Informality and Openness to Trade: Insights from Cross-sectional and Panel Analyses

The relationship between trade liberalisation and informal activity has received little theoretical and empirical attention. The conventional view poses that trade liberalisation would cause a rise in the share of informal production and a rise in informal employment. This article uses three different datasets to assess econometrically the sign of these relationships. Empirical results suggest that while informal output increases with deeper openness to trade, informal employment falls.JEL Classification: F13, F16, O17, C23