Informalität und Wachstum in Entwicklungsländern (The Informal Sector and Economic Growth in Economic Development) Dozent: Prof. Dr. Stefan Klonner Blockseminar SWS: 2 Leistungspunkte: 7 Studiengänge: Diplom VF/WPF Entwicklungsökonomie, nach Rücksprache auch Entwicklungspolitik und Dynamische Makroökonomik; Bachelor Wirtschaftswissenschaftliches Seminar Datum: 14 17. Juni 2010 Ort: Haus Bergkranz, Kleinwalsertal Sprachen: Deutsch und Englisch Nähere Informationen und Themenliste: per E mail (klonner@wiwi.uni frankfurt.de) Seminarinhalt Low income countries are often characterized by a weak legal system and inefficient public administration. For example, courts may be slow and public officials including the police may be corrupt. As a consequence, formal contracts as well as property rights are difficult or excessively expensive to enforce. This poses severe problems to the functioning of various markets. For example, labor contracts can hardly be enforced through the legal system and hence a laborer may not show up at the work place when his work is urgently needed by the employer. In the credit market, a lender may not be able to enforce her claims or seize collateral when the borrower is in default. When the formality of a contract, which is typically a necessary condition for its legal enforcement, fails to add any value, informal contracts and institutions tend to dominate. In such situations, contracts may have to remain incomplete (for example, collateral may not be used as security in a credit contract). Alternatively, contract enforcement may have to rely on alternative mechanisms, such as reputation building, peer pressure, networking, repeated interaction, or the threat of physical violence. In this seminar, we will identify the characteristics of informality in the context of lowincome countries, and examine how informality can lead to inefficient market outcomes and a slow down of growth. Seminar Format Based on background readings and an academic article, each student will elaborate on one specific informal economic institution or market, and its role for development and growth. Topics include informal labor markets (including casual labor), informal firms, informal
Page 2 credit, land markets when property rights are lacking, interlinked transactions (linkage between two markets, e.g. labor and credit), and social networks. The seminar paper (Seminararbeit) will be due two weeks before the presentations. For assignment of a topic and registration, please contact Stefan Klonner before February 5, 2010. The estimated cost of participation including travel, lodging and food is 150.
Page 3 Introductory literature Fafchamps, Marcel (2004) Market Institutions in Sub Saharan Africa MIT Press: Broad theoretical and empirical overview of the informal economy in sub Saharan Africa. Gërxhani, Klarita (2004) The Informal Sector in Developed and Less Developed Countries: A Literature Survey, Public Choice 120(3/4). LIST OF TOPICS The Size of the Informal Sector and its Determinants TAXATION AND THE SIZE OF THE UNOFFICIAL ECONOMY Loayza, Norman V. (1996). The economics of the informal sector: a simple model and some empirical evidence from Latin America, Carnegie Rochester Conference Series on Public Policy 45, 129 162. CORRUPTION AND REGULATION, AND THE SIZE OF THE UNOFFICIAL ECONOMY Johnson, Simon H., Kaufmann, Daniel and Zoido, Pablo (1998). Regulatory Discretion and the Unofficial Economy. American Economic Review, Vol. 88, No. 2, 387 392. This short paper may serve as an entry point to the literature on regulation, corruption and the size of the unofficial sector EMPIRICAL MEASUREMENT OF THE SIZE OF THE INFORMAL ECONOMY Chaudhuri, Kausik, Schneider, Friedrich and Chattopadhyay, Sumana (2006). The Size and Development of the Shadow Economy: An Empirical Investigation from States of India, Journal of Development Economics 80 (2), 428 443 This is one of several recent papers which thoroughly measure the informal sector. Papers on other developing countries should be processed as well. The Informal Labor Market and Migration DETERMINANTS OF INFORMALITY OF LABOR Jonasson, Erik (2009). Regional Variation in Informal Employment: Skills, Norms, and Governance, Working Paper, Lund University. Theoretical and empirical investigation of the role of the quality of local government on the size of the informal labor market in Brazil, related to the field The Size of the Informal Sector and its Determinants CHARACTERISTICS OF THE RURAL LABOR MARKET Foster, Andrew D.; Rosenzweig, Mark R (1993). Information, Learning, and Wage Rates in Low Income Rural, Journal of Human Resources, Fall 1993, v. 28, iss. 4, pp. 759 90 Studies Information Asymmetries and other complications in rural casual labor markets
Page 4 FAILURE OF RURAL LABOR MARKETS AND CHILD LABOR Sonia Bhalotra and Christopher Heady (2003). Child Farm Labor: The Wealth Paradox, World Bank Econ. Rev., Dec 2003; 17: 197 227.
