Informal Sector Dynamics in Times of Fragile Growth : The Case of Madagascar

This paper investigates the dynamics of the informal sector in Madagascar during a period of fragile growth. Overall, the behavior of informal firms in terms of earnings, employment and capital accumulation points to a degree of heterogeneity which...

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Bibliographic Details
Main Authors:	Vaillant, Julia, Grimm, Michael, Lay, Jann, Roubaud, François
Format:	Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2017
Subjects:	ACCESS TO CAPITAL ACCESS TO CREDIT ACCESS TO FINANCE ACCESS TO FORMAL CREDIT ACCOUNTS ACCUMULATION RATE ADVANCED ECONOMIES ADVANCED ECONOMY AGRICULTURAL ECONOMICS BANK CREDIT BANK POLICY BARRIERS TO ENTRY BIASES BORROWING BUSINESS ACTIVITIES BUSINESS ACTIVITY BUSINESS ASSOCIATIONS BUSINESS ECONOMICS BUSINESS OWNERS BUSINESS RISK BUSINESS RISKS CAPACITY BUILDING CAPITAL ACCUMULATION CAPITAL CONSTRAINT CAPITAL CONSTRAINTS CAPITAL COST CAPITAL COSTS CAPITAL INJECTION CAPITAL MARKET CAPITAL MARKETS CAPITAL REQUIREMENTS CAPITAL RETURNS CAPITAL SHORTAGES CAPITAL STOCK CAPITAL STOCKS CHECKS COLLATERAL CONTRACTUAL OBLIGATIONS COST OF CAPITAL CREDIT CONSTRAINED FIRMS CREDIT CONSTRAINT CREDIT CONSTRAINTS CREDIT HISTORY CREDIT INSTITUTIONS CREDIT MARKET CREDIT MARKETS CREDIT RATIONING DEGREES OF RISK DEMOGRAPHIC CHARACTERISTICS DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT ECONOMICS DIVERSIFICATION DUMMY VARIABLE DUMMY VARIABLES DURABLE DURABLE GOODS EARNINGS ECONOMETRIC MODELS ECONOMIC CONSTRAINTS ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMIC POLICIES ECONOMIC STATISTICS ENDOWMENTS ENTERPRISE PERFORMANCE ENTREPRENEUR ENTREPRENEURIAL ACTIVITIES ENTREPRENEURIAL ACTIVITY ENTREPRENEURS ENTRY BARRIERS EQUIPMENT EXCESSIVE RISK EXPECTED UTILITY EXPECTED VALUE EXPENDITURE EXPENDITURES EXTERNAL FINANCE FAMILY FINANCE FAMILY LOANS FARMERS FEMALE ENTREPRENEURS FINANCIAL MEANS FINANCIAL RESOURCES FINANCIAL SUPPORT FIXED COSTS FORMAL BANKS GDP GROUP OF FIRMS GROWTH THEORY HIGH INTEREST RATES HOLDING HOUSEHOLD WEALTH HOUSEHOLDS HUMAN CAPITAL INCOME GROWTH INFORMATION ASYMMETRIES INFORMATION ON ENTREPRENEURS INFORMATION ON INVESTMENT INSTRUMENT INSURANCE INSURANCE MARKET INSURANCE MARKETS INSURANCE PRODUCTS INTEREST RATE INTERNAL FINANCE INTERNAL FUNDS INVENTORIES INVENTORY INVESTING INVESTMENT BEHAVIOR JOB CREATION LABOR FORCE SURVEY LABOR MARKET LABOR MARKETS LACK OF ACCESS LEVEL OF RISK LIQUID WEALTH LIQUIDITY LIQUIDITY CONSTRAINT LIQUIDITY CONSTRAINTS LIQUIDITY PREMIUM LIQUIDITY PROBLEMS LOAN LOTTERY MARGINAL COST MARGINAL PRODUCT MARGINAL UTILITY MARGINAL UTILITY OF CONSUMPTION MARKET CONSTRAINTS MARKET ECONOMY MARKET FAILURE MARKET FAILURES MARKET INTEREST RATE MARKET INTEREST RATES MICRO DATA MICRO ENTERPRISES MICRO-CREDIT MICRO-ENTERPRISE MICRO-FINANCE MICRO-FINANCE INSTITUTIONS MICROCREDIT MICROENTERPRISES MIDDLE INCOME COUNTRIES MONEY LENDERS MONEYLENDERS MORAL HAZARD OPPORTUNITY COST OPPORTUNITY COSTS PHYSICAL CAPITAL POLITICAL ECONOMY PORTFOLIO PRICE RISK PRICE UNCERTAINTY PRODUCTION FUNCTION PRODUCTIVE INVESTMENT PROFITABILITY PURCHASING POWER PURCHASING POWER PARITY RATE OF RETURN RATES OF RETURN RECEIPTS REINVESTMENT RETAINED EARNINGS RISK AVERSION RISK PERCEPTIONS RISK PREMIUM RISK-AVERSE INDIVIDUALS SAFE ASSET SAVINGS SELF-EMPLOYMENT SMALL BUSINESS SMALL ENTERPRISES SMALL-SCALE ENTREPRENEURS SOURCE OF CREDIT SOURCES OF FINANCE START-UP TAX TAXIS TRADE SECTOR TRADING TRANSITION COUNTRY TRANSITION ECONOMY TRUST FUND UNION VALUE ADDED WEALTH
Online Access:	http://documents.worldbank.org/curated/en/357541468337172457/Informal-sector-dynamics-in-times-of-fragile-growth-the-case-of-Madagascar http://hdl.handle.net/10986/26798

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Summary:	This paper investigates the dynamics of the informal sector in Madagascar during a period of fragile growth. Overall, the behavior of informal firms in terms of earnings, employment and capital accumulation points to a degree of heterogeneity which goes beyond a simple dualistic model and even a more refined model that would distinguish between an upper entrepreneurial and a lower subsistence tier within the informal sector. However, in line with the dualistic model, the informal sector indeed fulfills a labor absorbing function in times of crisis. During the growth period authors see capital accumulation in most of the sectors and lots of evidence that households expand their activities. However, this happens mainly through the creation of new firms instead of the expansion of existing ones, which is consistent with much higher returns at very low levels of capital. More rapid expansion can be observed in sectors that operate with lower capital intensity, which is also consistent with risk or credit constraints as major deterrents to expansion. While there is some indication that total factor productivity increased over time, returns to capital and labor where not higher at the end of the observation period than at the beginning. Returns are also rather low at high levels of capital. These findings point to a limited growth potential of the informal sector as a whole. The heterogeneity in capital returns hints at large inefficiencies in allocating capital across informal firms.

Informal Sector Dynamics in Times of Fragile Growth : The Case of Madagascar

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