IZA DP No. 4186: Conceptualising Informality: Regulation and Enforcement
The informality discourse is large and vibrant, and is expanding rapidly. But there is a certain conceptual incoherence to the literature. New definitions of informality compete with old definitions leading to a plethora of alternative conceptualisations. While some individual studies may apply a tight definition consistently, the literature as a whole is in a mess. This article proposes that informality and formality should be seen in direct relation to economic activity in the presence of specified regulation(s). Relative to the regulation(s), four conceptual categories that can help frame the analysis are: (A) regulation applicable and compliant, (B) regulation applicable and non-compliant, (C) regulation non-applicable after adjustment of activity, and (D) regulation non-applicable to the activity. Rather than use the generic labels 'informal' and 'formal', it would be preferable if the analysis focused on these four categories (or even more disaggregated as appropriate). A central determining factor in the impacts of regulation on economic activity across these four categories is the nature and intensity of enforcement. While lack of enforcement is well-documented, an understanding of its determinants − why and to what extent a government would not enforce a regulation that it has itself passed, and why non-enforcement varies from one context to another, is relatively neglected in the literature. Thus, specificity on regulation and on enforcement is the key to achieving conceptual clarity in the analytical literature and in the policy discourse on informality.