Trade and Employment From Myths to Facts - International Labour ...

For more than two decades, quantitative and qualitative studies have tried to
assess the impact of trade liberalization on the informal sector and the presence of
a large informal sector on export competitiveness. Three approaches have been used
and are discussed below:
● Qualitative studies (case studies, partly using data).
● Quantitative ex post studies (econometric analysis).
Chapter 4: Trade and the informal economy
● Quantitative ex ante studies (mainly computable general equilibrium (CGE)
models).
In quantitative studies, published or specifically collected data are used to analyse
the relationship between trade and informality for policy analysis. Quantitative studies
can be exact in establishing relationships between variables in order to track the
impact of tariff reduction, for example, while field studies can establish nuances that
cannot be easily captured through data and models. Moreover, qualitative studies
use cases from the field. Policy-makers are interested in studying the impact of particular
policy measures, such as the impact of a change in income tax on welfare of
people below poverty lines and other socio-economic categories of households. It is
possible to study the impact of policies that are targeted and are not likely to have
major indirect impact on other variables of an economy through focused case studies.
Econometric exercises have also used samples to establish relationships between
informalization and other variables. Econometric studies allow determination of the
significance of a relation between variables using established statistical methodologies.
Most of the studies, with certain exceptions, 3 have used micro-level (i.e. firm- or industry-level)
data in specific countries to draw their conclusions.
Economy-wide analysis is essential when the indirect impact of policy changes
is potentially wide and other groups and other markets may be affected as a result
of a policy change. CGE models take the entire macroeconomy into consideration.
To provide a framework, in which the influence of policy changes or any exogenous
change can be traced through different sectors and different socio-economic classes,
it would be helpful to use a multi-sectoral model in which informal transactions and
“agents” can explicitly be tracked. In such a model, the magnitude of the impact of
different policies can be quantified to identify sectors that respond more strongly
through production, to analyse the impact on the demand for informal factors, and
eventually to identify income generation for the households belonging to the informal
economy. Moreover, through their expenditure pattern, second-round effects on the
economy can be identified. For instance, through simu lations based on government
investment expenditure or alternative trade policies, it is possible to explore the
inter-relationships among the various economic fac tors considered. A particular expansion
of sectoral exports may bring about repercussions that could be
counter-intuitive. For example, if the objective is to raise informal incomes in the
3 Sinha (1999), Sinha et al. (2003), Sinha and Adam (2006), and Sinha (2009).
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