Trade Liberalisation and Informality: New stylized...

Trade Liberalisation and Informality: New stylized facts

Norbert FiessThe World Bank and University of

Glasgow

and

Marco FugazzaUNCTAD

2

1.Introduction• The relationship between trade liberalisation

and informal activity has not received the attention, whether theoretical or empirical, that it may deserve

• The conventional view poses that trade liberalisation would cause a rise in informality

• This paper uses three different data sets to assess the sign of the relationship

• Empirical results suggest that while informal output increases with deeper trade liberalisation, informal employment falls

3

Plan

2. Insights from the Literature

3. Data and Empirical Strategy

4. Results

5. Discussion

4

2. Insights from the Literature

2.1 What is informality?

– Share of a country’s production of goods and services which does not comply with government regulation

– However, we should distinguish unregistered firms from underground activities in registered ones

– Common feature of developed and developing countries

5

2.2 Informality and trade liberalization: theory

– Conventional: Greater demand for informally produced inputs is expected to drive the extension of the informal sector following trade liberalisation (Goldberg and Pavnic (2003))

– Relationship is unclear in models with firms’ heterogenity (Aleman-Castilla (2006)): some informal firms may be attracted by the formal sector after a fall in trade costs

– Ambiguity remains in models with tradability exogenously determined

6

2.3 Informality and trade liberalization: empirical evidence

– Empirical evidence on the relationship between trade liberalisation and informality is limited and generally country specific (micro data)

– Most of the evidence relates to Brazil, Colombia and Mexico for which rich, relevant and reliable micro datasets are available

– Empirical studies suggest that informality can respond to trade liberalisation either positively or negatively, depending on country and industry characteristics (economic and institutional)

7

3. Data and Empirical StrategyNo evidence in a multi-country sample

- 3 measures of informality

- The ILO survey-based measure: provides a directly observable measure of the share of informal employment (32 countries, 1990-2004)

- The Schneider’s (2005, 2007) -indirect- measure of informality : computed share of informal output in total (110 countries 1990-1995-2000-2004)

- The macro-eclectic approach (Kaufmann and Kaliberda, 1996) another indirect measure of informal output in total GDP (66 countries 1990-2004)

8

- 4 measures of openness to trade:

- Trade/GDP (WDI) (+)

- Effectively Applied external tariff rate (weighted and unweighted average) (TRAINS in WITS) (-)

- KOF Index of Globalization components: actual economic flows (trade, FDI and portfolio investment) and trade/capital restrictions (mean tariff rates, taxes on international trade, index of capital controls, hidden import barriers) (+)

9

– Other explanatory variables:

− GDP per capita (WDI)

− Labor Flexibility index of Fraser Institute (composite of four equally weighted components: minimum wages, rigidity of hours, difficulty of firing redundant employees and the cost of firing redundant workers )

− Measure of freedom of corruption (ICRG country guide)

10

Algeria

Argentina

Bolivia

Brazil

Chile

Colombia

Costa Rica

Dominican RepublicEcuador

Honduras

Indonesia

Malaysia

Mexico

MoroccoPakistan

Peru

Philippines

Sri Lanka

Thailand

Hungary

Norway

SwitzerlandAustraliaCanada

JapanNew Zealand

Singapore

.1.2

.3.4

.5.6

ILO

0 10 20 30 40Tariff

Algeria

Argentina

Bolivia

Brazil

Chile

Colombia

Costa Rica


Indonesia

Malaysia

Mexico

MoroccoPakistan

Panama

Peru

Philippines

Sri Lanka

Thailand

AustriaFinlandHungary

Norway

SwitzerlandAustraliaCanadaIsrael

JapanNew Zealand

Singapore

.1.2

.3.4

.5.6

ILO

20 40 60 80 100Trd_rstr_KOF

Algeria

Argentina

Bolivia

Brazil

Chile

Colombia

Costa Rica


Honduras

Indonesia

Malaysia

Mexico

MoroccoPakistan

Panama

PeruPhilippines

Sri Lanka

Thailand


NorwaySweden

SwitzerlandAustraliaCanada

Israel

JapanNew Zealand

Singapore

.1.2

.3.4

.5.6

ILO

0 100 200 300Tradegdp

Algeria

Argentina

Bolivia

Brazil

Chile

Colombia

Costa Rica


Indonesia

Malaysia

Mexico

MoroccoPakistan

Panama

PeruPhilippines

Sri Lanka

Thailand


NorwaySweden

SwitzerlandAustraliaCanadaIsrael

JapanNew Zealand

Singapore

.1.2

.3.4

.5.6

ILO

20 40 60 80 100Tradeflows_KOF

ILO Informality and Trade Openess (means)

11

Algeria

Argentina

Bangladesh

Bolivia

Brazil

ChileChina

Colombia

Costa Rica

Cote d'Ivoire

Dominican RepublicEcuadorEgypt, Arab Rep.

