), calculate its degree of informality.
The results of this regression are presented in Table 3.
Table-3. Results of the logistic regression using Eviews 8.0.
Dependent Variable: INFORMILITE_A_PRIORI Method: ML - Binary Logit (Quadratic hill climbing) |
||||
Sample: 1 189 Included observations: 189 Convergence achieved after 8 iterations Covariance matrix computed using second derivatives |
||||
Variable | Coefficient |
Standard. Error |
z-Statistic |
Prob. |
Gdp_Per_Capita | 1.461805 |
0.432742 |
3.378005 |
0.0007 |
Electric_Power_per_Capit | 0.028358 |
0.035549 |
0.797707 |
0.4250 |
Money_M2_Per_Capita | 2.236586 |
0.552650 |
4.047018 |
0.0001 |
Agricult_Value_Added_per | 1.779468 |
0.482526 |
3.687818 |
0.0002 |
Domestic_Credit__Financi | 0.279028 |
0.149033 |
1.872251 |
0.0612 |
Repeaters_Primary_School | 0.372993 |
0.133375 |
2.796562 |
0.0052 |
Total_Tax_Rate | 0.986562 |
0.195872 |
5.036757 |
0.0000 |
Cost_Business_Start_Up_P | 1.533072 |
0.295666 |
5.185154 |
0.0000 |
Unemployment_of_Youth | 0.219015 |
0.109656 |
1.997292 |
0.0458 |
Age_Dependency_Ratio | 1.070668 |
0.285380 |
3.751731 |
0.0002 |
C | 6.523453 |
0.926498 |
7.040982 |
0.0000 |
McFadden R-squared | 0.889027 |
Mean dependent variable |
0.408377 |
|
S.D. dependent var | 0.492825 |
S.E. of regression |
0.153073 |
|
Akaike info criterion | 0.265278 |
Sum squared resid |
4.217665 |
|
Schwarz criterion | 0.452581 |
Log likelihood |
-14.33401 |
|
Hannan-Quinn criter. | 0.341144 |
Deviance |
28.66803 |
|
Restr. Deviance | 258.3322 |
Restr. log likelihood |
-129.1661 |
|
LR statistic | 229.6642 |
Avg. log likelihood |
-0.075047 |
|
Prob(LR statistic) | 0.000000 |
|||
ObswithDep=0 | 113 |
Total observations |
189 |
|
ObswithDep=1 | 76 |
All the coefficients of the model are positive, which reflects coherence in the construction of the model (the elementary indices of informality are built so that their increase leads to an increase in the level of informality).
The model is globally acceptable see Table 3, statistics of the likelihood ratio) although some parameters 17 are not significantly different from 0. Table 4 below shows the different levels of informality of each country.
Table-4. The degree of informality of some countries .
Name of the Country | Number of scores of informality |
Probability of informality in % |
Score of informality |
dimension of risk |
Informality a priori |
Afghanistan | 7 |
70.2 |
7,38 |
2.36 |
1 |
Albania | 2 |
42.0 |
6,20 |
0.72 |
0 |
Algeria | 6 |
55.2 |
6,73 |
1.23 |
1 |
Angola | 6 |
77.8 |
7,78 |
3.50 |
1 |
Antigua | 2 |
21.6 |
5,23 |
0.27 |
0 |
Argentina | 3 |
43.2 |
6,25 |
0.76 |
0 |
Armenia | 4 |
40.2 |
6,13 |
0.67 |
0 |
Australia | 1 |
0.4 |
1,06 |
0.00 |
0 |
Austria | 1 |
5.4 |
3,66 |
0.06 |
0 |
Azerbaijan | 2 |
40.5 |
6,14 |
0.68 |
0 |
The Bahamas | 2 |
3.4 |
3,17 |
0.03 |
0 |
Baharin | 1 |
6.9 |
3,92 |
0.07 |
0 |
Bangladesh | 8 |
66.9 |
7,23 |
2.03 |
1 |
Barbados | 2 |
28.4 |
5,60 |
0.40 |
0 |
Belarus | 2 |
37.6 |
6,02 |
0.60 |
0 |
Belgium | 1 |
5.2 |
3,62 |
0.05 |
0 |
Belize | 6 |
49.9 |
6,52 |
0.99 |
1 |
Benin | 9 |
80.6 |
7,95 |
4.16 |
1 |
Table 2 is primarily descriptive. It gives the list of the countries with marks of informality. However, it does not inform on the extent of the informality and does not take into account the weight of each criterion of informality. Table 4 combines the elementary indices of informality and the associated weights to calculate the scores, the dimensions and the probabilities (degrees) of informality.
