Skip to main content
SpringerLink
Log in

Did state antiquity matter for the size of the informal economy?

  • Original Paper
  • Published:
Economics of Governance Aims and scope Submit manuscript

Abstract

This study investigates how state history influences the size of the informal sector. The study employs a two-stage least squares estimation technique with data from 91 countries for the period 1991–2015 to examine this relationship. Our results show that longer state history reduces the size of the informal sector. Therefore, young states with a large informal sector should be mindful that state building is a time-consuming process, and any radical transformation in order to accelerate state development beyond its realistic capacity, may increase the informal sector size and leads to disastrous outcomes.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. This is statehood experience covering the period 1 AD–1950 AD.

  2. Higher values reflect a more in-depth experience with state-level institutions.

  3. State presence (whether a government above the tribal level was present), state autonomy (whether this government was foreign or locally based), and state coverage (the extent to which the territory of the modern country was ruled by this government).

  4. We average this informal economy estimates over the period 1991–2013 as Hassan and Schneider (2016) spread them out from 1991 to 2013. Although they both use the Multiple Indicators Multiple Causes methods, Hassan and Schneider (2016) and Medina and Schneider (2018) informal economy estimates have key differences. For instance, as external factors, Hassan and Schneider (2016) use GDP growth rate, the labor force participation rate, and the currency circulating in the economy. Medina and Schneider (2018) use these external factors as well, but they capture the overall economic activity based on satellite data on night lights instead of GDP. In terms of exogenous factors, Hassan and Schneider (2016) use the total tax revenues as a percentage of GDP, government spending, unemployment rate, self-employment rate, indices of economic, and business freedom. In contrast, Medina and Schneider (2018) use as exogenous factors the trade openness, unemployment rate, size of government, rule of law, control of corruption, government stability, and an index of fiscal freedom that measures direct and indirect taxation at all levels of government.

  5. See Table 2 for the different data sources.

References

  • Ang JB (2013) Are modern financial systems shaped by state antiquity? Monash University Discussion paper 38(13).

  • Ang JB (2020) Early state institutions and the persistence of linguistic diversity. Eur J Polit Econ 64:101914

    Article  Google Scholar 

  • Ang JB, Fredriksson PG (2018) State history, legal adaptability and financial development. J Bank Finance 89:169–191

    Article  Google Scholar 

  • Ang JB, Fredriksson PG (2021) Does an early start help or hurt? Statehood, institutions and modern climate change policies. Energy Econ 94:105075

    Article  Google Scholar 

  • Baklouti N, Boujelbene Y (2020) A simultaneous equation model of economic growth and shadow economy: is there a difference between the developed and developing countries? Econ Changes Restruct 53:151–170

    Article  Google Scholar 

  • Barth F (1969) Ethnic groups and boundaries: the social organization of culture difference. Boston Little, Brown

    Google Scholar 

  • Becerra O, Cavallo EA, Scartascini C (2012) The politics of financial development: the role of interest groups and government capabilities. J Bank Finance 36:626–643

    Article  Google Scholar 

  • Bentzen JS, Kaarsen N, Wingender AM (2017) Irrigation and autocracy. J Eur Econ Assoc 15:1–53

    Google Scholar 

  • Bockstette V, Chanda A, Putterman L (2002) States and markets: the advantage of an early start. J Econ Growth 7:347–369

    Article  Google Scholar 

  • Bologna J (2016) The effect of informal employment and corruption on income levels in Brazil. J Comp Econ 44:657–695

    Article  Google Scholar 

  • Borcan O, Olsson O, Putterman L (2018) State history and economic development: Evidence from six millennia. J Econ 23:1–40

    Google Scholar 

  • Chanda A, Putterman L (2007) Early starts, reversals and catch-up in the process of economic development. Scand J Econ 109:387–413

    Article  Google Scholar 

  • Chatterjee S, Turnovsky S (2018) Remittances and the informal economy. J Dev Econ 133:66–83

    Article  Google Scholar 

  • Comin D, Easterly W, Gong E (2010) Was the Wealth of Nations Determined in 1000 BC? Am Econ J  2:65–97

