Asymmetric role of the informal sector on economic growth: Empirical investigation on a developing country

• Published in: Structural change and economic dynamics 2024-06, Vol.69, p.96-107
• Main Authors: Sultana, Nahid, Rahman, Mohammad Mafizur, Murad, S.M. Woahid
• Format: Article
• Language: English
• Subjects: Bangladesh; Economic growth; Informal sector; Nonlinear autoregressive distributed lag; Structural equation model
• ISSN: 0954-349X
• DOI: 10.1016/j.strueco.2023.11.015

•Investigation on an asymmetric impact of the informal sector on economic growth.•The informal sector asymmetrically affects the economic growth in Bangladesh.•Urbanization and capital growth contribute to increase economic growth in Bangladesh.•Diminishing the prevalence of informality is suggested for higher economic growth in Bangladesh. The role of the informal sector in economic growth still remains an issue of debate. This study contributes to resolving this by taking into account the asymmetric effect of the informal sector on economic growth. The study applies the Non-linear Autoregressive Distributed Lag (N-ARDL) model to capture the asymmetric relationship between the informal sector activity and economic growth for the period 1982–2018 in Bangladesh. The estimation of the N-ARDL model reveals that the informal sector asymmetrically affects the domestic output and economic growth in Bangladesh for both the short-run and the long run. The study has observed an asymmetrically larger effect on output and economic growth from the falling contribution of the informal sector. Urbanization and capital growth also contribute to an increase in economic growth. Therefore, proper incentives and careful policy measures are suggested to effectively diminish the prevalence of informality and promote its transition towards a more formalized framework.