Ghana

Guatemala

Honduras

India

Indonesia

Kenya

Korea, Rep.Malaysia MexicoMoroccoNepal

Nicaragua

Nigeria

Pakistan

Peru

PhilippinesSenegal

South Africa

Sri LankaThailandUruguay

Zambia

Zimbabwe

HungaryNorway

SwitzerlandUnited StatesAustraliaCanadaHong Kong, China

JapanNew ZealandSingapore

0.2

.4.6

.8

macro

0 10 20 30 40Tariff

Algeria

Argentina

Bangladesh

Benin

Bolivia

BrazilCameroon

ChileChina

Colombia

Costa RicaDominican RepublicEcuador

Egypt, Arab Rep.Ghana

Guatemala

India

Indonesia

Kenya

Korea, Rep.MalaysiaMexicoMoroccoNepal

Nicaragua

Pakistan

PanamaPeru

PhilippinesSenegal

South Africa

Sri LankaThailand Uruguay

Venezuela, RB

Zambia

Zimbabwe

Austria

FinlandFrance

GreeceHungary

IrelandNetherlands

NorwayPortugalSpain

SwitzerlandUnited StatesAustraliaCanadaIsrael

Japan New ZealandSingapore

0.2

.4.6

.8

macro

20 40 60 80 100Trd_rstr_KOF

Algeria

Argentina

Bangladesh

Benin

Bolivia

BrazilCameroon

ChileChina

Colombia

Costa Rica

Cote d'Ivoire


Ghana

Guatemala

Honduras

India

Indonesia

Kenya

Korea, Rep. MalaysiaMexicoMoroccoNepal

Nicaragua

Nigeria

Pakistan

PanamaPeru

PhilippinesSenegal

South Africa

Sri Lanka

Syrian Arab Republic

ThailandUruguay

Venezuela, RB

Zambia

Zimbabwe

Austria

BelgiumDenmarkFinland

FranceGermany

Greece Hungary

Ireland

Italy

Netherlands

NorwayPortugalSpainSweden

SwitzerlandUnited Kingdom

United StatesAustraliaCanada Hong Kong, China

Israel

JapanNew Zealand Singapore

0.2

.4.6

.8

macro

0 100 200 300Tradegdp

Algeria

Argentina

Bangladesh

Benin

Bolivia

BrazilCameroon

ChileChina

Colombia

Costa Rica

Cote d'Ivoire


Ghana

Guatemala

India

Indonesia

Kenya

Korea, Rep. MalaysiaMexicoMorocco

Nicaragua

Nigeria

Pakistan

PanamaPeru

PhilippinesSenegal

South Africa

Sri LankaThailandUruguay

Venezuela, RB

Zimbabwe

Austria

BelgiumDenmarkFinland

FranceGermany

Greece Hungary

Ireland

Italy

Netherlands

NorwayPortugalSpain Sweden


United StatesAustraliaCanadaIsrael

Japan New ZealandSingapore0

.2.4

.6.8

macro


Macroeclectic Informality and Trade Openess (means)