The score, dimension of informality, and the probability of informality are equivalent criteria making it possible to classify the economies according to their degree of informality. In Table 4, we note that Bangladesh which has a priori 8 marks of informality on 10 is more informal a priori than Angola that has 6 marks of informality a priori. When we take into account of size of informality and their weights, we find that Angola is a posteriori (following the results of the logistic model) more informal than Bangladesh.
According to the results of the logistic model, the 10 most informal countries in decreasing order are: the Democratic republic of Congo, Chad, Gambia, Haiti, Comoros, Central African Republic, South-Sudan, Guinea, Malawi, and Togo. In the same manner, the 10 least informal countries a posteriori are (by order ascending of informality): Singapore, Qatar, Denmark, United States, Japan, Australia, Macao, Iceland, Sweden, and Switzerland.
Figure-1. Graphical representation of countries according to their levels of informality.
Figure 1 describes the countries according to their degree of informality. The red marks show highly informal countries (level of informality is higher than 69%). They are mainly the countries of Sub-Saharan Africa and some countries of South Asia and Latin America. The yellow marks show countries where the degree of informality is relatively high (degree of informality ranging between 45 and 69%). These are located mainly in Africa, Latin America and Asia. Blue marks denote countries where the degree of informality is relatively low (ranging between 29 and 45%). It should be noted that these countries are dispersed on the planet, with a small majority in Europe. The green marks denote countries that are slightly informal (degree of informality lower than 29%). They are mainly the countries of Europe and North America.
Table 5 below gives the elasticities of the risk of informality relative to the factors of informality for some countries with high income. In this table, we notice that the elasticity of the degree of informality relative to the consumption of electricity is very low. If the consumption of electricity decreases, the degree of informality does not increase significantly. On the other hand, if the basic index of informality related to the money supply per capita increases by 1% (i.e. the quantity of money per capita decreases), then the degree of informality will increase by approximately 2% in the Netherlands, Finland, Belgium, Germany, Canada, Austria and France. Elasticities indicate the factors likely to make informality very quickly.
Table-5. Elasticity of informality relative to the determinants of informality.
Country Names | GDP per Capita |
Electric power per Capita |
Agriculture value added worker |
Age dependency ratio |
money (M2) capita |
Cost of business start-up |
Domestic credit y financial sector) |
Repeaters primary school |
Total tax rate |
Unemployment, youth |
U. Kingdom | 0,26 |
0,01 |
0,49 |
0,50 |
0,00 |
0,00 |
0,01 |
0,00 |
0,34 |
0,09 |
Hong Kong | 0,39 |
0,01 |
0,74 |
0,32 |
0,00 |
0,01 |
0,00 |
0,01 |
0,22 |
0,04 |
Korea, Rep. | 0,74 |
0,00 |
0,69 |
0,35 |
0,00 |
0,08 |
0,06 |
0,00 |
0,33 |
0,04 |
Emirates | 0,24 |
0,00 |
1,24 |
0,16 |
0,28 |
0,03 |
0,17 |
0,00 |
0,14 |
0,04 |
Brunei | 0,24 |
0,00 |
1,10 |
0,37 |
0,18 |
0,06 |
