Publication: Do Shocks Perpetuate Disparities within and across Informal Firms?: Evidence from the COVID-19 Pandemic in South Asia
Loading...
Date
2023-10-04
ISSN
Published
2023-10-04
Author(s)
Pereira-López, Mariana
Editor(s)
Abstract
Using three rounds of data from the Business Pulse Survey in South Asia, this paper studies the differential effects of the COVID-19 shock on informal firms. It also captures heterogeneity within informal firms based on the degree and motivation of informality. The findings suggest that the severity of the impact of the COVID-19 shock and the recovery speed are strongly associated with the degree of informality. Firms' external attributes, such as size, sector, age, and gender of the owner, do not explain the depth of the impact. Internal characteristics such as poor management capabilities and education of the manager and owners are strong predictors of vulnerability among informal firms. In particular, necessity firms experience a larger drop in sales relative to the parasitic type of informal firms. To add to this, the adjustment response (for example, the use of digital platforms) of informal firms is smaller, which perpetuates the gap between formal and informal firms. Within informal firms, the parasitic type typically have a smaller adjustment response. These findings have implications for policies to support the private sector in the presence of informality, including considerations pertaining to targeting, modality of support, and the instruments required for designing more impactful programs during shocks.
Link to Data Set
Citation
“Grover, Arti; Pereira-López, Mariana. 2023. Do Shocks Perpetuate Disparities within and across Informal Firms?: Evidence from the COVID-19 Pandemic in South Asia. Policy Research Working Paper; 10579. © World Bank. http://hdl.handle.net/10986/40426 License: CC BY 3.0 IGO.”
Associated URLs
Associated content
Other publications in this report series
Publication Disentangling the Key Economic Channels through Which Infrastructure Affects Jobs(Washington, DC: World Bank, 2025-04-03)This paper takes stock of the literature on infrastructure and jobs published since the early 2000s, using a conceptual framework to identify the key channels through which different types of infrastructure impact jobs. Where relevant, it highlights the different approaches and findings in the cases of energy, digital, and transport infrastructure. Overall, the literature review provides strong evidence of infrastructure’s positive impact on employment, particularly for women. In the case of electricity, this impact arises from freeing time that would otherwise be spent on household tasks. Similarly, digital infrastructure, particularly mobile phone coverage, has demonstrated positive labor market effects, often driven by private sector investments rather than large public expenditures, which are typically required for other large-scale infrastructure projects. The evidence on structural transformation is also positive, with some notable exceptions, such as studies that find no significant impact on structural transformation in rural India in the cases of electricity and roads. Even with better market connections, remote areas may continue to lack economic opportunities, due to the absence of agglomeration economies and complementary inputs such as human capital. Accordingly, reducing transport costs alone may not be sufficient to drive economic transformation in rural areas. The spatial dimension of transformation is particularly relevant for transport, both internationally—by enhancing trade integration—and within countries, where economic development tends to drive firms and jobs toward urban centers, benefitting from economies scale and network effects. Turning to organizational transformation, evidence on skill bias in developing countries is more mixed than in developed countries and may vary considerably by context. Further research, especially on the possible reasons explaining the differences between developed and developing economies, is needed.Publication Economic Consequences of Trade and Global Value Chain Integration(World Bank, Washington, DC, 2025-04-04)This paper introduces a new approach to measuring Global Value Chains (GVC), crucial for informed policy-making. It features a tripartite classification (backward, forward, and two-sided) covering trade and production data. The findings indicate that traditional trade-based GVC metrics significantly underestimate global GVC activity, especially in sectors like services and upstream manufacturing, and overstate risks in early trade liberalization stages. Additionally, conventional backward-forward classifications over-estimate backward linkages. The paper further applies these measures empirically to assess how GVC participation mediates the impact of demand shocks on domestic output, highlighting both the exposure and stabilizing potential of GVC integration. These new measures are comprehensively available on the World Bank’s WITS Platform, providing a key resource for GVC analysis.Publication Participation in Pension Programs in Low- and Middle-Income Countries(Washington, DC: World Bank, 2025-04-24)Low- and middle-income countries are aging rapidly but stagnation of growth in participation in pension programs, due to widespread