New Informal Economy article

A new article on the Informal Economy by Rafael la Porta (Dartmouth) and Andres Shleifer (Harvard) was recently released (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1304760). The paper does a nice job summarizing a few of the key theories of informal economy and economic development, including the work of Victor Tokman and Hernando de Soto. It does not, however, give due credit to more recent work by Alejandro Portes, Martha Chen, and others that have categorized the informal economy as a dynamic, heterogenous sector of the economy. Instead, the paper concludes that the firms found in the informal economy are largely run by uneducated individuals and operate unproductively. Accordingly, they should be formalized, and following Tokman's model of modernization, they will formalize when the economy grows. This theory takes us back in time to the early studies on development take-offs and assumes that informality is a relic of the traditional economy and nothing more. Based on the fact that the I.E. is growing and becoming a more essential part of overall economic growth, perceiving it as a stagnant and unproductive environment limits resolutions to increased enforcement and formalization, which may not be the best solution to this phenomenon.

KJF