0,26 |
0,00 |
0,15 |
0,05 |
Luxembourg | 0,00 |
0,00 |
0,05 |
0,42 |
1,91 |
0,01 |
0,00 |
0,00 |
0,19 |
0,08 |
Norway | 0,00 |
0,00 |
0,00 |
0,48 |
1,90 |
0,01 |
0,11 |
0,01 |
0,39 |
0,04 |
Lebanon | 1,14 |
0,02 |
0,19 |
0,44 |
0,48 |
0,18 |
0,03 |
0,10 |
0,29 |
0,08 |
Israel | 0,50 |
0,01 |
1,05 |
0,57 |
0,32 |
0,02 |
0,16 |
0,02 |
0,27 |
0,05 |
Netherlands | 0,02 |
0,01 |
0,00 |
0,47 |
2,04 |
0,03 |
0,00 |
0,02 |
0,37 |
0,04 |
Bahamas, | 0,79 |
0,01 |
0,18 |
0,38 |
0,95 |
0,05 |
0,13 |
0,00 |
0,43 |
0,13 |
Finland | 0,07 |
0,00 |
0,00 |
0,49 |
2,03 |
0,01 |
0,05 |
0,00 |
0,39 |
0,08 |
Canada | 0,00 |
0,00 |
0,68 |
0,41 |
1,99 |
0,00 |
0,08 |
0,02 |
0,19 |
0,06 |
Belgium | 0,14 |
0,01 |
0,00 |
0,47 |
2,00 |
0,03 |
0,12 |
0,03 |
0,54 |
0,08 |
Germany | 0,17 |
0,01 |
0,24 |
0,47 |
2,01 |
0,02 |
0,06 |
0,01 |
0,43 |
0,03 |
Austria | 0,05 |
0,00 |
0,32 |
0,44 |
1,99 |
0,02 |
0,08 |
0,03 |
0,49 |
0,04 |
S. Arabia | 0,69 |
0,00 |
0,66 |
0,43 |
1,19 |
0,03 |
0,26 |
0,02 |
0,14 |
0,12 |
France | 0,25 |
0,01 |
0,00 |
0,51 |
1,99 |
0,00 |
0,07 |
0,02 |
0,62 |
0,10 |
This study has as objective to characterize informal economies. It identifies the factors that determine informality and of synthesizes them into indices measuring informality. We use data on 189 countries and analyze only the data for the year 2012. We used two approaches to examine informality in the economies. The first approach is exploratory and enables us to classify the countries into four groups according to the criteria which best describes informality in each group. The second approach is based on the results of the first and uses the techniques of logistic regression to build a synthetic indicator which measures the degree of informality of the economy of each country. The results of the two approaches show that the marks of informality are more visible in developing countries of Sub-Saharan Africa than in developed countries of the OECD. Moreover, the degree of informality in the countries is related to their level of development. Thus, developing countries are generally those where the degree of informality is highest while developed countries generally have lower degrees of informality. This study made it possible to organize the countries in groups according to the variables which characterize informality and to visualize on maps the countries according to their degree of informality. The measurement of the size of the informal economy is of a major importance because it makes it possible to correct the macroeconomic indicators such as the GDP per capita, the cost of living, poverty indices, and the index of human development. The taking into account of the informal economy also makes it possible to better target economic diagnosis and decisions to evaluate the impact of social policies and tax decisions.
Funding: This study received no specific financial support. |
Competing Interests: The authors declare that they have no competing interests. |
Acknowledgement: All authors contributed equally to the conception and design of the study. |
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Appendix-1. Representation of the variables on the 1st and 2nd factorial axes Figure 1.
Appendix-2. Description of countries and variables on the 1st and 2nd factorial axes Figure 2.
Appendix-3. Determination of the level of informality of countries.
