We establish five facts about the informal economy in developing countries. First, it is huge, reaching about half of the total in the poorest countries. Second, it has extremely low productivity compared to the formal economy: informal firms are typically small, inefficient, and run by poorly educated entrepreneurs. Third, although avoidance of taxes and regulations is an important reason for informality, the productivity of informal firms is too low for them to thrive in the formal sector. Lowering registration costs neither brings many informal firms into the formal sector, nor unleashes economic growth. Fourth, the informal economy is largely disconnected from the formal economy. Informal firms rarely transition to formality, and continue their existence, often for years or even decades, without much growth or improvement. Fifth, as countries grow and develop, the informal economy eventually shrinks, and the formal economy comes to dominate economic life. These five facts are most consistent with dual models of informality and economic development.
Gary Becker, who died on 3 May 2014 at the age of 83, redefined economics both in its methodology and scope. He radically expanded the sphere of economic analysis. As the range of issues and especially data in economics increased over the last half century, Becker's approach became more and more relevant and modern. He was awarded the 1992 Nobel Prize in Economics for “having extended the domain of microeconomic analysis to a wide range of human behavior and interaction, including nonmarket behavior.”