    Google Scholar 

  • Dell’Anno R (2016) Analysing the determinants of the shadow economy with a separate approach: an application of the relationship between inequality and the shadow economy. World Dev 84:342–356

    Article  Google Scholar 

  • Dreher A, Gaston N, Martens P (2008) Measuring globalization: Gauging its Consequence. Springer, New York

  • Dutta N, Kar S, Roy S (2013) Informal sector and corruption: an empirical investigation for India. Int Rev Econ and Fin 27:357–373

    Article  Google Scholar 

  • Elbahnasawy NG, Ellis MA, Assande DA (2016) Political instability and the informal economy. World Dev 85:31–42

    Article  Google Scholar 

  • Farrel D (2004) The hidden dangers of the informal economy. Mckinsey Quaterly 26–37.

  • Gutiérrez-Romero R (2021) Inequality, persistence of the informal economy, and club convergence. World Dev 139:105–211

    Article  Google Scholar 

  • Harish SP, Paik C (2020) Historical state stability and economic development in Europe. Polit Sci Res Methods 8(3):425–443

    Article  Google Scholar 

  • Hassan M, Schneider F (2016) Size and development of the shadow economies of 157 countries worldwide: Updated and new measures from 1999 to 2013. Institute of Labor Economics Discussion Paper 10281

  • Henderson JV, Storeygard A, Weil DN (2012) Measuring economic growth from outer space. Am Econ Rev 102(2):994–1028

    Article  Google Scholar 

  • Hong TH (2017) Impact of globalization on the informal sector. Econ Model 62:207–218

    Article  Google Scholar 

  • Johnson A, Earle T (2000) The evolution of human societies from foraging group to agrarian state. Stanford University Press

    Book  Google Scholar 

  • La Porta R, Shleifer A (2014) Informality and development. Journal of Economic Perspectives 28(3):109–126

    Article  Google Scholar 

  • Massenot B, Straub S (2016) Informal sector and economic development: the credit supply channel. Econ Inq 54(2):1046–1067

    Article  Google Scholar 

  • Medina L, Schneider F (2018) Shadow economies around the world: what did we learn over the last 20 years? International Monetary Fund Working paper 18

  • Newey WK (1987) Efficient estimation of limited dependent variable models with endogenous explanatory variables. Journal of Econometrics 36:231–250

    Article  Google Scholar 

  • Nunn N, Puga D (2012) Ruggedness: the blessing of bad geography in Africa. Rev Econ Stat 94:20–36

    Article  Google Scholar 

  • Olson M (1986) A theory of the incentives facing political organizations: neocorporatism and the hegemonic state. Int Polit Sci Rev 7(2):165–189

    Article  Google Scholar 

  • Owen PD, Vu TV (2020) State history and corruption. Department of Economics, University of Otago

  • Policy IV (2015) Political regime characteristics and transitions 1800–2015

  • Putterman L, Weil DN (2010) Post-1500 Population Flows and the Long-Run Determinants of Economic Growth and Inequality. Quart J of Econ 125:1627–1682

    Article  Google Scholar 

  • The Quality of Government Standard dataset (2020) The Quality of Government Institute. University of Gothenburg

  • Tilly C (1992) Coercion, capital and European states: AD 990–1992. Wiley-Blackwell, New York

    Google Scholar 

  • Vu TV (2021a) Statehood experience and income inequality: A historical perspective. Econ Model 94:415–429

    Article  Google Scholar 

  • Vu TV (2021b) State history and political instability: the disadvantage of early state development. Economic Discussion Papers, University of Otago.

  • World Bank Data (2020) World development indicators. World Bank Publications. 

Download references

Author information

Authors and Affiliations

  1. University of Yaounde II, Soa, Cameroon

    Atangana Ondoa Henri & Seabrook Arthur Mveng

Authors
  1. Atangana Ondoa Henri
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Seabrook Arthur Mveng
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Seabrook Arthur Mveng.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Henri, A.O., Mveng, S.A. Did state antiquity matter for the size of the informal economy?. Econ Gov 23, 115–131 (2022). https://doi.org/10.1007/s10101-022-00274-1

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10101-022-00274-1

Keywords

Search

Navigation