Country Name | Sum of indicators of informality |
A priori Informality |
SCORE |
ODD |
Probability of informality |
Afghanistan | 7 |
1 |
7,38 |
2,36 |
0,70 |
Albania | 2 |
0 |
6,20 |
0,72 |
0,42 |
Algeria | 6 |
1 |
6,73 |
1,23 |
0,55 |
Angola | 6 |
1 |
7,78 |
3,50 |
0,78 |
Antigua and Barbuda | 2 |
0 |
5,23 |
0,27 |
0,22 |
Argentina | 3 |
0 |
6,25 |
0,76 |
0,43 |
Armenia | 4 |
0 |
6,13 |
0,67 |
0,40 |
Australia | 1 |
0 |
1,06 |
0,00 |
0,00 |
Austria | 1 |
0 |
3,66 |
0,06 |
0,05 |
Azerbaijan | 2 |
0 |
6,14 |
0,68 |
0,40 |
Bahamas, The | 2 |
0 |
3,17 |
0,03 |
0,03 |
Bahrain | 1 |
0 |
3,92 |
0,07 |
0,07 |
Bangladesh | 8 |
1 |
7,23 |
2,03 |
0,67 |
Barbados | 2 |
0 |
5,60 |
0,40 |
0,28 |
Belarus | 2 |
0 |
6,02 |
0,60 |
0,38 |
Belgium | 1 |
0 |
3,62 |
0,05 |
0,05 |
Belize | 6 |
1 |
6,52 |
0,99 |
0,50 |
Benin | 9 |
1 |
7,95 |
4,16 |
0,81 |
Bhutan | 4 |
0 |
6,48 |
0,96 |
0,49 |
Bolivia | 7 |
1 |
7,41 |
2,43 |
0,71 |
Bosnia and Herzegovina | 3 |
0 |
6,25 |
0,76 |
0,43 |
Botswana | 4 |
0 |
6,30 |
0,80 |
0,44 |
Brazil | 0 |
0 |
5,17 |
0,26 |
0,21 |
Brunei Darussalam | 1 |
0 |
2,44 |
0,02 |
0,02 |
Bulgaria | 1 |
0 |
5,25 |
0,28 |
0,22 |
Burkina Faso | 9 |
1 |
7,42 |
2,44 |
0,71 |
Burundi | 8 |
1 |
7,55 |
2,80 |
0,74 |
Cabo Verde | 4 |
0 |
6,30 |
0,80 |
0,45 |
Cambodia | 7 |
1 |
7,03 |
1,66 |
0,62 |
Cameroon | 9 |
1 |
7,34 |
2,27 |
0,69 |
Canada | 0 |
0 |
3,61 |
0,05 |
0,05 |
Caribbean small states | 2 |
0 |
6,37 |
0,86 |
0,46 |
Central African Republic | 9 |
1 |
8,36 |
6,31 |
0,86 |
Chad | 9 |
1 |
8,87 |
10,50 |
0,91 |
Chile | 0 |
0 |
4,86 |
0,19 |
0,16 |
China | 1 |
0 |
5,13 |
0,25 |
0,20 |
Colombia | 3 |
0 |
6,40 |
0,88 |
0,47 |
Comoros | 9 |
1 |
8,38 |
6,38 |
0,86 |
Congo, Dem. Rep. | 9 |
1 |
9,40 |
17,68 |
0,95 |
Congo, Rep. | 9 |
1 |
7,66 |
3,13 |
0,76 |
Costa Rica | 1 |
0 |
6,03 |
0,61 |
0,38 |
Cote d'Ivoire | 9 |
1 |
7,88 |
3,87 |
0,79 |
Croatia | 1 |
0 |
4,43 |
0,12 |
0,11 |
Cyprus | 2 |
0 |
4,75 |
0,17 |
0,15 |
Czech Republic | 1 |
0 |
4,74 |
0,17 |
0,14 |
Denmark | 0 |
0 |
0,87 |
0,00 |
0,00 |
Djibouti | 8 |
1 |
