BANCO CENTRAL DE RESERVA DEL PER

The causes and consequences of informality in

Peru
Norman Loayza*
* The World Bank

DT. N 2007-018
Serie de Documentos de Trabajo
Working Paper series
Noviembre 2007
Los puntos de vista expresados en este documento de trabajo corresponden a los del autor y no reflejan
necesariamente la posicin del Banco Central de Reserva del Per.
The views expressed in this paper are those of the author and do not reflect necessarily the position of the
Central Reserve Bank of Peru.

THE CAUSES AND CONSEQUENCES OF INFORMALITY IN PERU

Norman Loayza *
The World Bank

November 2007

Abstract: Adopting a legal definition of informality, this article studies the causes of
informality in general and with a particular application to Peru. It starts with a
discussion on the definition and measures of informality, as well as on the reasons why
widespread informality should be of great concern. Then, the article analyzes
informalitys main determinants, arguing that informality is not single-caused but results
from the combination of poor public services, a burdensome regulatory regime, and weak
monitoring and enforcement capacity by the state. This combination is especially
explosive when the country suffers from low educational achievement and features
demographic pressures and primary production structures. Finally, using cross-country
regression analysis, the article evaluates the empirical relevance of each determinant of
informality. It then applies the estimated relationships to the case of Peru in order to
assess the country-specific relevance of each proposed mechanism.

JEL classification: K20, K30, H11, O40, O17.

Keywords: Regulation, government performance, economic growth, informal economy.

Naotaka Sugawara provided excellent research assistance. I have benefited from discussions with Marco
Camacho, Claudia Canales, Mauricio Carrizosa, Juan Chacaltana, Agnes Franco, Vicente Fretes-Cibils,
Javier Illescas, Miguel Jaramillo, Teresa Lamas, Julio Luque, Miguel Morales, Ana Mara Oviedo, Rossana
Polastri, Renn Quispe, Jamele Rigolini, Jaime Saavedra, Pablo Secada, Luis Servn, Magaly Silva, Jos
Valderrama, Moiss Ventocilla, and Gustavo Yamada.

Definition
The informal sector is the collection of firms, workers, and activities that operate
outside the legal and regulatory frameworks. Therefore, participating in the informal
sector entails escaping the burden of taxation and regulation but, at the same time, not
enjoying the protection and services that the state can provide. This definition was
introduced by De Soto (1989), the classic study of informality. It has gained remarkable
popularity due to its conceptual strength, which allows it to focus on the root causes of
informality rather than merely its symptoms. 1

Measures
Although the definition of informality can be simple and precise, its measurement
is not.

Given that it is identified with working outside the legal and regulatory

frameworks, informality is best described as a latent, unobserved variable. That is, a

variable for which an accurate and complete measurement is not feasible but for which an
approximation is possible through indicators reflecting its various aspects. Here we
consider four of these indicators, for which data are available for Peru and a relatively
large collection of countries. Two of them refer to overall informal activity in the
country, and the other two relate in particular to informal employment. Each indicator on
its own has conceptual and statistical shortcomings as a proxy of informality; taken
together, however, they may provide a robust approximation to the subject.
The indicators related to overall informal activity are the Schneider index of the
shadow economy and the Heritage Foundation index of informal markets. Details on
definitions, sources, and samples for these and other variables used in this article are
provided in the Appendix 1. The Schneider index combines the DYMIMIC (dynamic
multiple-indicator-multiple-cause) method, the physical input (electricity) method, and
the excess currency-demand approach for the estimation of the share of production that is
not declared to tax and regulatory authorities. The Heritage Foundation index is based on

For an excellent review of the causes and consequences of the informal sector, see Schneider and Enste
(2000). Drawing from a public-choice approach, Gerxhani (2004) provides an interesting discussion of the
differences of the informal sector in developed and developing countries. The World Bank Latin American
and Caribbean 2007 flagship report Informality: Exit and Exclusion, Perry et al. (2007), is the most
comprehensive and in-depth study on informality in the region.

subjective perceptions of general compliance to the law, with particular emphasis on the
role played by official corruption.

The indicators that focus on the labor facet of

informality are the prevalence of self employment and the lack of pension coverage. The
former is given by the ratio of self to total employment, as reported by the International
Labor Organization. The latter is given by the fraction of the labor force that does not
contribute to a retirement pension scheme, as given in the World Development Indicators.
Appendix 2 presents some descriptive statistics on the four informality indicators. In
particular, it shows that, as expected, they are significantly positively correlated, with
correlation coefficients ranging from 0.60 to 0.85 high enough to represent the same
phenomenon but not too high to make them mutually redundant.

Figure 1. Size of Informality, Various Measures

B. Heritage Foundation Informal Market index

20

40

60

A. Schneider Shadow Economy index (% of GDP)

PER

CHL

MEX

COL

USA

PER

MEX

COL

USA

D. No Pension (% of labor force)

10

20

20

40

30

60

40

80

C. Self Employment (% of total employment)

CHL

PER

CHL

MEX

COL

USA

PER

CHL

MEX

COL

USA

Note:
1. Four measures of informality A. Schneider (2004); B. Index of Economic Freedom by The Heritage Foundation (range
1-5: higher, more informality); C. ILO, collected by Loayza and Rigolini (2006); and D. Share of labor force not
contributing to a pension scheme (World Development Indicators)

Using data on these four indicators, we can assess the prevalence of informality in
Peru and compare it to that in other countries. Figure 1 presents data on the four
informality indicators for Peru, for Colombia and Mexico (two countries with similar
average income levels), for Chile (the Latin American country with the highest sustained
growth rate), and for the USA (the developed country to which Peru and the whole region
are most closely related). All in all, the degree of informality in Peru is alarmingly high,
much worse than in Chile and the USA according to all indicators and worse than in
Mexico and Colombia according to the share of informal production (Schneider) and self
employment. Taking the indicators at face value, in Peru 60% of production is done
informally, 40% of the labor force work is self-employed in informal micro-enterprises,
and even counting those that work for larger firms only 20% of the labor force contribute
to a formal pension plan.

Why should we worry about informality?

Informality is a distorted response of an excessively regulated economy to the
shocks it faces and its potential for growth. It is a distorted, second-best response
because it implies misallocation of resources and entails losing, at least partially, the
advantages of legality, such as police and judicial protection, access to formal credit
institutions, and participation in international markets. Trying to escape the control of the
state induces many informal firms to remain sub-optimally small, use irregular
procurement and distribution channels, and constantly divert resources to mask their
activities or bribe officials. Conversely, formal firms are induced to use more intensively
the resources that are less burdened by the regulatory regime; in particular for developing
countries, this means that formal firms are less labor intensive than they should be
according to the countries endowments. In addition, the informal sector generates a
negative externality that compounds its adverse effect on efficiency: informal activities
use and congest public infrastructure without contributing the tax revenue to replenish it.
Since public infrastructure complements private capital in the process of production, a
larger informal sector implies smaller productivity growth. 2
2

See Loayza (1996) for an endogenous-growth model highlighting the negative effect of informality
through the congestion of public services.