Page 5 Informal Firms DETERMINANTS OF INFORMALITY Era Dabla Norris, Mark Gradstein, Gabriela Inchauste (2006). What causes firms to hide output? The determinants of informality, Journal of Development Economics 85 (1 2), 1 27. The topic of this paper also contributes to the field The Size of the Informal Sector and its Determinants FINANCING ISSUES Bigsten, A., P. Collier, S. Dercon, M. Fafchamps, B. Gauthier, J. Gunning, M. Soderbom, A. Oduro, R. Oostendorp, C. Patillo, F. Teal, A. Zeufack (2003): Credit Constraints in Manufacturing Enterprises in Africa. Journal of African Economies 12, 104 125. Informal Credit EVOLUTION OF INFORMAL CREDIT IN INDIA Clive Bell (1990). Interactions between Institutional and Informal Credit Agencies in Rural India, World Bank Econ. Rev., 297 27. Develops a (analytically somewhat demanding) theory of formal vs. informal lending motivated by developments in India CHARACTERISTICS OF THE RURAL CREDIT MARKET Aleem, Irfan (1990). Imperfect Information, Screening, and the Costs of Informal Lending: A Study of a Rural Credit Market in Pakistan, World Bank Economic Review 4(3), pp. 329 49 An informal introduction to rural credit. Another relevant, more recent article is Contracting Constraints, Credit Markets and Economic Development by Abhijit Banerjee. Working Paper 02-17, MIT, Sept. 2001 Informal Insurance CONCEPTUAL FOUNDATIONS OF MUTUAL EXCHANGE WITH LIMITED COMMITMENT Marcel Fafchamps (1992). Solidarity Networks in Preindustrial Societies: Rational Peasants with a Moral Economy, Economic Development and Cultural Change 41(1), 147 174. This is an entry point to a large literature which is often analytically or econometrically fairly involved. Other seminal papers in this field are by Robert Townsend (Econometrica), Coate and Ravallion (Journal of Development Economics), and Ethan Ligon with varying co-authors. CREDIT AND INSURANCE Christopher Udry (1990). Credit Markets in Northern Nigeria: Credit as Insurance in a Rural Economy, World Bank Econ. Rev. 4: 251 269. Shows how terms of loans between individuals are altered in response to idiosyncratic shocks. REMITTANCES AND INSURANCE
Page 6 Dean Yang and HwaJung Choi (2007). Are Remittances Insurance? Evidence from Rainfall Shocks in the Philippines, World Bank Econ. Rev., 2007; 21: 219 248. Econometric Investigation of international intra-family remittances in the Philippines
Page 7 Informal Networks REPUTATION AND PUNISHMENT IN NETWORKS Greif, Avner (1993) Contract Enforceabilityand Economic Institutions in Early Trade: The Maghribi Tradersʹ Coalition, American Economic Review 83(3), 525 548. An interesting case of informal contract enforcement mechanisms from economic history SOCIAL NETWORKS AND MIGRATION Munshi, Kaivan (2003). Networks in the Modern Economy: Mexican Migrants in the U.S. Labor Market, Quarterly Journal of Economics 118(2), 549 597. Empirical paper on the determinants of labor migration