Paper short abstract:

Focusing on Latin America, we use a taxonomy approach to classify informal economy policy papers based on their underlying definitions and conceptualizations (schools of thought). This allows to compare different theoretical approaches taken and to link these with resulting policy recommendations.

Paper long abstract:

For over five decades, policy makers and scholars have been trying to understand the dynamics of the informal economy and to translate their findings into policy action. A significant impediment to formalization lies in the convoluted body of partially contradicting literature, resulting from a continuing disagreement among scholars on how to define and conceptualize informality. In response to this, recent research attempts to summarize and compare the existing theories to establish a coherent analytical basis. Building on these approaches, we conduct a broad literature review of informal economy theory to construct a taxonomy that allows to classify relevant policy recommendations based on their underlying definitions, conceptualizations (or explanatory approaches), and statistical methods. Central to this analysis are the different schools of thought—dualism, structuralism, legalism, and voluntarism—that use distinctive conceptualizations to explain causes and consequences of informality. Applying the taxonomy to classify a sample of Latin America focused policy papers published by international organizations allows to compare their differing theoretical approaches and to relate these to the corresponding policy recommendations. By connecting theory and practice, the analysis finds that in some instances, two papers following different theoretical approaches recommend directly opposing policies to the same underlying issues. The paper thus underlines the need to establish a coherent theoretical understanding of the informal economy theory as basis for policy formulation and proposes a taxonomy as conceptual tool to work towards this goal.