Compared with a first-best response, the expansion of the informal sector often
represents distorted and insufficient economic growth. 3 This statement merits further
clarification: Informality is sub-optimal with respect to the first-best scenario that occurs
in an economy without excessive regulations and adequate provision of public services.
Nevertheless, informality is indeed preferable to a fully formal but sclerotic economy that
is unable to circumvent its regulation-induced rigidities. This brings to bear an important
policy implication: the mechanism of formalization matters enormously for its
consequences on employment, efficiency, and growth. If formalization is purely based
on enforcement, it will likely lead to unemployment and low growth. If, on the other
hand, it is based on improvements in both the regulatory framework and the
quality/availability public services, it will bring about more efficient use of resources and
high growth.
From an empirical perspective, the ambiguous impact of formalization highlights
an important difficulty in assessing the impact of informality on economic growth: two
countries can have the same level of informality, but if this depends on different
underlying causes, the countries growth rates may also be markedly different. Countries
where informality is kept at bay by drastic enforcement will fare worse than countries
where informality is low because of light regulations and appropriate public services.
We now present a simple regression analysis of the effect of informality on
growth.

As suggested above, this analysis must control for enforcement; and a

straightforward, albeit debatable, way to do so is by including a proxy for overall states

capacity as a control variable in the regression. For this purpose, we try two proxies: the
level of GDP per capita and the ratio of government expenditures to GDP. The former
has the advantage of also accounting for conditional convergence, and the latter has the
advantage of more closely reflecting the size of the state. 4 Table 1 presents the results of
the regressions having the average growth of per capita GDP over 1985-2004 as

This does not necessarily mean that informal firms are not dynamic or lagging behind their formal
counterparts. In fact, in equilibrium the risk-adjusted returns in both sectors should be similar at the
margin. See Maloney 2004 for evidence on the dynamism of Latin American informal firms. The
arguments presented in the text apply to the comparison between an excessively regulated economy and
one that is not.
4
We also considered as proxy the ratio of tax revenues to GDP. Despite the fact that the number of
observations drops considerably, the results were the same on the negative effect of informality.

dependent variable, initial (1985) GDP per capita as control variable, and, in turn, the
four informality indicators as explanatory variables.

Table 1. The Effect of Informality on Economic Growth

Method of estimation: Ordinary Least Squares with Robust Standard Errors
Dependent variable: Per capita GDP Growth, 1985-2004, country average
Per capita GDP Growth, 1985-2004

Initial GDP per capita

(1985, in logs)

[1]

[2]

[3]

[4]

-0.23
-1.45

-0.54***
-2.89

-0.77***
-3.00

-0.90***
-3.52

Initial Government Expenditure

(% of GDP, 1985)
Schneider Shadow Economy index
(% of GDP, in logs)

-2.18***
-3.87

Heritage Foundation Informal Market index

(ranging 1-5: higher, more informality)

[7]

[8]

-0.03*
-1.80

-0.05***
-2.62

-0.05
-1.42

-0.05***
-2.52

-1.15***
-5.07

-0.68***
-5.70
-0.10***
-3.43

No Pension
(% of labor force)

No. of observations
R-squared

[6]

-1.68***
-4.44

Self Employment
(% of total employment)

Constant

[5]

-0.04**
-2.24
-0.05***
-5.01

-0.02***
-3.87

10.41***
3.53

9.16***
4.36

11.02***
3.96

11.36***
4.40

7.54***
5.39

4.38***
8.03

3.74***
4.34

3.27***
6.03

120
0.19

127
0.22

47
0.15

92
0.20

113
0.17

120
0.19

45
0.07

89
0.12

Notes:
1. t-statistics are presented below the corresponding coefficients.
2. *, ** and *** denote significance at the 10 percent, 5 percent and 1 percent levels, respectively.
3. Four types of informality measure used [1] and [5] Schneider (2004); [2] and [6] Index of Economic Freedom by
The Heritage Foundation; [3] and [7] ILO, collected by Loayza and Rigolini (2006); and [4] and [8] Share of labor
force not contributing to a pension scheme (World Development Indicators).
4. All four informality indicators are in country averages while periods vary by indicator.
Source: Authors estimation

We choose a period of 20 years for the computation of the average growth rate in
order to achieve a compromise between merely cyclical, short-run growth (which would
be unaffected by informality) and very long-run growth (which may actually cause
informality, rather than the other way around).

The maintained hypothesis for

identification of the causal relationship between informality and growth is that the level
of informality is related to institutional and structural factors that change little over time
and influence but are not influenced by medium-term growth rates (in our case, covering
the 20-year period leading to 2004).

.1
BTN

GEO

ZAR

THA
VNM
SGP
MYS

KOR
IRL

CHL

HKG
CYP
ESP

TUN

PRT

NOR GBR
CRI
AUS
AUT
USA TTO
JPN
EGYDEUNLD
ISL
JAM
CAN URY
ITA
ISR
PAK
DNK
PHL
SLVNZL
COL
PANARG
CHE MEX
ECU BOL
BRA

-.02

HND
-10

-2

-1
0
1
Heritage Foundation Informal Market index [2]

GRC

PER

-5
0
5
10
Self Employment (% of total employment) [3]

CHN

LBY
KOR
VNM
IRL
THA
MUS
MOZ IND
CHL
SGP
MYS
IDN
LKA
SDN
UGA
BGD
PRTTUN
DOM
ESPGHA
NPL CRI
TUR
EGY
GBR NOR
JAM PAK
ALB
EST HUN URY
AUS
GRC
MAR
PHL
AUT
NLD
NGA
BEL
FIN
SLV
USAIRN
DEU
JPN
COL
FRA
ISR
ITA
SWE
CAN
BFA
BGR LVA
DNK
GTM
PAN
BOL
NZLSVK
ECUSEN
ARG
BRA
HND
KENCHEBEN MRT
PER
ROM
DZA PRY
RWA
JOR
NIC
TGO NER
MDGZMB
SLE
BDI
ZWE CIV
CMR

MEX
VEN

GAB

COG

-.04

MLT

BWA
VNM
TWN KOR
THA
MOZIRL
MUS
IND
SGP
BLZ
MYS
IDN
LAO
LKA LUX
LSO
UGA HKG
MLT
BGD
CPV
DOM
NPL
PRTESP
CYP
TUN
GUY
GHA
CRI
PAK
MLI
TUR
EGY
TCD
SWZ FJI ALB
BHR
JAM
TTO
GBR
KWT
MAR
PHL
NGA
NOR
ESTHUN
WSMMNG
GRC
URY
SLV
AUT
NLD
BEL
FIN
BFA
COL
IRN
ETH AUS
USA
DEU
ISL
BGR
ISR
FRA
JPN
ITA
SWE
SVK
CAN
GTM
BOL
LVA
PAN
DNK
ECU MEXSYR
OMN
NZL
PNG SEN
ARG
NAM
SUR
BEN
HND
MRT KEN
MWI
GMB
PER BRA
CHE
ROM
DZA ZAF
PRY
RWA
SAU
TGO
NIC
ZMB JORNER
VEN
MDG
GNB
SLE
GAB
CAF
CIV
ZWE
CMR
COG
ARE
HTI
MDA
TJK
GEO
CHL

.06

TWN

Per capita GDP Growth, 1985-2004

-.02
0
.02
.04

.03

-.5
0
.5
Schneider Shadow Economy index (% of GDP, in logs) [1]

CHN

-.05

KOR
BWA
TWN
THA
IRL
INDSGPCHL MOZ
MYSLKA
IDN
LAO
HKG
LSO
UGA
BGD
DOM TUN
PRT
NPLGHA
ESP
CRI
PAK
MLI
TUR JAM
EGY
TCD
GBR
MNG
KWT
ALB
NOR
PHL
FJI GRC
MAR
EST
NGA
AUS
URY
TON
WSM
SLV
HUN
NLD
BEL
FIN
USA AUTSYR
BFA
COL
IRN
DEU
ETH
FRA
JPN
ISR
BGR
ITA
SWE
CAN
SVK
GTM BOL
DNK
PAN
LVA
KIR
SEN
OMN
NZL
ECU
PNG
ARGMEXHND
BRA
BEN
MRT NAM
KEN
MWI
PER
AGO
CHE
ROM
PRY
SLB
RWA
ZAFDZA
MHL
JOR SAU
NIC
TGO
VUT
VEN
NER
ZMB
MDG
SLE
BDI
CAF CIV
ZWE
CMR
COG
ARE
HTI
MDA

