Formalization of the Informal Economy: An e-Government Approach (SpringerBriefs in Economics) 3031379306, 9783031379307

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SpringerBriefs in Economics Colin C. Williams

Formalization of the Informal Economy An e-Government Approach

SpringerBriefs in Economics

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Colin C. Williams

Formalization of the Informal Economy An e-Government Approach

Colin C. Williams Management School University of Sheffield Sheffield, UK

ISSN 2191-5504     ISSN 2191-5512 (electronic) SpringerBriefs in Economics ISBN 978-3-031-37930-7    ISBN 978-3-031-37928-4 (eBook) https://doi.org/10.1007/978-3-031-37928-4 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland. Paper in this product is recyclable.

Contents

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Introduction to Formalising the Informal Economy Using an E-government Approach���������������������������������������������������������    1 1.1 Introduction��������������������������������������������������������������������������������������    1 1.2 What Is the Informal Economy? ������������������������������������������������������    2 1.3 Why Is Formalisation of the Informal Economy Necessary? ����������    7 1.3.1 Consequences for Informal Employees��������������������������������    7 1.3.2 Consequences for Formal Employees����������������������������������    8 1.3.3 Consequences for Informal Enterprises��������������������������������    9 1.3.4 Consequences for Formal Enterprises����������������������������������   10 1.3.5 Consequences for Purchasers������������������������������������������������   11 1.3.6 Consequences for Governments�������������������������������������������   12 1.3.7 Consequences for Economies and Societies ������������������������   12 1.4 What Is an E-government Approach Towards Formalising the Informal Economy?��������������������������������������������������������������������   13 References��������������������������������������������������������������������������������������������������   16

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Theorising an E-government Approach Towards Formalising the Informal Economy ����������������������������������������������������������������������������   21 2.1 Introduction��������������������������������������������������������������������������������������   21 2.2 Explaining Participation in the Informal Economy: A Neo-Institutional Theoretical Perspective������������������������������������   22 2.2.1 First-Wave Neo-institutionalist Explanation: Formal Institutional Failings������������������������������������������������   23 2.2.2 Second-Wave Neo-institutionalist Explanation: Informal Institutions�������������������������������������������������������������   27 2.2.3 Third-Wave Neo-institutionalist Explanation: Formal and Informal Institutional Failings ��������������������������   30 2.3 Addressing Institutional Failings: An E-government Approach ������   31 2.3.1 What Is an E-government Approach? ����������������������������������   31

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2.3.2 How Does an E-government Approach Address the Institutional Failings that Result in Participation in the Informal Economy?����������������������������������������������������   34 2.4 Relationship Between E-government and the Informal Economy ������������������������������������������������������������������������������������������   38 2.4.1 Measuring E-government Adoption��������������������������������������   39 2.4.2 Measuring Participation in the Informal Economy��������������   41 2.4.3 Evaluating the Relationship Between E-government and the Informal Economy���������������������������������������������������   42 2.5 Conclusions��������������������������������������������������������������������������������������   46 References��������������������������������������������������������������������������������������������������   47 3

 E-government Tools to Formalise the Informal Economy ������������������   57 3.1 Introduction to the Range of E-government Tools����������������������������   57 3.2 Enforcing Compliance: E-government Deterrence Tools ����������������   60 3.2.1 E-initiatives to Improve the Risks of Detection��������������������   60 3.2.2 E-initiatives to Sanction Informal Work ������������������������������   70 3.3 Enforcing Compliance: E-government Incentive Tools��������������������   72 3.3.1 E-tools to Make Formalisation Easier and Beneficial����������   73 3.3.2 E-tools to Encourage Purchasing from the Formal Economy ������������������������������������������������������������������������������   82 3.4 Encouraging Voluntary Compliance: E-initiatives to Change Social Norms������������������������������������������������������������������������������������   89 3.5 Encouraging Voluntary Compliance: E-services to Modernise Formal Institutions����������������������������������������������������������������������������   91 3.6 Conclusions��������������������������������������������������������������������������������������   93 References��������������������������������������������������������������������������������������������������   94

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Conclusions: A Future Roadmap for the Transition to Formality Using Digital Services��������������������������������������������������������  105 4.1 Introduction��������������������������������������������������������������������������������������  105 4.2 Defining the Informal Economy and Its Consequences��������������������  106 4.3 Theorising an E-government Approach Towards Formalising the Informal Economy����������������������������������������������������������������������  110 4.4 E-government Tools to Formalise the Informal Economy����������������  116 4.5 Concluding Remarks������������������������������������������������������������������������  119 References��������������������������������������������������������������������������������������������������  120

About the Author

Colin  C.  Williams  is Professor of Public Policy at the University of Sheffield, UK. For the past 30 years, he has been researching the subject of how to tackle the informal economy. He has published 20 books and over 500 peer-reviewed journal articles on this topic. Since 2016, he has been the lead expert on the service contract supporting the European Platform Tackling Undeclared Work of the European Labour Authority. In 2018, he was appointed as chief advisor on the informal economy to the Regional Cooperation Council advising six West Balkans countries on their national strategies and in 2020, as lead expert to the Western Balkan Network Tackling Undeclared Work. Beyond Europe, he works with the International Labour Organization (ILO) and other United Nations institutions in a range of countries and global regions on strategies to implement the transition to formality.

