No:
The overall picture of economic development that emerges from this analysis is in some ways very similar to the traditional pre†growth†theory development economics, although it is related to the modern reformulations of economic growth through the lens of development economics (Banerjee and Dulfo 2005). The recipe for productivity growth is the formation of official firms, the larger and the more productive, the better. Such formation must perhaps be promoted through tax, human capital, infrastructure, and capital markets policies, very much along the lines of traditional dual economy theories. From the perspective of economic growth, we should not expect much from the unofficial economy, and its millions of entrepreneurs, except to hope that it disappears over time. This “Walmart” theory of economic development receives quite a bit of support from firm level data.
That’s from a recent La Porta and Shleifer paper, just presented at Brookings. I find this very convincing. The pointer comes from Greg Mankiw.
Not a surprise at all: The informal economy exists only because some people made the formal economy too expensive. But we can say “better than no economy”.
What has happened with Mankiw, anyways? He’s become a lazy blogger. His blog used to be informative and engaging on a daily basis. Now, its just a link hub 3 or 4 times a week, no better than Tyler’s Assorted Links.
I think its been this way since he became a Romney advisor, but why has it continued?
While I agree with the fundamental notion that the formal sector and big companies will be driving economic growth, and that registered firms are more productive, I think the registered vs. unregistered decision is a bit off.
The authors describe it as a trade off between higher taxes and regulation vs. access to the courts and public finance and pubic goods. Yet small firms have no real advantage in using the courts, they don’t seem to use finance that much, and public goods suck.
Perhaps another explanation for registering is required. For instance, the fact that informal firms are not involved in the B2B market at all, where as registered firms are, and deal with large clients: large firms might exert pressure on smaller firms to register, so the large firm doesn’t get castigated by the central government. A second explanation: registered firms may conglomerate in cities, where law enforcement as a whole is easier AND government has higher income (as stated in the paper, higher income generally leads to more registered firms. Perhaps this applies at the city as well as the national level).
If informal sector employment provided growth, the current poorest countries of the planet would be the richest ones!
The firm exists for a purpose, as put forward by Coase, to reduce the costs and difficulties of organizing labor to do things.
Of course large firms face their own version of the “economic calculation problem” that hits socialist economies…
I think Hernando de Soto would probably agree.
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