VNM

-1

Per capita GDP Growth, 1985-2004

-.01
0
.01
.02

Per capita GDP Growth, 1985-2004

0
.05

CHN

-.05

Per capita GDP Growth, 1985-2004

0
.05

.1

Figure 2. Informality and Economic Growth

Partial regression plots, controlling for initial GDP per capita (1985)

15

-20

-10

0
10
20
30
No Pension (% of labor force) [4]

40

50

Note:
1. Four measures of informality [1] Schneider (2004); [2] Index of Economic Freedom by The Heritage Foundation
(range 1-5: higher, more informality); [3] ILO, collected by Loayza and Rigolini (2006); and [4] Share of labor force not
contributing to a pension scheme (World Development Indicators)

The regression results indicate that an increase in informality leads to a decrease

in economic growth. All four informality indicators carry negative and highly significant
regression coefficients. Figure 2 shows the partial regression plots between growth and
each of the informality measures (that is, partial in the sense that the initial level of per
capita GDP is controlled for).

They confirm that the negative connection between

informality and growth represents a general tendency and not the influence of isolated
observations.

The harmful effect of informality on growth is not only robust and

significant, but its magnitude makes it also economically meaningful --An increase of

one standard deviation in any of the informality indicators leads to a decline of 1-2
percentage points in the rate of per capita GDP growth. 5

The Causes of Informality: conceptual discussion

Informality is a fundamental characteristic of underdevelopment, shaped both by
the modes of socio-economic organization inherent to economies in the transition to
modernity and by the relationship that the state establishes with private agents through
regulation, monitoring, and the provision of public services. As such, informality is best
understood as a complex, multi-faceted phenomenon.
Informality arises when the costs of belonging to the countrys legal and
regulatory framework exceed its benefits. Formality entails costs of entry --in the form
of lengthy, expensive, and complicated registration procedures-- and costs of permanence
--including payment of taxes, compliance with mandated labor benefits and
remunerations, and observance of environmental, health, and other regulations. The
benefits of formality potentially consist of police protection against crime and abuse,
recourse to the judicial system for conflict resolution and contract enforcement, access to
legal financial institutions for credit provision and risk diversification, and, more
generally, the possibility of expanding markets both domestically and internationally. At
least in principle, formality also voids the need to pay bribes and prevents penalties and
fees, to which informal firms are continuously subject to. Therefore, informality is more
prevalent when the regulatory framework is burdensome, the quality of government
services to formal firms is low, and the states monitoring and enforcement power is
weak.
These benefits and costs considerations are affected by the structural
characteristics of underdevelopment, dealing in particular with educational achievement,
production structure, and demographic trends.

A higher level of education reduces

informality by increasing labor productivity and, therefore, making labor regulations less
binding and formal returns potentially larger. Likewise, a production structure tilted

To be precise, a one-standard-deviation increase of, in turn, the Schneider index, the Heritage Foundation
index, the share of self-employment, and the labor force lacking pension coverage leads to a decline of,
respectively, 1.0, 1.4, 1.0, and 1.8 percentage points of per capita GDP growth.

towards primary sectors like agriculture, rather than to the more complex processes of
industry, induces informality by making legal protection and contract enforcement less
relevant and valuable. Finally, a demographic composition with larger shares of youth or
rural populations is likely to increase informality by making monitoring more difficult
and expensive, by complicating the training and acquisition of abilities, and by making
more problematic the expansion of formal public services.
Often times in popular and even academic discussions, people do not follow this
comprehensive approach, emphasizing instead particular sources of informality. Thus,
some people focus on insufficient enforcement and related government weaknesses such
as corruption; others prefer to emphasize the burden of taxes and regulations; yet others
concentrate on explanations dealing with social and demographic characteristics.
As suggested above, all these possibilities make sense, and there is some evidence
to support them. Take, for instance, Figure 3. It presents scatter plots of each of the four
measures of informality versus proxies for the major proposed determinants of
informality. These are as follows. 6 An index on the prevalence of law and order -obtained from The International Country Risk Guide-- to proxy for both the quality of
formal public services and governments enforcement strength. An index of business
regulatory freedom --taken from Fraser Foundations Economic Freedom of the World
Report-- to represent the ease of restrictions imposed by the legal and regulatory
frameworks. The average years of secondary schooling of the adult population --taken
from Barro and Lee (2001)-- to represent educational and skill achievement of the
working force. And an index of socio-demographic factors --constructed from the World
Banks World Development Indicators-- which includes the share of youth in the
population, the share of rural population, and the share of agriculture in GDP. 7

Again, details on definitions and sources of all variables are presented in Appendix 1.
This is constructed by first standardizing each component (to a mean of zero and a standard deviation of
1) and then taking a simple arithmetic average. We use a composite index, rather than the components
separately, given the very high correlation among them.

Figure 3. Informality and Basic Determinants

correlation: -0.69***

ZAF

40

TUN

EGY
BWA
TUR

POL KOR
CRI
ITA
HUN
IND
PRT
ESP
BEL
KWT
JOR
CHL
SWE
NOR
FIN
DNK
HKG DEU
IRL
CAN
CHN FRA
AUS
SGP GBR
NLD
NZL
JPN
AUT
CHE
USA

IDN

IND

IDN

ESP
BEL
KWT
JOR PRT

CHN

CHL

FRA
JPN

NOR SWE
HKG FIN
DEU IRLDNK
CAN
AUS
NLD GBR
NZLSGP
AUT
CHE
USA

20

60

NIC

VENECU
DOM
MEX
MYS
PRY
GRC
ARG

KEN
CMRDZA

PER
TZA

THA
GTM
URY
ZMB
SLV
SEN NIC LKA
PHL
UGA
MLI
GHA
COL
MOZ
MWI
BRA
TUN
JAM
PAK
BGD
EGY
VEN CMRDZAECUKEN
BWA
TUR
MEX DOM
MYS
PRY
ZAF
POL
KOR
GRC
ARG
CRI
ITA
HUN

HND

UGA

MLI
MOZ MWI
PAK

BOL
PAN

ZWE

HTI

3
4
5
Law and Order (index: higher, better) - ICRG

correlation: -0.68***

MLI
MOZ
MWI

ZWE

HTI

PAN

GTMHNDTHA
ZMB
SLV NIC
SEN
UGA

20

COL

PHL

LKA

SLV

PHL

MLIUGA

IDN

PRT JOR
ESP
BEL KWT
CHL
SWE
NOR FIN
HKGDNK
DEU
CAN
IRL
FRA
AUS
SGP
NLD
NZL
GBR
JPN
AUT
CHE
USA

CHN

GTM
HND
ZMB
NICLKA
SEN

MOZGHA
MWI
BRA COL
TUN
JAM
PAK
BGD
EGY
ECU DZA
VEN
CMR KEN
TUR
DOMBWA
MEX MYS
PRY
ZAF
POL
KOR
GRC
ARG
CRI
ITA HUN
IND

KOR

KWT
NOR SWE
DNKFIN HKG
DEU
CAN
FRA IRL
NLDAUS
GBR NZL
JPN
AUT
CHEUSA

TZA

HTI

THA

URY

TUNPAK JAM
EGY
ECU
VEN
BWA DZA
TUR
DOM
MEX
MYS
PRY
ZAF
GRC
ARG
CRI POL
ITA
HUN
IND
IDN
PRT
BEL
JOR ESP
CHL
CHN
SGP

ZWE

PER

URY

GHA

BRA

BGD
KEN
CMR

BOL

PAN

PER

60

TZA

correlation: 0.70***

40

60

BOL

3
4
5
6
7
8
Business Regulatory Freedom (index: higher, less regulated) - Fraser Institute