informal employment, presents a major fiscal challenge. Some claim that improving the design of pension program rules can encourage more pension contributions, while others push for universal non-contributory pensions. This paper reviews the recent academic literature on the determinants of active participation in pension systems in high- informality settings. An emerging body of evidence shows that participation responds significantly to financial incentives as well as nonfinancial obstacles. At the same time, pensions are imperfect substitutes for other strategies to cover longevity risk, including support through the family, which will remain crucial for many older people in fiscally constrained environments. Therefore, policy makers should integrate the design of contributory pensions, social pensions, and policies that facilitate other forms of elderly support and consider how all three interact. To inform such efforts, these interactions must be more systematically investigated, and the empirical evidence must be expanded beyond a small number of middle-income countries.Publication Capitalizing on Digital Transformation to Enhance the Effectiveness of Property Institutions(Washington, DC: World Bank, 2025-04-14)Property registries have long been a pillar of state capacity and a basis for private market activity. While registry establishment and operation traditionally were costly and time consuming, digital technology makes low-cost registry operation and wide outreach easier. To guide developing countries aiming to establish such registries and measure progress, this paper develops indicators (in terms of digital coverage, interoperability, and property taxation for local service delivery and public land management) of effective digital registry service provision. Data from 85 countries highlight vast differences and provide suggestions for strategic reforms as well as a basis for measuring progress over time. Expanding geographical coverage and collecting these indicators on a regular basis could provide guidance to improve the way in which, by protecting property, the state creates the basis for widely shared prosperity and a livable environment.Publication Bridging the Gap(Washington, DC: World Bank, 2025-04-21)This paper examines tax revenue shortfalls in South Asian countries. On average during 2019–23, South Asian revenues totaled 18 percent of GDP—well below the average 24 percent among emerging market and developing economies (EMDEs). Econometric estimates from stochastic frontier analysis, which control for tax rates and the size of potential tax bases, suggest that tax revenues in the region are 1 to 7 percentage points of GDP below potential, with shortfalls in five of the region’s eight countries larger than in the average EMDE. Even after controlling for country characteristics, such as widespread informal economic activity outside the tax net and large agriculture sectors, sizable tax gaps remain, suggesting the need for improved tax policy and administration. The paper discusses and provides evidence from international experience with reforms to raise government revenues.
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Does Informality Depress Investments and Job Recovery?(World Bank, Washington, DC, 2023-10-09)Using three rounds of the World Bank's Business Pulse Surveys in South Asia, this paper quantifies the relationship between informality and firms' investment and employment decisions. Accounting for multidimensionality in definition and the margins of informality, the analysis suggests that first, informal firms remain credit and liquidity constrained before and during the crisis, especially the necessity firms. In the pre-crisis period, access to finance is correlated with the extensive margin of informality, while during the crisis, both margins of informality matter. Second, informal firms perceive uncertainty to be higher because of pessimistic expectations on recovery and lower ability to predict future sales, especially the necessity firms. Third, credit constraints and accentuated uncertainty among informal firms discourage investments. Finally, while employment growth is slow and gradual for formal firms as they begin to recover sales, job growth in informal firms does not correspond to the recovery. The results suggest that countries with a large informal sector may face unusually depressed investments and jobs recovery and may have to deploy additional policy levers to accelerate recovery in the post-crisis period.Publication Firm Recovery during COVID-19(World Bank, Washington, DC, 2021-10)Building on prior work that documented the impact of COVID-19 on firms in developing countries using the first wave of Business Pulse Surveys, this paper presents a new set of stylized facts on firm recovery, covering 65,000 observations in 38 countries. This paper suggests that: One, since the outset of the pandemic, some aspects of business performance such as sales show signs of partial recovery. Two, other aspects remain challenging, including persistently high uncertainty and financial fragility. Three, recovery is heterogeneous across firms and more sensitive to firm-level attributes such as size, sector, and initial productivity than to country-level differences in the severity of the initial shock. In