7,73 |
3,33 |
0,77 |
Dominica | 0 |
0 |
5,62 |
0,41 |
0,29 |
Dominican Republic | 6 |
1 |
6,39 |
0,88 |
0,47 |
Ecuador | 5 |
0 |
6,50 |
0,98 |
0,49 |
Egypt, Arab Republic | 5 |
0 |
6,57 |
1,05 |
0,51 |
El Salvador | 6 |
1 |
6,68 |
1,17 |
0,54 |
Equatorial Guinea | 6 |
1 |
6,74 |
1,25 |
0,55 |
Eritrea | 8 |
1 |
7,67 |
3,14 |
0,76 |
Estonia | 3 |
0 |
5,79 |
0,48 |
0,32 |
Ethiopia | 8 |
1 |
7,75 |
3,41 |
0,77 |
Fiji | 2 |
0 |
6,23 |
0,74 |
0,43 |
Finland | 1 |
0 |
3,23 |
0,04 |
0,04 |
France | 4 |
0 |
3,82 |
0,07 |
0,06 |
Gabon | 6 |
1 |
6,56 |
1,04 |
0,51 |
Gambia, The | 8 |
1 |
8,51 |
7,26 |
0,88 |
Georgia | 4 |
0 |
6,21 |
0,73 |
0,42 |
Germany | 1 |
0 |
3,63 |
0,06 |
0,05 |
Ghana | 6 |
1 |
6,86 |
1,41 |
0,58 |
Greece | 3 |
0 |
5,52 |
0,37 |
0,27 |
Grenada | 1 |
0 |
5,89 |
0,53 |
0,35 |
Guatemala | 8 |
1 |
6,98 |
1,58 |
0,61 |
Guinea | 9 |
1 |
8,16 |
5,16 |
0,84 |
Guinea-Bissau | 9 |
1 |
7,41 |
2,42 |
0,71 |
Guyana | 4 |
0 |
6,29 |
0,79 |
0,44 |
Haiti | 9 |
1 |
8,44 |
6,77 |
0,87 |
Honduras | 5 |
0 |
6,74 |
1,24 |
0,55 |
Hong Kong SAR, China | 0 |
0 |
1,76 |
0,01 |
0,01 |
Hungary | 2 |
0 |
5,44 |
0,34 |
0,25 |
Iceland | 0 |
0 |
1,08 |
0,00 |
0,00 |
India | 6 |
1 |
6,75 |
1,25 |
0,56 |
Indonesia | 7 |
1 |
6,65 |
1,14 |
0,53 |
Iran, Islamic Republic. | 3 |
0 |
6,07 |
0,63 |
0,39 |
Iraq | 5 |
0 |
6,75 |
1,26 |
0,56 |
Ireland | 1 |
0 |
4,52 |
0,14 |
0,12 |
Israel | 1 |
0 |
3,06 |
0,03 |
0,03 |
Italy | 3 |
0 |
4,06 |
0,09 |
0,08 |
Jamaica | 3 |
0 |
6,37 |
0,86 |
0,46 |
Japan | 1 |
0 |
0,93 |
0,00 |
0,00 |
Jordan | 3 |
0 |
6,04 |
0,61 |
0,38 |
Kazakhstan | 1 |
0 |
5,65 |
0,42 |
0,29 |
Kenya | 9 |
1 |
7,23 |
2,03 |
0,67 |
Kiribati | 7 |
1 |
7,20 |
1,97 |
0,66 |
Korea, Rep. | 0 |
0 |
2,32 |
0,01 |
0,01 |
Kosovo | 5 |
0 |
6,46 |
0,94 |
0,48 |
Kuwait | 1 |
0 |
1,59 |
0,01 |
0,01 |
Kyrgyz Republic | 4 |
0 |
6,57 |
1,04 |
0,51 |
Lao PDR | 6 |
1 |
6,74 |
1,24 |
0,55 |
Latvia | 1 |
0 |
5,32 |
0,30 |
0,23 |
Lebanon | 2 |
0 |
3,05 |
0,03 |
0,03 |
Lesotho | 8 |
1 |
6,93 |
1,49 |
0,60 |
Liberia | 8 |
1 |
7,45 |
2,52 |
0,72 |
Libya | 3 |