80

80

20

40

PHL

GHA
BRA

JAM
BGD

TZA
THA
ZMB

URY
SLVSEN
LKA

20

60

PER

HTI

GTM
HND

40

correlation: -0.67***

BOL
PAN

ZWE

COL

80

80

A. Schneider Shadow Economy index (% of GDP)

1
2
3
4
Average Years of Secondary Schooling - Barro and Lee (2001)

-2

-1

0
Sociodemographic Factors

B. Heritage Foundation Informal Market index (range 1-5: higher, more informality)

4
COL

ZWE
HND

PHL

GTM
BRA

correlation: -0.83***

MLI

MOZ
PAK
VEN BOL
ECU
GUY

IND
NIC
UGA
ZMB

LKA

URY

TZA

MWI

SENARG
DOM PER
PAN
MEX SLV

ZAFDZA
JAM GHA

VEN

EGY
CHN
TUR
POL
THA
JOR

CRI

GRC

TTO

MYS

BWA

TUN

KOR

2
CHL

DEU USA

CHESGP

IRL
AUT
GBR
DNK
SWE
NZL
NOR
NLD
ISL
FIN
AUS
CAN

SLV
TUN
HUN

PRT ESP
JPN
FRA
BEL

CHL

IRL
HKG
DEU AUT USA
DNK
GBR
NLDNOR
ISL
CHE
CAN
AUSSWE NZLSGPFIN

3
4
5
6
7
8
Business Regulatory Freedom (index: higher, less regulated) - Fraser Institute

3
4
5
Law and Order (index: higher, better) - ICRG

BGD

HTI

CMR
KEN

correlation: -0.81***

PRY

IDN

PAK
IND
BOL
NIC
VEN
ZMB
ZWE
UGA HND
GUY
ECU PHL
GTM
COL
SENBRA
EGY
CHN
DOM
ARG
PANPER
TUR
POL MEX
SLV
ZAF DZA JAM JOR LKA
THA
GHA
GRC
CRI
URY
TUN
TTO
BWA

MYS
HUN

PRT

SGP

GBR

PRY

BGD

HTI

CMR

MOZ
BOL NICINDPAK
ZWE
ECU PHL HND ZMB
GUY
GTM
COL
EGYSEN
CHN
ARGBRA PER
DOM
PAN
POL
MEX TURSLV
LKA
JOR ZAF
DZA
GHA
JAMTHA
GRC
CRI
URY
TUN
KOR
TTO

4
KOR

MYS

HUN

FRAJPN
IRL
DNK
NZL
NLDAUS FIN
ISL

MLI
KEN
UGA
TZA
MWI

BWA

ITA

KWT

HKGAUT

BEL

USA DEU

NOR
CAN
CHE

1
2
3
4
Average Years of Secondary Schooling - Barro and Lee (2001)

KWT
ESP
JPN
FRA

PRT

CHL

HKG DEUUSA
AUT
GBR
DNK
SGPSWE
NLD
NOR
NZL
FIN
CHE
AUS
CANISL

SWE

ESP

IDN

VEN

ITA

BEL

CHL

correlation: 0.83***

MOZ
TZA
MWI

MLI

KWT

KWT
PRT
JPN
FRA
BEL
HKG

PAK
MOZ
IND
NIC
BOL
ZWE HND
ZMB
UGATZA
PHL
ECU GUY
MWICOL
GTM
SEN CHN
ARG
BRA
EGYDOM
PER
PAN
POL
TUR
MEX
THA
LKA
JAMJOR ZAF
DZA
GHA
GRC
CRI
URY
KOR
TTOMYS
BWA
ITA

ITA

KEN

HUN

ESP

correlation: -0.91***

MLI
PRY

BGD
IDN
CMR

HTI

PRY

HTI

IDN
CMR
KEN

BGD

-2

-1

IRL

0
Sociodemographic Factors

10

Figure 3. Informality and Basic Determinants (continued)

correlation: -0.85***

PRT
ITA

TTO

MYS

IRL

ESP

ISL
CAN
CHE AUS
SGP
JPN
GBR
AUT
NLD
DEU
DNK
USA
NOR

HKG

10

NZL

50

3
4
5
Law and Order (index: higher, better) - ICRG

ECU
COL

PRT

TUN

20

PER

MYS

TTO

ESP

IRL
NZL

SGP

CAN
CHE

AUS
JPN
NLD

10

GBR

AUT
HKG
DNK

USA
NOR

1
2
3
4
Average Years of Secondary Schooling - Barro and Lee (2001)

DEU

EGY

CRI

TUN

IRL

NZL
ESP

TTO

MYS

ISL

CAN
CHEAUS
SGP
JPN
GBR
AUT
NLD
HKG
DEU
DNK USA
NOR

PAN

PRT

ITA

ISL

PHL

ECU
COL SLV THA

BRA
CHL KOR MEX
URY
ARG

ITA

PAK

HND

BOL

JAM
GRC

KOR

SGP
HKG

DNK
USA

correlation: 0.82***

GRC

PAN MEX
CHL
EGY
URY
ARG

CRI

AUT
NLD
DEU

NZL
ISL

CAN
AUS
CHE
GBR

NOR

40

JAMPHL

IRL

4
5
6
7
8
Business Regulatory Freedom (index: higher, less regulated) - Fraser Institute

30

30

SLV
THA
BRA

PER

TTO

MYS
ESP

20

40

HND
BOL

TUN

JPN

correlation: -0.74***
PAK

CHL

PRT

ITA

20

TUN

SLV

10

CRIARG

30

CHL

BOL

JAM
ECU

COL
GRC
THA
BRA
PAN
MEX
EGY
KOR
URY
ARG
CRI

GRC
THA

KOR EGY

50

SLV
PAN
MEX
URY

PER

HND

PHL

ECU

10

40

40

PER

correlation: -0.81***
PAK

20

30

PAK

HND
BOL
JAM
PHL
COL
BRA

50

50

C. Self Employment (% of total employment) ILO

-1

0
1
Sociodemographic Factors

80

COL

GHA IDN
CMR
KEN

NIC

CHN

THA

PRY
DOM
SLV
VENPER
ECU
LKA
MEX

HND
GTM

TZA

UGA
ZMB
IND

BOL

100

MOZ
SEN
PAK

BGD
ZWE

MOZ
BGD
PAKSEN
IDN
ZWE
CMR

80

100

D. No Pension (% of labor force) World Development Indicators

HND

VEN

ECU
MEX

60

JOR
TUR

ARG

MYS

PAN
40

TUN

BRA
JAM

correlation: -0.75***

BEL
PRT
FRA
DEU USA
JPN
CHE

3
4
5
Law and Order (index: higher, better) - ICRG

IDN
ZMB
GHA
IND
BOL
CMR
NIC
THA
KEN

IRL
AUT
FIN
SWE
DNK
GBR
AUS
NLD
NOR
NZL

80

PRYCOL
GTMHNDDOM
SLV
VEN PER
PHL
ECU MEX LKA
DZA

40

CRI
TUN

20

HUN

URY

SGP

PRT

GRC
IRL
BEL
ESP ITAFRA
GBR NLDAUSDNKFIN
NZL
JPN

MOZ
BGD
SENPAK
IND ZMBGHA
ZWE
CMR

KOR
CAN
AUT

SWE
USA DEU
NOR
CHE

1
2
3
4
Average Years of Secondary Schooling - Barro and Lee (2001)