particular, larger and more productive firms are recovering faster, with implications for competition policy and allocative efficiency. Four, the decline in jobs has been steeper during the initial shock than the expansion in employment during recovery, raising the risk of a "jobless" recovery pattern. Five, the diffusion of digital technology and product innovation accelerated during the pandemic but did so unevenly, further widening gaps between small and large firms. Six, businesses now have more access to policy support, but poorer countries continue to lag behind and appropriate targeting of firms remains a challenge.Publication ICT Use, Competitive Pressures and Firm Performance in Mexico(World Bank, Washington, DC, 2016-04)This paper presents a set of stylized facts on the relation between information and communications technology (ICT) use, firm performance, and competition. Taking advantage of a novel firm-level data set on information and communications technology for Mexico, the study finds that firms facing higher competition appear to have more incentives to increase their use of information and communications technology. Accordingly, although there is indeed a positive relation between information and communications technology use and firm performance, this effect is greater for firms that face higher competition pressures, which is consistent with the theoretical predictions of the trade-induced technical change hypothesis.Publication Competition Makes IT Better(World Bank, Washington, DC, 2016-04)This paper uses a unique firm-level data set for Mexico, with information never used for research before, to assess how use of information technology (IT henceforth) influences firm performance. Further, the paper explores if, in the context of increasing competition from China, this effect is different for firms more strongly affected by competition where incentives for upgrading and innovation may be more intense. In this perspective, the paper analyzes the complementarity between IT and other changes spurred by competition, taking advantage of the exogenous shock generated by Chinese competition. The results indicate that IT use has higher effects over productivity in the case of firms facing higher competition from China, in the domestic market and in the U.S. market. Furthermore, the paper shows how these changes appear to be driven by complementary investments in innovation and organizational changes.Publication Policies to Support Businesses through the COVID-19 Shock(World Bank, Washington, DC, 2021-01)Relying on a novel dataset covering more than 120,000 firms in 60 countries, this paper con-tributes to the debate about D policies to support businesses through the COVID-19 pandemic. While governments around the world have implemented a wide range of policy support measures, evidence on the reach of these policies, the alignment of measures with firm needs, and their targeting and effectiveness remains scarce. This paper provides the most comprehensive assessment to date of these issues, focusing primarily on the developing economies. It shows that policy reach has been limited, especially for the more vulnerable firms and countries, and identifies mismatches between policies provided and policies most sought. It also provides some indicative evidence regarding mistargeting of policies and their effectiveness in addressing liquidity constraints and preventing layoffs. This assessment provides some early guidance to policymakers on tailoring their COVID-19 business support packages and points to new directions in data and research efforts needed to guide policy responses to the current pandemic and future crises.
Users also downloaded
Showing related downloaded files
Publication South Asia Development Update, October 2024: Women, Jobs, and Growth(Washington, DC: World Bank, 2024-10-10)South Asia’s growth is on track to exceed earlier expectations, in a broad-based upturn. The region is expected to remain the fastest-growing among emerging market and developing economies (EMDEs). Several risks could upend this generally promising outlook, including extreme weather events, social unrest, and policy missteps, such as reform delays. But South Asian countries also have considerable untapped potential that could help them further boost productivity growth and employment and adapt to climate change. In particular, with about two-thirds of the region’s working-age women out of the labor force, raising female employment rates to those of men could increase per capita income by as much as one-half. Measures to accelerate job creation, remove obstacles to women working, and equalize gender rights would be more effective if combined with a shift toward social norms that looked more favorably on working women. Also, most South Asian countries rank among the EMDEs least open to global trade and investment. Greater openness could boost women’s employment, spur the growth of firms, and allow the region to take better advantage of the reshaping of global supply chains and trade. Reducing the cost of conducting business could help the region better harness large-scale remittance inflows.Publication Global Economic Prospects, June 2024(Washington, DC: World Bank, 2024-06-11)After several years of negative shocks, global growth is expected to