0 |
5,80 |
0,48 |
0,33 |
Lithuania | 3 |
0 |
5,75 |
0,46 |
0,32 |
Luxembourg | 0 |
0 |
2,72 |
0,02 |
0,02 |
Macao SAR, China | 1 |
0 |
1,08 |
0,00 |
0,00 |
Macedonia, FYR | 2 |
0 |
5,64 |
0,41 |
0,29 |
Madagascar | 8 |
1 |
7,46 |
2,56 |
0,72 |
Malawi | 8 |
1 |
8,01 |
4,43 |
0,82 |
Malaysia | 0 |
0 |
4,66 |
0,16 |
0,13 |
Maldives | 1 |
0 |
5,95 |
0,56 |
0,36 |
Mali | 9 |
1 |
7,90 |
3,95 |
0,80 |
Malta | 2 |
0 |
5,27 |
0,28 |
0,22 |
Marshall Islands | 6 |
1 |
7,06 |
1,70 |
0,63 |
Mauritania | 9 |
1 |
7,54 |
2,76 |
0,73 |
Mauritius | 1 |
0 |
5,14 |
0,25 |
0,20 |
Mexico | 1 |
0 |
5,86 |
0,51 |
0,34 |
Micronesia, Fed.. | 8 |
1 |
7,60 |
2,92 |
0,74 |
Moldova | 4 |
0 |
6,27 |
0,78 |
0,44 |
Mongolia | 2 |
0 |
6,06 |
0,63 |
0,39 |
Montenegro | 1 |
0 |
5,85 |
0,51 |
0,34 |
Morocco | 4 |
0 |
6,35 |
0,84 |
0,46 |
Mozambique | 7 |
1 |
7,22 |
2,01 |
0,67 |
Myanmar | 7 |
1 |
7,47 |
2,59 |
0,72 |
Namibia | 4 |
0 |
6,50 |
0,98 |
0,49 |
Nepal | 7 |
1 |
6,93 |
1,50 |
0,60 |
Netherlands | 0 |
0 |
3,10 |
0,03 |
0,03 |
New Zealand | 1 |
0 |
3,95 |
0,08 |
0,07 |
Nicaragua | 7 |
1 |
7,28 |
2,13 |
0,68 |
Niger | 8 |
1 |
7,93 |
4,06 |
0,80 |
Nigeria | 7 |
1 |
7,32 |
2,22 |
0,69 |
Norway | 1 |
0 |
3,02 |
0,03 |
0,03 |
Oman | 2 |
0 |
4,92 |
0,20 |
0,17 |
Pakistan | 7 |
1 |
6,83 |
1,36 |
0,58 |
Palau | 3 |
0 |
6,42 |
0,90 |
0,47 |
Panama | 1 |
0 |
5,69 |
0,43 |
0,30 |
Papua New Guinea | 7 |
1 |
6,76 |
1,27 |
0,56 |
Paraguay | 6 |
1 |
6,62 |
1,10 |
0,52 |
Peru | 3 |
0 |
6,33 |
0,82 |
0,45 |
Philippines | 5 |
0 |
6,68 |
1,17 |
0,54 |
Poland | 2 |
0 |
5,60 |
0,40 |
0,28 |
Portugal | 3 |
0 |
5,58 |
0,39 |
0,28 |
Puerto Rico | 3 |
0 |
4,10 |
0,09 |
0,08 |
Qatar | 0 |
0 |
0,85 |
0,00 |
0,00 |
Romania | 2 |
0 |
5,82 |
0,50 |
0,33 |
Russian Federation | 1 |
0 |
5,32 |
0,30 |
0,23 |
Rwanda | 6 |
1 |
7,02 |
1,65 |
0,62 |
Samoa | 3 |
0 |
6,39 |
0,87 |
0,47 |
Sao Tome and Principe | 7 |
1 |
7,16 |
1,89 |
0,65 |
Saudi Arabia | 2 |
0 |
3,75 |
0,06 |
0,06 |
Senegal | 8 |
1 |
7,40 |
2,41 |
0,71 |
Serbia | 1 |
0 |
6,22 |
0,74 |
0,42 |
Seychelles | 2 |
0 |
