Review of the Informal Sector in a Developing Country : Evidence from Monetary and Structural Equation Modelling Approach

This study attempts to explore the contribution of the informal sector to the output of a developing country. For empirical investigation the study has evaluated the context of Bangladesh for the last 40 years and uses time series data for the period of 1982 -2018. Econometric and model-based approaches have been applied to explore the contribution of informal sector to the total output in Bangladesh over the years. The tax burden, currency in circulation and financial development are identified as significant factors that can contribute to the informal sector. The joint contributions of the identified factors lead to an increasing trend of the informal sector as a percentage share of total GDP in Bangladesh that satisfy the characteristics of a developing country. A flexible tax system with a developed monetary and financial sector is suggested as a policy measure to facilitate the reduction of informality from the economy and to faster the process of economic formalization