The Informal Economy and its Relative Effect on Political Capacity

Informal economics is a field of study which applies to every state in the world. The dynamics of this “shadow” economy infiltrate the entirety of markets, affecting governments, citizens, producers, and consumers. As a result of this deep infiltration, a significant amount of resources have been committed to unraveling the mysteries of the informal economy. Over the course of the last two decades, the academic community has seen a surge of studies and data that explore the determinates of the informal economy, means of measuring said economy, how the informal sector affects economic development, and, most recently, how the informal sector effects a state’s political capacity. Modern research has done an excellent job of representing the relative implications of the informal economy on taxation, foreign investment and other phenomena within developed nations. However, despite this definite increase in the available data, models and case studies, this new field of focus, the informal-political capacity relationship, is unarguably incomplete. Current research on the informal economy has primarily been based on proxy measurements, which makes it quite common for researchers to capture latent variables in their measurements or even, in some cases, ignore other variables altogether. When it comes to developing nations, the available data is even more incomplete. Developing nations are typically ignored due to the relative lack of information on governing systems, population data, and economic activities. However, it is developing nations that may garner the most benefit from understanding the inner workings of the informal economy. It is the general disregard for developing nations and the inaccuracy of current informal economic models that I wish to address.