NIC
PRY
HND
GTM

FIN
NZL

TZA
UGA
KEN

LKA

20

JOR

TUR

ARGBRA
JAM
MYS
PAN CRI

TUN

CHL
SGP

URY

CANKOR
HUN

EGY

POL

GRC
IRL
BEL
PRT
AUT FIN
ITA
ESP
FRA
SWE
DNK
DEU
GBR
USA
AUS
NLD
NOR
JPN NZL
CHE

COLDOM
SLV
PER
VEN
PHL
MEX ECU DZA

40

POL

CHN
THA

80

CHL

CHE

correlation: 0.89***
IDN

ARG
JAM
MYS
PAN
EGY

IRL
AUT
SWE
DNK
DEU
GBR
USA
AUS
NLD NOR

3
4
5
6
7
8
Business Regulatory Freedom (index: higher, less regulated) - Fraser Institute

60

60

TUR

SGP

CAN

HUN
BEL
ITAPRT ESPFRA

BOL

JOR

BRA

CHL

URY

JPN

ZWE
CHN

KOR
GRC

correlation: -0.82***

PAK

TUN

100

BGD
SEN
UGA

CAN

20

MOZ
TZA

SGP

KOR

GRC

MYS

CRI

20

HUN

POL

POL

ITA
ESP

100

ARG

CHL
URY

JOR
TUR

PAN
EGY

EGY
CRI

SLV

LKA

DZA

40

60

DZA

correlation: -0.80***

BOL
NIC
PRY
DOM
GTM
PER

CHN THA
KEN
COL

PHL

PHL

JAMBRA

TZA
UGA
GHA
ZMB
IND

-2

-1

0
Sociodemographic Factors

Notes: 1. Sociodemographic Factors: Simple average of share of youth (aged 10-24) population, share of rural population
and share of agriculture in GDP (all three variables are standardized) World Development Indicators, ILO and UN.
2. *** denotes significance at the 1 percent level.

11

Remarkably, all 16 correlation coefficients (4 informality measures times 4

determinants) are highly statistically significant, with p-values below 1%, and of large
magnitude, ranging approximately between 0.7 and 0.9. All informality measures present
the same pattern of correlations: informality is negatively related to law and order,
regulatory freedom, and schooling achievement; and it is positively related to factors that
denote incipient socio-demographic transformation.
Therefore, all these explanations may hold some truth in them. What we need to
determine now is whether each of them has independent explanatory power with respect
to informality. Or, more specifically, we need to assess to what extent each of them is
relevant both in general for the cross-section of countries and in particular for a given
country. To this purpose we turn next.

The Causes of Informality: econometric analysis

In what follows, we use cross-country regression analysis to evaluate the general
significance of each explanation on the origins of informality. Then, we apply these
estimated relationships to the case of Peru in order to evaluate the country-specific
relevance of each proposed mechanism.
Each of the four informality measures presented earlier serves as the dependent
variable of its respective regression model. The set of explanatory variables is the same
for each informality measure and represents the major determinants of informality. They
are the same variables used in the simple correlation analysis, introduced above.
The regression results are presented in Table 2. They are remarkably robust
across informality measures. Moreover, all regression coefficients have the expected
sign and are highly significant. Informality decreases when law and order, business
regulatory freedom, or schooling achievement rise.

Similarly, informality decreases

when the production structure shifts away from agriculture and demographic pressures
from youth and rural populations decline. The fact that each explanatory variable retains
its sign and significance after controlling for the rest indicates that no single determinant
is sufficient to explain informality. All of them should be taken into account for a
complete understanding of informality.

12

Table 2. Determinants of Informality

Method of estimation: Ordinary Least Squares with Robust Standard Errors
Dependent variable: Four types of informality measure, country average
Informality measures
Schneider Shadow Heritage Foundation
Self
Economy index
Informal Market
Employment
No Pension
(% of GDP, in logs)
index
(% of total employment) (% of labor force)
[1]
[2]
[3]
[4]

Law and Order

(index from ICRG, range 0-6: higher, better; country average)

Business Regulatory Freedom

(index from Economic Freedom of the World by The Fraser
Institute, range 0-10: higher, less regulated; country average)

Average Years of Secondary Schooling

(from Barro and Lee (2001); country average)

Sociodemographic Factors
(simple average of share of youth (aged 10-24) population, share of
rural population, and share of agriculture in GDP; country average)

Constant

No. of observations
R-squared

-0.1069***
-3.23

-0.1530***
-3.30

-2.3941***
-3.52

-3.4748*
-1.88

-0.1020***
-2.72

-0.4884***
-9.21

-2.1587***
-2.62

-5.8250**
-2.16

-0.0858**
-1.92

-0.1761***
-3.87

-1.7743**
-2.26

-5.1117***
-2.96

0.1459**
2.27

0.3127***
4.38

3.3082**
2.44

19.1452***
6.69

4.5612***
25.03

6.5817***
32.20

51.3973***
11.16

111.2550***
11.35

74
0.74

77
0.93

42
0.85

67
0.89

Notes:
1. t-statistics are presented below the corresponding coefficients.
2. *, ** and *** denote significance at the 10 percent, 5 percent and 1 percent levels, respectively.
3. Four types of informality measure [1] Schneider (2004); [2] Index of Economic Freedom by The Heritage
Foundation (range 1-5: higher, more informality); [3] ILO, collected by Loayza and Rigolini (2006); and [4] Share of
labor force not contributing to a pension scheme (World Development Indicators).
4. Variables used to compute sociodemographic factors are all standardized. Sources are World Development Indicators,
ILO and UN.
5. Periods used to compute country averages vary by informality measure.
6. A dummy variable is also included in regression [1] for Indonesia, China, India or Paraguay and in regression [4] for
Greece. The dummy variable controls for anomalous cases.
Source: Authors estimation

The four explanatory variables account jointly for a large share of the crosscountry variation in informality: the R-squared coefficients are 0.74 for the Schneider
shadow economy index, 0.93 for the Heritage Foundation informal market index, 0.85 for
the share of self employment, and 0.89 for the share of the labor force not contributing to
a pension program. Figure 4 presents a scatter plot of the actual vs. predicted informality
measures. The majority of countries have small residuals (i.e., the unpredicted portion of
informality), a fact which is consistent with the large R-squared coefficients obtained in
the regressions. Is this also the case of Peru?
13

B. Heritage Foundation Informal Market index

5

A. Schneider Shadow Economy index (% of GDP, in logs)

PRY

PAN BOL

PER

3.5

HTI
URY THA ZMB GTM
HND
SLV
NICPHL
SEN
LKA
UGAGHA
MLI
COL MWI
MOZ
BRA
TUN
JAMPAK
BGD
EGY
VENDZA
ECU
KEN
CMR
BWA
TUR
DOM
MEX
PRY MYS ZAF
POL
KOR
GRC
ARG
CRI

