Sociological, Psychological, and Political Factors Behind the Informal Economy: Recommendations for Successful Development Policy

Abstract

Informal economic activity is an inevitability that occurs around the world. There is a strong correlation between a region's level of development and the size of its informal economy. Although informal economies exist in both the developed and the developing world, they are more significant to the everyday lives of individuals in the Global South. This paper examines the ways in which sociological, psychological and political factors mediate the pervasiveness of the informal economy. Here, the argument is made that the objectives of development policy can more effectively meet the needs of the developing world if policy-makers work to reduce both the barriers to formal activity and the incentives to operate informally.