Economic resilience: Dynamics of informality

Informality is associated with increased vulnerability of countries to economic shocks. At the same time, informality raises the likelihood of being affected by (external) shocks. The combination of these two tendencies can create a vicious circle, weakening the long-term performance of a country, lowering the potential benefi ts it can derive from trade and reducing economic well-being. This chapter discusses how informal employment evolves over the cycle – differentiating among different segments of informal labour markets – and the consequences for economic resilience to shocks. It presents evidence of the extent to which informal economies increase volatility in growth performance and the frequency of extreme economic events. Moreover, the chapter discusses the particular interaction between international capital fl ows and labour market informality in worsening a country’s vulnerability to shocks. It emphasizes the potentially adverse effects of offi cial development aid and international investment by multinationals within global production networks.