ITA
INDHUN
ESP
PRT IDN
BEL
KWT
JOR
CHL

2.5

3.5

TUN

20

ITA
IRL

NZL

80

JOR

60

BOL
JAM
PHL
ECU
SLV COL
THA
PANBRA
MEX
EGY

MYS

15

MYS

SGP
CAN

20
SWE

20

25

30

35

40

45

TUR

BRA
JAM

PAN
CRI

EGY

CHL

15
10

10

DZA

TUN

JPN

IND
ZWECMR
BOL
NIC
CHNTHA
KEN
COL
PRY HND
DOM
GTM
SLV
PER
VEN
PHL
MEX ECU LKA

ARG

CRI

TTO

ESP

MOZ
TZA
BGD
SEN
PAK
UGA
IDN
ZMB
GHA

ISL
CAN
CHE AUS
SGP
GBR
HKG AUT
NLD
DEU
USA
DNK
NOR

HND

40

PRT

URY
ARG

D. No Pension (% of labor force)

100

45
40
35
30
25

KOR

CHL

PAK

PER
GRC

IRL
DEU
HKG USAAUT
DNK
GBR
CAN
CHE
AUS NLD
FIN
SWE
ISLSGP
NZL
NOR

4.5

C. Self Employment (% of total employment)

CHL

KWT
ESP PRT
FRA
JPN
BEL

2
1

CHE
USA

2.5

URY
TTO BWA
MYS

KOR
TUN
HUN
ITA

SWE
NOR
FIN
DNK
HKG
DEU
IRL
CAN
CHNFRA
AUS
SGP
NLD
NZL
GBR
JPN
AUT

MLI
BGD
HTI
IDN
CMR
KEN
IND
PAK MOZ
BOL
NIC VEN
ZMB
TZA
PHL
UGA HNDZWE
ECU
GUY
MWI
COL
GTM
CHN
EGY
SEN
ARG
BRA
DOM
PER
PAN
POL
TUR MEX
SLV
DZA
GHA
JOR
LKA
ZAFTHA
JAM
GRC
CRI

ZWE

TZA

4.5

Figure 4. Predicted and Actual Levels of Informality

Actual

KOR

GRC
BEL IRL
AUT
ITA
FRAESP
FIN
DNK
DEU
GBR
USA
AUS
NLD
NOR
NZL JPN
CHE

20

URY

POL

HUN
PRT

40

60

80

100

Predicted
Notes:
1. Four measures of informality A. Schneider (2004); B. Index of Economic Freedom by The Heritage Foundation
(range 1-5: higher, more informality); C. ILO, collected by Loayza and Rigolini (2006); and D. Share of labor force not
contributing to a pension scheme (World Development Indicators)
2. In each graph, a 45-degree line is drawn to show a distance between predicted and actual levels for each case.

Peru is in the minority of countries for which the residual is relatively large. (For
illustrative purposes, the Peru observation is highlighted in Figure 4). In fact, statistical
tests show that Perus unexplained informality is significantly different from zero. Figure
5 compares actual with predicted informality for the case of Peru. For all four measures,
predicted informality falls short of actual informality, with explained fractions of 85% for
the Schneider shadow economy index, 89% for the Heritage Foundation informal market
index, 75% for the share of self employment, and 72% for the share of the labor force not
contributing to a pension program. In summary, the cross-country regression model

14

explains to an important degree the high level of informality in Peru, but it does not
account for it fully.

To complete the story, an in-depth study that focuses on the

specificities of the Peruvian case is needed.

Figure 5. Difference between Predicted and Actual Levels of Informality

B. Heritage Foundation Informal Market index
4

A. Schneider Shadow Economy index (% of GDP, in logs)

4.10
4

3.60
3.21

3.49

89%

85%

Actual

Predicted

Actual

D. No Pension (% of labor force)

80

C. Self Employment (% of total employment)

77.57

56.22

72%

10

20

20

75%

60

30

30.67

40

40

40.91

Predicted

Actual

Predicted

Actual

Predicted

Note: Four measures of informality A. Schneider (2004); B. Index of Economic Freedom by The Heritage Foundation
(range 1-5: higher, more informality); C. ILO, collected by Loayza and Rigolini (2006); and D. Share of labor force not
contributing to a pension scheme (World Development Indicators)

Focusing now on the portion of informality explained by the cross-country

regression model, we can evaluate the importance of each explanatory variable for the
case of Peru. In particular, we can assess how each of them contributes to the difference
in informality between Peru and comparator countries, for which we choose Chile (the
highest growing country in the region) and the USA (Perus main trading partner). The
contribution of each explanatory variable is obtained by multiplying the corresponding
regression coefficient (from Table 2) times the difference in the value of this explanatory
variable between Peru and the comparator country.

(Naturally, the sum of the

15

contributions equals the total difference in predicted informality between the two
countries). The importance of a particular explanatory variable would, therefore, depend
on the size of its effect on informality in the cross-section of countries and how far apart
the two countries are with respect to the explanatory variable in question.

Figure 6. Explanation of Differences in Informality, Peru and Chile

Peru and Chile

B. Heritage Foundation Informal Market index

80

60

A. Schneider Shadow Economy index (% of GDP, in logs)

Regulatory Freedom
Law and Order

40

40

60

Regulatory Freedom

20

Socio-demographics*

20

Law and Order

Socio-demographics*

Education

-20

-20

Education

C. Self Employment (% of total employment)

D. No Pension (% of labor force)

Socio-demographics*

40

60

Regulatory Freedom

30

Regulatory Freedom

-20

Education

-10

10

20

Socio-demographics*

Law and Order

20

40

Law and Order

Education

Notes:
1. Four measures of informality A. Schneider (2004); B. Index of Economic Freedom by The Heritage Foundation
(range 1-5: higher, more informality); C. ILO, collected by Loayza and Rigolini (2006); and D. Share of labor force not
contributing to a pension scheme (World Development Indicators)
2. *Sociodemographics: Youth population, rural population and agricultural production are considered.

16

Figure 6 presents the decomposition of the difference of (predicted) informality

between Peru and Chile. Law and order, regulatory freedom, and socio-demographic
conditions are more advanced in Chile and, thus, contribute positively to explain the
higher level of informality in Peru. Education, at least as measured by years of secondary
schooling, is better in Peru; therefore, by itself the difference in education would predict
lower informality in Peru. Except for the informality measure based on the lack of
pension coverage, the role of education and socio-demographic factors is small in
explaining the informality differences between Peru and Chile. We can combine law and
order and regulatory freedom in a group called institutional factors and then combine
education and socio-demographics in another group called structural factors. Then, it
is clear that the higher level of informality in Peru is mostly due to Chiles higher
progress in institutional factors.
Figure 7 presents the decomposition of the difference of (predicted) informality
between Peru and the USA.

The first thing to notice is that these differences are

substantially larger than those between Peru and Chile. The second point to realize is that
the relative importance of institutional and structural factors is different in the Peru-USA
comparison than in the Peru-Chile case.

Although for the majority of informality

measures institutional factors still play the larger role, structural factors become
quantitatively relevant in the Peru-USA comparison. 8

The exception is the lack of pension coverage. It seems that lack of pension coverage differs from the
other informality measures in the much larger role that structural factors play in explaining its crosscountry differences. This was already glimpsed in the Peru-Chile case and is quite evident in the PeruUSA comparison.

