Center for Culture, Organizations and Politics - Previously Affiliated

This article undertakes an analysis of internationally comparable data to examine the relationship between state regulation and the informal economy at the macro level across a broad set of countries. The findings shed light on the question of why economic informality is more prevalent in some nations than others. The author shows that the regulatory environments within which economic activities operate vary across countries in terms of the degree of state’s regulation of economic activities (low vs. high), and the quality of legal enforcement (effective vs. ineffective). The reason why some countries have less informality in their economies than others has much to do with the prevailing regulatory environment. It is in regulatory environments combining a low regulatory load with effective law enforcement institutions where we find the size of the informal economy to be smallest. Conversely, the highest levels of informality are found in countries that have a high degree of regulation in the economy coupled with ineffective enforcement. The results also provide insight as to why decreasing the degree of regulation cannot necessarily be expected to lead to formalization in the economy as the neoliberal orthodoxy has prescribed.