12

Algeria

Argentina

Bangladesh

Bolivia

Brazil

ChileChina

Colombia

Costa Rica

Cote d'Ivoire

Dominican RepublicEcuador Egypt, Arab Rep.Ghana

GuatemalaHonduras

IndiaIndonesia

Kenya

Korea, Rep.Malaysia Mexico

MoroccoNepal

Nicaragua

Nigeria

Pakistan

Peru

PhilippinesSenegal

South Africa

Sri Lanka

ThailandUruguay Zambia

Zimbabwe

Hungary

Norway

SwitzerlandUnited States

AustraliaCanadaHong Kong, China

JapanNew ZealandSingapore

10

20

30

40

50

60

Schn

eid

er

0 10 20 30 40Tariff

Algeria

Argentina

Bangladesh

Benin

Bolivia

Brazil

Cameroon

ChileChina

Colombia

Costa Rica

Dominican RepublicEcuadorEgypt, Arab Rep.Ghana

Guatemala

IndiaIndonesia

Kenya

Korea, Rep.MalaysiaMexico

MoroccoNepal

Nicaragua

Pakistan

Panama

Peru

PhilippinesSenegal

South Africa

Sri Lanka

ThailandUruguay

Venezuela, RB

Zambia

Zimbabwe

Austria

FinlandFrance

GreeceHungary

IrelandNetherlands

NorwayPortugalSpain

SwitzerlandUnited States

AustraliaCanada

Israel


10

20

30

40

50

60

Schn

eid

er

20 40 60 80 100Trd_rstr_KOF

Algeria

Argentina

Bangladesh

Benin

Bolivia

Brazil

Cameroon

ChileChina

Colombia

Costa Rica

Cote d'Ivoire


GuatemalaHonduras

IndiaIndonesia

Kenya


MoroccoNepal

Nicaragua

Nigeria

Pakistan

Panama

Peru

PhilippinesSenegal

South Africa

Sri Lanka

Syrian Arab Republic

ThailandUruguay

Venezuela, RB

Zambia

Zimbabwe

Austria

Belgium

DenmarkFinlandFranceGermany

GreeceHungary

Ireland

Italy

Netherlands

NorwayPortugalSpainSweden


United StatesAustralia

Canada Hong Kong, China

Israel

JapanNew Zealand Singapore

10

20

30

40

50

60

Schn

eid

er

0 100 200 300Tradegdp

Algeria

Argentina

Bangladesh

Benin

Bolivia

Brazil

Cameroon

ChileChina

Colombia

Costa Rica

Cote d'Ivoire


Guatemala

IndiaIndonesia

Kenya


Morocco

Nicaragua

Nigeria

Pakistan

Panama

Peru

PhilippinesSenegal

South Africa

Sri Lanka

ThailandUruguay

Venezuela, RB

Zimbabwe

Austria

Belgium

DenmarkFinlandFranceGermany

GreeceHungary

Ireland

Italy

Netherlands

NorwayPortugalSpain

Sweden


United StatesAustralia

Canada

Israel


10

20

30

40

50

60

Schn

eid

er


Schneider (2007) Informality and Trade Openess (means)

13

• Contrasting evidence across datasets but not across indicators

• Less restricited trade is associated with a larger share of informal output

• Less restricited trade is associated with a lower share of informal labor

• Results are robust to a series of changes in specification, controls and reference sample

4. Results

14

TRD TRADE FLOWS TARIFF TRADE RESTR

-0.000

(-1.25)

0.0249***

(2.66)

-0.005***

(-3.71)

0.00298***

(4.07)

896 840 581 742

64/ 113 60/ 113 49/ 113 53/ 59

Results from dynamic panel analysis (macro eclectic informality measure)

15

Results from dynamic panel analysis (ILO informality measure)

TRD TRADE

FLOWS

TARIFF TRADE RESTR

-0.000

(-1.08)

-0.000

(-1.57)

0.0679***

(3.08)

-0.0028

(-1.95)**

335 326 270 311

32/ 58 31/ 58 30/ 58 30/ 58

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5. Discussion

• Results may suggest that unregistered activity has fallen with trade liberalisation but underground activity in registered firms has increased

• It is unlikely that productivity has increased in the unregistered sector and the size of the underground labour force (within the boundaries of registered firms)

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Employment Production ProductionEmployment

Unregistered

Underground

Declared

Underground

Unregistered

Declared

Trade Liberalization

II

F F

Underground

Unregistered

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5. Discussion

• The real issue seems to be undeclared production (/employment) in registered firms

• Lower informal employment (ILO definition) may be seen as a good news if workers move to formality (higher labour productivity)

• However, the overall incidence of precarity may have remained the same or even worsened

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• Moreover tax evasion by registered firms have increased

• We may want to see these results as an evidence of smoother adjustment with eventually some possible improvements in overall labor productivity

• But the consequent fiscal cost is likely to be high with desastrous consequences for the financing of public goods and services

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Policy Implications

• Not straightforward

• Usual candidate: safety nets also covering informal workers (avoid desperate choices)

• ISSUE: financing + efficiency & effectiveness

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• Alternative: focus on measures able to contain tax evasion & stimulate hiring

– e.g.: temporary tax reductions/exemptions to firms hiring new employees + controls

• Formalization

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