5,66 |
0,42 |
0,30 |
Sierra Leone | 8 |
1 |
7,45 |
2,54 |
0,72 |
Singapore | 0 |
0 |
0,84 |
0,00 |
0,00 |
Slovak Republic | 3 |
0 |
5,53 |
0,37 |
0,27 |
Slovenia | 2 |
0 |
4,01 |
0,08 |
0,07 |
Small states | 9 |
1 |
6,98 |
1,58 |
0,61 |
Solomon Islands | 7 |
1 |
6,98 |
1,57 |
0,61 |
South Africa | 1 |
0 |
5,67 |
0,43 |
0,30 |
South Asia | 5 |
0 |
6,71 |
1,21 |
0,55 |
South Sudan | 8 |
1 |
8,27 |
5,71 |
0,85 |
Spain | 2 |
0 |
4,20 |
0,10 |
0,09 |
Sri Lanka | 6 |
1 |
6,75 |
1,25 |
0,56 |
St. Kitts and Nevis | 3 |
0 |
4,99 |
0,22 |
0,18 |
St. Lucia | 1 |
0 |
5,86 |
0,51 |
0,34 |
St. Vincent and the Grenadines | 1 |
0 |
6,13 |
0,68 |
0,40 |
Sudan | 7 |
1 |
7,03 |
1,67 |
0,62 |
Suriname | 3 |
0 |
6,38 |
0,86 |
0,46 |
Swaziland | 8 |
1 |
7,08 |
1,75 |
0,64 |
Sweden | 2 |
0 |
1,29 |
0,01 |
0,01 |
Switzerland | 0 |
0 |
1,40 |
0,01 |
0,01 |
Tajikistan | 6 |
1 |
7,32 |
2,21 |
0,69 |
Tanzania | 8 |
1 |
7,28 |
2,12 |
0,68 |
Thailand | 1 |
0 |
5,59 |
0,39 |
0,28 |
Timor-Leste | 7 |
1 |
6,83 |
1,36 |
0,58 |
Togo | 9 |
1 |
8,01 |
4,40 |
0,81 |
Tonga | 4 |
0 |
6,46 |
0,93 |
0,48 |
Trinidad and Tobago | 2 |
0 |
5,08 |
0,24 |
0,19 |
Tunisia | 4 |
0 |
6,34 |
0,83 |
0,45 |
Turkey | 0 |
0 |
5,67 |
0,43 |
0,30 |
Turkmenistan | 4 |
0 |
6,48 |
0,96 |
0,49 |
Uganda | 8 |
1 |
7,82 |
3,67 |
0,79 |
Ukraine | 2 |
0 |
6,23 |
0,74 |
0,43 |
United Arab Emirates | 0 |
0 |
2,34 |
0,02 |
0,01 |
United Kingdom | 1 |
0 |
1,72 |
0,01 |
0,01 |
United States | 0 |
0 |
0,91 |
0,00 |
0,00 |
Uruguay | 3 |
0 |
5,56 |
0,38 |
0,28 |
Uzbekistan | 6 |
1 |
7,43 |
2,49 |
0,71 |
Vanuatu | 4 |
0 |
6,40 |
0,88 |
0,47 |
Venezuela, RB | 2 |
0 |
5,90 |
0,54 |
0,35 |
Vietnam | 3 |
0 |
6,25 |
0,76 |
0,43 |
West Bank and Gaza | 7 |
1 |
7,14 |
1,85 |
0,65 |
Yemen, Rep. | 9 |
1 |
7,33 |
2,23 |
0,69 |
Zambia | 7 |
1 |
7,07 |
1,73 |
0,63 |
Zimbabwe | 7 |
1 |
7,54 |
2,77 |
0,73 |
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4. The transactions approach (Feige, 1979) the method of the ratio of liquid assets (Gutmann, 1977) and the method of monetary demand (Tanzi, 1982).