Journal Article

International movements of money and men: impact on the informal economy


  • Goel
  • R.
  • Ram
  • R.
  • Schneider
  • F.
  • Potempa
  • A.
Publication Date

Using panel data for a large cross-country sample, we consider the influences of FDI inflows, inward development aid, and immigration on the informal sector. Both FDI and immigration increase the informal sector, with the effect of immigration being relatively more robust. Aid inflows reduce the informal sector, but the statistical significance is low. Among the control variables, government size persistently increases the informal economy, while inflation sometimes lowers the informal sector. As a secondary exercise, we consider the effect of globalization and note the informality increasing role of social and overall globalization, with economic and political globalization being statistically insignificant.

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JEL Classification
O17, O19, J46

Key Words

  • Development aid
  • foreign direct investment
  • globalization
  • informal economy
  • migration
  • shadow economy