A low-growth model: Informality as a structural constraint

Abstract

Af ter years of reforms and unending debate, the question remains unanswered: why is Latin America not growing more? The present article approaches the subject from an unconventional perspective, presenting the persistence of informality as a structural barrier to growth. As an analytical frame of reference, it introduces a 2 x 2 model of growth in which the economy comprises just two sectors, the formal and the informal. The model presents the links between the growth pattern of the formal sector and the dynamics of the informal sector, and between these and the pattern of growth in the overall economy. Adverse specialization patterns and an unfavourable international trade profile are perpetuating informality. Thus, export-led growth most resembles an enclave model which does not even guarantee high growth, since the dynamic of the informal sector, which accounts for about half the urban workforce, adversely affects the performance of the whole economy.