17

Figure 7. Explanation of Differences in Informality, Peru and USA

Peru and USA

A. Schneider Shadow Economy index (% of GDP, in logs)

Regulatory Freedom

30

50

Law and Order

B. Heritage Foundation Informal Market index

40

Education

30

20

Regulatory Freedom

Education
Law and Order

10

20

Socio-demographics*

10

Socio-demographics*

D. No Pension (% of labor force)

40

40

C. Self Employment (% of total employment)

Law and Order

30

30

Socio-demographics*

Regulatory Freedom

20

Socio-demographics*

Education

20

Regulatory Freedom
Education

10
0

10

Law and Order

Notes:
1. Four measures of informality A. Schneider (2004); B. Index of Economic Freedom by The Heritage Foundation (range
1-5: higher, more informality); C. ILO, collected by Loayza and Rigolini (2006); and D. Share of labor force not
contributing to a pension scheme (World Development Indicators)
2. *Sociodemographics: Youth population, rural population and agricultural production are considered.

Conclusion
Informality is alarmingly widespread in Peru. In fact, available measures indicate
that the level of informality in the country is among the highest in the world. This is

18

worrisome because it denotes sharp misallocation of resources (labor in particular) and

grossly inefficient utilization of government services, which can jeopardize the countrys
growth prospects.

Cross-country evidence suggests that informality in Peru is the

outcome of a combination of poor public services and a burdensome regulatory

framework for formal firms. This combination is particularly dangerous when, as in the
Peruvian case, education and skills are deficient, modes of production are still primary,
and demographic pressures are strong. Although cross-country evidence explains most of
the high informality in Peru, it is not sufficient to fully account for it. Country-specific
evidence is essential to fill in the gap.

19

References
[1] Barro, Robert and Jong-Wha Lee, International data on educational attainment:
updates and implications, Oxford Economic Papers, 3, 541-63 (2001).
[2] De Soto, Hernando, The Other Path: The Invisible Revolution in the Third World,
HarperCollins (1989).
[3] Gerxhani, Klarita, The Informal Sector in Developed and Less Developed
Countries: A Literature Survey, Public Choice, 120, 267-300 (2004).
[4] Gwartney, James and Robert Lawson, Economic Freedom of the World: 2006
Annual Report, The Fraser Institute (2006). www.freetheworld.com.
[5] International Labour Organization (ILO), Bureau of Statistics, LABORSTA Internet.
laborsta.ilo.org.
[6] Loayza, Norman, The Economics of the Informal Sector: A Simple Model and
Some Empirical Evidence from Latin America, Carnegie-Rochester Conference
Series on Public Policy, 45, 129-62 (1996).
[7] Loayza, Norman and Jamele Rigolini, Informality Trends and Cycles, World
Bank Policy Research Working Paper No. 4078 (2006).
[8] Maloney, William, Informality Revisited, World Development, 32(7), 1159-78
(2004).
[9] Miles, Marc, Edwin Feulner and Mary OGrady, 2005 Index of Economic Freedom,
The Heritage Foundation and The Wall Street Journal (2005).
[10] Perry, Guillermo, William Maloney, Omar Arias, Pablo Fajnzylber, Andrew Mason
and Jaime Saavedra-Chanduvi, Informality: Exit and Exclusion, The World Bank
(2007).
[11] The PRS Group, International Country Risk Guide (ICRG). www.icrgonline.com.
[12] Schneider, Friedrich, The Size of the Shadow Economies of 145 Countries all over
the World: First Results over the Period 1999 to 2003, IZA DP No. 1431 (2004).
[13] Schneider, Friedrich and Dominik Enste, Shadow Economies: Size, Causes, and
Consequences, Journal of Economic Literature, 38, 77-114 (2000).
[14] United Nations (UN), Population Division, World Population Prospects: The 2004
Revision, UN (2005)
[15] The World Bank, World Development Indicators, The World Bank, various years.

20

Appendix 1. Definitions and Sources of Variables Used in Regression Analysis

Variable

Definition and Construction

Source

Schneider Shadow
Economy index

Estimated shadow economy as the percentage of official GDP. Average of 20012002 by country.

Schneider (2004).

Heritage Foundation
Informal Market index

An index ranging 1 to 5 with higher values indicating more informal market

activity. The scores and criteria are: (i) Very Low: Country has a free-market
economy with informal market in such things as drugs and weapons (score is 1);
(ii) Low: Country may have some informal market involvement in labor or
pirating of intellectual property (score is 2); (iii) Moderate: Country may have
some informal market activities in labor, agriculture, and transportation, and
moderate levels of intellectual property piracy (score is 3); (iv) High: Country
may have substantial levels of informal market activity in such areas as labor,
pirated intellectual property, and smuggled consumer goods, and in such services
as transportation, electricity, and telecommunications (score is 4); and (v) Very
High: Country's informal market is larger than its formal economy (score is 5).
Average of 2000-2005 by country.

Miles, Feulner and O'Grady

(2005).

Self Employment

Self employed workers as the percentage of total employment. Country averages

but periods to compute the averages vary by country. Only 47 countries that have
at least two consecutive pairs of observations are used. For more details, refer to
Loayza and Rigolini (2006).

ILO, collected by Loayza

and Rigolini (2006).

No Pension

Labor force not contributing to a pension scheme as the percentage of total labor
force. Average of 1992-2004 by country.

World Development
Indicators, various years.

Law and Order

An index ranging 0 to 6 with higher values indicating better governance. Law and
Order are assessed separately, with each sub-component comprising 0 to 3 points.
Assessment of Law focuses on the legal system, while Order is rated by popular
observance of the law. Average of 2000-2005 by country for Schneider Shadow
Economy index, Heritage Foundation Informal Market index and No Pension,
while periods to compute country averages are different by country for Self
Employment.

ICRG. Data retrieved from

www.icrgonline.com.

Business Regulatory
Freedom

An index ranging 0 to 10 with higher values indicating less regulated. It is

composed of following indicators: (i) Price controls: extent to which businesses
are free to set their own prices; (ii) Burden of regulation / Administrative
Conditions/Entry of New Business; (iii) Time with government bureaucracy:
senior management spends a substantial amount of time dealing with government
bureaucracy; (iv) Starting a new business: starting a new business is generally
easy; and (v) Irregular payments: irregular, additional payments connected with
import and export permits, business licenses, exchange controls, tax assessments,
police protection, or loan applications are very rare. Average of 2000-2005 by
country for Schneider Shadow Economy index, Heritage Foundation Informal
Market index and No Pension, while periods to compute country averages are
different by country for Self Employment.

Gwartney and Lawson

(2006), The Fraser Institute.
Data retrieved from
www.freetheworld.com.

Average Years of
Secondary Schooling

Average years of secondary schooling in the population aged 15 and over.

Average of 2000-2005 by country for Schneider Shadow Economy index,
Heritage Foundation Informal Market index and No Pension, while periods to
compute country averages are different by country for Self Employment.

Barro and Lee (2001).

Sociodemographic
Factors

Simple average of following three variables: (i) Youth (aged 10-24) population as
the percentage of total population; (ii) Rural population as the percentage of total
population; and (iii) Agriculture as the percentage of GDP. All three variables are
standardized before the average is taken. Average of 2000-2005 by country for
Schneider Shadow Economy index, Heritage Foundation Informal Market index
and No Pension, while periods to compute country averages are different by
country for Self Employment.

Author's calculations with

data from World
Development Indicators, ILO
and UN.

21

Appendix 2. Descriptive Statistics

Data in country averages; periods vary by informality measure
(a) Univariate (regression sample)
Variable

Obs.

Mean

Std. Dev.

74

32.430

15.172

8.550

68.200

77

2.936

1.206

1.000

4.800

Self Employment (% of total employment)

42

23.730

10.494

7.206

42.482

No Pension (% of labor force)

67

51.178

33.394

1.450

98.000

Obs.