hold steady in 2024 and then edge up in the next couple of years, in part aided by cautious monetary policy easing as inflation gradually declines. However, economic prospects are envisaged to remain tepid, especially in the most vulnerable countries. Risks to the outlook, while more balanced, are still tilted to the downside, including the possibility of escalating geopolitical tensions, further trade fragmentation, and higher-for-longer interest rates. Natural disasters related to climate change could also hinder activity. Subdued growth prospects across many emerging market and developing economies and continued risks underscore the need for decisive policy action at the global and national levels. Global Economic Prospects is a World Bank Group Flagship Report that examines global economic developments and prospects, with a special focus on emerging market and developing economies, on a semiannual basis (in January and June). Each edition includes analytical pieces on topical policy challenges faced by these economies.Publication Maldives Country Climate and Development Report(Washington, DC: World Bank, 2024-06-27)The Maldives Country Climate and Development Report (CCDR) analyses climate change and development challenges and opportunities in the country in an integrated manner. The report focuses on the Maldives achieving six high-level objectives: (1) improving macroeconomic stability and fiscal space to enable climate action, (2) mobilizing climate finance, (3) enhancing the climate resilience of islands and infrastructure, (4) enhancing the climate resilience of ecosystems, (5) enhancing the climate resilience of livelihoods (fishers and tourism), and (6) unlocking the development benefits from green transitions in energy, mobility, and waste sectors. The CCDR contributes original research into key dimensions of climate resilience in the Maldives, including sea-level rise impact modeling on land, infrastructure, and economic activities; ocean heating impact modeling on fishing and coral reef degradation; and survey work to understand climate change adaptation efforts of and associated challenges faced by tourist resorts. The recommendations presented in the CCDR will support the country in facilitating its climate resilience and green transitions, giving due consideration to the macroeconomic vulnerabilities at the time of releasing the report.Publication World Bank East Asia and the Pacific Economic Update, April 2024: Firm Foundations of Growth(Washington, DC: World Bank, 2024-04-01)Most economies in developing East Asia and Pacific (EAP) are growing faster than the rest of the world but slower than before the pandemic. Slowing global growth, still tight financial conditions, and an increase in trade protection and industrial support in large and rich countries are key aspects of the external environment shaping the region’s economic performance. Amplified public and private debt, constrained macroeconomic policy, and increased policy uncertainty are the major domestic issues. EAP’s current macroeconomic challenges risk obscuring the microeconomic foundations of longer-term growth. Over the last decade, EAP’s growth has been driven by investment and capital deepening rather than by increased productivity of firms. Now private investment is weak and productivity declining–further inhibiting the incentive to invest. Firms are the protagonists of productivity growth. Some of the weaker firms in EAP countries are beginning to catch up with stronger firms. But the stronger firms in the region are failing to take full advantage of new technologies: regional leaders risk becoming global laggards. Bold policy action to unleash competition, improve infrastructure and reform education with measured state support could revitalize the region’s economy.Publication Recipe for a Livable Planet(Washington, DC: World Bank, 2024-09-20)The global agrifood system has been largely overlooked in the fight against climate change. Yet, greenhouse gas emissions from the agrifood system are so big that they alone could cause the world to miss the goal of keeping global average temperatures from rising above 1.5 centigrade compared to preindustrial levels. Greenhouse gas emissions from agrifood must be cut to net zero by 2050 to achieve this goal. Recipe for a Livable Planet: Achieving Net Zero Emissions in the Agrifood System offers the first comprehensive global strategic framework to mitigate the agrifood system’s contributions to climate change, detailing affordable and readily available measures that can cut nearly a third of the world’s planet heating emissions while ensuring global food security. These actions, which are urgently needed, offer three additional benefits: improving food supply reliability, strengthening the global food system’s resilience to climate change, and safeguarding vulnerable populations. This practical guide outlines global actions and specific steps that countries at all income levels can take starting now, focusing on six key areas: investments, incentives, information, innovation, institutions, and inclusion. Calling for collaboration among governments, businesses, citizens, and international organizations, it maps a pathway to making agrifood a significant contributor to addressing climate change and healing the planet.