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Informal Economy And Poverty Alleviation Essay

1666 words - 7 pages

Subject area
Any sovereign state is to some extent concerned about the existence of informality in its economy. Although the subject of informal economy is broadly presented in interdisciplinary research, it remains understudied, especially from an entrepreneurship perspective in developing context (Castro, Khavul, & Bruton, 2014). At the same time the problem of poverty alleviation is particularly up-to-date in the light of millennium development goals, first of which is eradication of extreme poverty and hunger. Poverty alleviation programs mostly rely on the increasing involvement of ‘bottom quintile’ private sector in economic activity through various development programs. In this light the effect of informality on productivity and growth is much debated(Castro et al., 2014). On the one hand, informal economy is one of the main factors undermining the effectiveness of reforms in private sector development, because microfinance programs and other benefits, received from formality are underutilized. On the other hand, given the fact that financial systems in developing counties are not consistent with the needs of poor, the existence of informal sector is a response to the shortcomings of the formal sector (Bakhtiari, 2006). To which extent inefficiency, created by the presence of informal sector affects the dynamics of well-being of developing society? Which positive effects informality brings and why informality is a persistent phenomenon in developing countries? There exist established answers in this research field, and this paper plans to synthesize them to reveal new determinants and effects of informality. For example, in such countries as Kyrgyzstan the level of informal economy is about 40% of the total GDP (the number is obtained using the mix of survey and ‘standard’ procedures such as electricity consumption and MIMIC), the main part of it consists of micro enterprises, whose growth is bounded by the costs associated with formality, which demonstrates the extreme importance of the question. Informality in Kyrgyzstan is an interiorized and self-sustained category and the steps to changing the situation must contain a complex of measures, including social and psychological incentives.
Literature review
When talking about poverty reduction, a growing body of literature highlights the necessity of taking into account informal economy (Hillenkamp, Lapeyre&Lemaître, 2013). Informal economy is extremely multi-faceted subject, with complex social, legal and institutional determinants. Some authors see informality and underdevelopment as synonyms (Loayza & Rigolini, 2006) and use the terms interchangeably. In order to understand the influence of informal economy on poverty we need to define the nature of connection between two terms. Behavioral studies highlight the decision of individual based on relevant cost-benefit analysis. Experimental evidence shows that even after the direct costs of registration and information costs were...

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