Mean

Std. Dev.

145

34.838

13.214

8.550

68.200

157

3.390

1.197

1.000

5.000

Self Employment (% of total employment)

47

23.518

10.504

7.206

42.482

No Pension (% of labor force)

112

56.073

32.602

1.450

98.700

Schneider Shadow Economy index

(% of GDP)
Heritage Foundation Informal Market index
(range 1-5)

Minimum Maximum

(b) Univariate (full sample)

Variable
Schneider Shadow Economy index
(% of GDP)
Heritage Foundation Informal Market index
(range 1-5)

Minimum Maximum

(c) Bivariate Correlations between Informality Measures

(upper triangle for regression sample (in italics) and lower triangle for full sample)
Variable

Schneider
Heritage Fndn.
Shadow Economy Informal Market

Self
Employment

No Pension

Schneider Shadow Economy index

(% of GDP)

1.00
145 | 74

0.74***
74

0.83***
40

0.73***
67

Heritage Foundation Informal Market index

(range 1-5)

0.65***
132

1.00
157 | 77

0.90***
42

0.90***
67

Self Employment (% of total employment)

0.76***
43

0.85***
47

1.00
47 | 42

0.85***
39

No Pension (% of labor force)

0.60***
106

0.78***
108

0.86***
41

1.00
112 | 67

Notes:
1. Sample sizes are presented below the corresponding coefficients.
2. *** denotes significance at the 1 percent level.

22

Documentos de Trabajo publicados

Working Papers published
La serie de Documentos de Trabajo puede obtenerse de manera gratuita en formato
pdf en la siguiente direccin electrnica:
http://www.bcrp.gob.pe/bcr/Documentos-de-Trabajo/Documentos-de-Trabajo.html
The Working Paper series can be downloaded free of charge in pdf format from:
http://www.bcrp.gob.pe/bcr/ingles/working-papers/working-papers.html
2007
Noviembre \ November
DT N 2007-017
El mecanismo de transmisin de la poltica monetaria en un entorno de dolarizacin
financiera: El caso del Per entre 1996 y 2006
Renzo Rossini y Marco Vega
Setiembre \ September
DT N 2007-016
Efectos no lineales de la volatilidad sobre el crecimiento en economas emergentes
Nelson Ramrez-Rondn
DT N 2007-015
Proyecciones desagregadas de inflacin con modelos Sparse VAR robustos
Carlos Barrera
Agosto \ August
DT N 2007-014
Aprendiendo sobre Reglas de Poltica Monetaria cuando el Canal del Costo Importa
Gonzalo Llosa y Vicente Tuesta
DT N 2007-013
Determinantes del crecimiento econmico: Una revisin de la literatura existente y
estimaciones para el perodo 1960-2000
Raymundo Chirinos
DT N 2007-012
Independencia Legal y Efectiva del Banco Central de Reserva del Per
Vicente Tuesta Retegui
DT N 2007-011
Regla Fiscal Estructural y el Ciclo del Producto
Carlos Montoro y Eduardo Moreno
DT N 2007-010
Oil Shocks and Optimal Monetary Policy
Carlos Montoro

Mayo \ May
DT N 2007-009
Estimacin de la Frontera Eficiente para las AFP en el Per y el Impacto de los Lmites
de Inversin: 1995 - 2004
Javier Pereda
DT N 2007-008
Efficiency of the Monetary Policy and Stability of Central Bank Preferences. Empirical
Evidence for Peru
Gabriel Rodrguez
DT N 2007-007
Application of Three Alternative Approaches to Identify Business Cycles in Peru
Gabriel Rodrguez
Abril \ April
DT N 2007-006
Monetary Policy in a Dual Currency Environment
Guillermo Felices, Vicente Tuesta
Marzo \ March
DT N 2007-005
Monetary Policy, Regime Shift and Inflation Uncertainty in Peru (1949-2006)
Paul Castillo, Alberto Humala, Vicente Tuesta
DT N 2007-004
Dollarization Persistence and Individual Heterogeneity
Paul Castillo y Diego Winkelried
DT N 2007-003
Why Central Banks Smooth Interest Rates? A Political Economy Explanation
Carlos Montoro
Febrero \ February
DT N 2007-002
Comercio y crecimiento: Una revisin de la hiptesis Aprendizaje por las
Exportaciones
Raymundo Chirinos Cabrejos
Enero \ January
DT N 2007-001
Per: Grado de inversin, un reto de corto plazo
Gladys Choy Chong

2006
Octubre \ October
DT N 2006-010
Dolarizacin financiera, el enfoque de portafolio y expectativas:
Evidencia para Amrica Latina (1995-2005)
Alan Snchez
DT N 2006-009
Passthrough del tipo de cambio y poltica monetaria:
Evidencia emprica de los pases de la OECD
Csar Carrera, Mahir Binici
Agosto \ August
DT N 2006-008
Efectos no lineales de choques de poltica monetaria y de tipo de cambio real en
economas parcialmente dolarizadas: un anlisis emprico para el Per
Saki Bigio, Jorge Salas
Junio \ June
DT N 2006-007
Corrupcin e Indicadores de Desarrollo: Una Revisin Emprica
Saki Bigio, Nelson Ramrez-Rondn
DT N 2006-006
Tipo de Cambio Real de Equilibrio en el Per: modelos BEER y construccin de
bandas de confianza
Jess Ferreyra y Jorge Salas
DT N 2006-005
Hechos Estilizados de la Economa Peruana
Paul Castillo, Carlos Montoro y Vicente Tuesta
DT N 2006-004
El costo del crdito en el Per, revisin de la evolucin reciente
Gerencia de Estabilidad Financiera
DT N 2006-003
Estimacin de la tasa natural de inters para la economa peruana
Paul Castillo, Carlos Montoro y Vicente Tuesta
Mayo \ May
DT N 2006-02
El Efecto Traspaso de la tasa de inters y la poltica monetaria en el Per: 1995-2004
Alberto Humala
Marzo \ March
DT N 2006-01
Cambia la Inflacin Cuando los Pases Adoptan Metas Explcitas de Inflacin?
Marco Vega y Diego Winkelreid

2005
Diciembre \ December
DT N 2005-008
El efecto traspaso de la tasa de inters y la poltica monetaria en el Per 1995-2004
Erick Lahura
Noviembre \ November
DT N 2005-007
Un Modelo de Proyeccin BVAR Para la Inflacin Peruana
Gonzalo Llosa, Vicente Tuesta y Marco Vega
DT N 2005-006
Proyecciones desagregadas de la variacin del ndice de Precios al Consumidor (IPC),
del ndice de Precios al Por Mayor (IPM) y del Crecimiento del Producto Real (PBI)
Carlos R. Barrera Chaupis
Marzo \ March
DT N 2005-005
Crisis de Inflacin y Productividad Total de los Factores en Latinoamrica
Nelson Ramrez Rondn y Juan Carlos Aquino.
DT N 2005-004
Usando informacin adicional en la estimacin de la brecha producto en el Per: una
aproximacin multivariada de componentes no observados
Gonzalo Llosa y Shirley Miller.
DT N 2005-003
Efectos del Salario Mnimo en el Mercado Laboral Peruano
Nikita R. Cspedes Reynaga
Enero \ January
DT N 2005-002
Can Fluctuations in the Consumption-Wealth Ratio Help to Predict Exchange Rates?
Jorge Selaive y Vicente Tuesta
DT N 2005-001
How does a Global disinflation drag inflation in small open economies?
Marco Vega y Diego Winkelreid