Tackling%2bthe%2binformal%2bsector_McKinsey%2b2006

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Home > About Us > McKinsey in the News > Tackling the Informal Economy BusinessWeek Diana Farrell May 8, 2006 McKinsey's Diana Farrell says companies operating in the gray zone sap economic growth in the developing world. Here's what governments should do What do Japan, Singapore, South Korea, and Taiwan have in common? Obviously, they are Asian nations that joined the ranks of the wealthy during the second half of the 20th century. But a less well-known shared feature is that none of them have much of an informal economy. Research on economic development from the McKinsey Global Institute (MGI) and others shows consistently that these two facts are closely related. Sadly, the converse is also true: When large numbers of businesses fail to register, ignore labor laws, flout regulations, and evade taxes, they hinder the expansion of more productive, modern companies. TINY TRADERS. That puts a powerful brake on a country's growth rate, locking it into a condition of "emerging but never quite making it," and condemning those living and working in the gray economy to a lifetime of insecurity and poor living standards. For Asian nations with large informal economies — the Philippines, Indonesia, Thailand, India, and Vietnam among them — this is bad news indeed. This view, however, is not accepted by many policymakers and development economists. Two myths prevail. The first is that unlicensed activities by unregistered businesses paying little or no tax do not threaten the growth of the formal, modern economy. Many believe that informal operators are mostly tiny street traders, too small to prosecute for tax evasion, and any that grow bigger will naturally choose to "go straight" as they expand. The second myth is that for a country experiencing mass rural-urban migration, a growing informal sector is a godsend because it will create jobs much faster than the formal economy can. INCENTIVE TO HIDE.
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This note was uploaded on 11/10/2011 for the course ECON 4310 taught by Professor Staff during the Fall '08 term at Kennesaw.

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Tackling%2bthe%2binformal%2bsector_McKinsey%2b2006 - Home...

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