Will the informal sector drive third world growth?


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.


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