Informality and development: Revisiting the nonlinear dynamics with threshold evidence

Abstract

This paper investigates the nonlinear and threshold-based impact of informality on economic development across 150 countries from 1990 to 2020. Drawing on dualistic and institutional economic theories, it employs a Dynamic Panel Threshold Model (DPTM) to endogenously identify levels of informality beyond which the effect of informality on development shifts. Our findings reveal significant threshold effects. The analysis reveals that informality can support development in low-income and institutionally weak contexts but becomes detrimental in more advanced economies. Region-specific thresholds are estimated: informality remains growth-enhancing below ∼20 % globally and ∼37–40 % in African economies but has adverse effects in high-income countries even at low levels. Institutional quality and financial development also influence the nature of these dynamics. These findings challenge one-size-fits-all formalisation policies, suggesting that tailored, more context-specific interventions are likely to be more fruitful.