April 1, 1999

The informal sector: a source of growth

In developing countries labour reallocation from traditional, low-productivity sectors towards modern, high-productivity sectors is an important source of economic growth, and a driving force behind specialization.

Simulations with the applied general-equilibrium model WorldScan show that Asian countries can expect up to a 30 percent increase in income per capita or, equivalently, slightly more than one percentage point extra annual growth during a period of 25 years. Moreover, our results suggest that labour reallocation is mainly induced by productivity increases in agriculture that push redundant labour towards modern industrial sectors.