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Chapter 1

Introduction to Formalising the Informal Economy Using an E-government Approach

Abstract  What is the informal economy? Why is formalising the informal economy necessary? What is an e-government approach? In answering these questions, this introductory chapter sets the scene for the rest of this book on how digital technologies can facilitate the transition to formality. It commences by reviewing the various adjectives and nouns used to describe socially legitimate paid activities that are legal in all respects other than they are hidden from, not declared to, or unregistered by the authorities for tax, social security, and/or labour law purposes when they should be reported, declared, or registered. Attention then turns towards why formalising the informal economy is necessary. This reveals that any beneficial consequences of the informal economy are far outweighed by its harmful consequences and that most benefits of the informal economy are only beneficial if this economic activity is subsequently brought into the formal economy, meaning that action is required by governments to formalise the informal economy. The third and final section then turns to how this can be achieved. This introduces the emergent e-­government approach that digital technologies applied in public initiatives, programmes, and policies can be an effective means for accomplishing this transition to formality.

1.1 Introduction In this introductory chapter, the intention is to answer three questions. What is the informal economy? Why is formalising the informal economy necessary? What is an e-government approach? This will set the scene for the rest of the book on how digital technologies can be used to facilitate the transition to formality. To commence, this introductory chapter will define the informal economy. Reflecting the consensus among both academics and practitioners, the informal economy within this book will be used as a shorthand for socially legitimate paid activities that are legal in all respects other than they are hidden from, not declared to, or unregistered by the authorities for tax, social security, and/or labour law purposes when they should be reported, declared, or registered. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. C. Williams, Formalization of the Informal Economy, SpringerBriefs in Economics, https://doi.org/10.1007/978-3-031-37928-4_1

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1  Introduction to Formalising the Informal Economy Using an E-government Approach

In the second section, to explain why formalising the informal economy is necessary, the harmful and beneficial consequences of the informal economy will be evaluated. To do so, a review will be undertaken of its harmful and beneficial consequences for multifarious stakeholders, namely, formal enterprises, informal businesses, formal workers, informal workers, customers, governments, and the broader society and economy. This will reveal that any beneficial consequences of the informal economy are far outweighed by its harmful consequences and that most of the identified so-called benefits of the informal economy are only beneficial if this economic activity is subsequently brought into the formal economy, meaning that action is required by governments to formalise the informal economy. The third and final section will then turn to a fresh approach regarding how this can be achieved. This introduces the emergent e-government approach that digital technologies applied in public initiatives, programmes, and policies can be an effective means for accomplishing this transition to formality. Until now, the dominant view of digital technologies in the literature on the informal economy has been overall negative. Such technologies have been portrayed as having harmful impacts on formality, exemplified by portrayals of digital platforms as having detrimental impacts on the formal economy (Hauben et al., 2020; ILO, 2021; Mendonça et al., 2022). However, a small but growing literature adopting a more beneficial view of digital technologies has begun to emerge in the past few years. This has started to explore how an e-government approach, in which digital technologies are applied in public initiatives, programmes, and policies, can facilitate the formalisation of the informal economy (Bhattarai, 2018; Chacaltana et al., 2018; Divald, 2021; Kring & Leung, 2021). By outlining the structure and contents of this book, this final section will then address what needs to be known about this e-government approach towards formalising the informal economy. At the outset, it is vital to state why this book is important. The informal economy is not a trivial insignificant aspect of the global economy. It employs the majority of the world’s workforce. Indeed, examining 112 countries that contain 90% of the world’s workforce, the International Labour Organisation (ILO, 2018) find that 61.2% of the workforce are in informal employment as their main job, equating to some two billion workers. In Africa, 85.8% of the workforce are in informal employment as their main job, 68.6% in the Arab States, 68.2% in Asia and the Pacific, 40.0% in the Americas, and 25.1% in Europe and Central Asia. Therefore, tackling this harmful sphere in which most of the global workforce have their main work is a crucial issue for governments throughout the world. This book directly addresses this issue by evaluating an emergent and innovative e-government approach for doing so.

1.2 What Is the Informal Economy? Casting an eye over the literature, no less than 38 different adjectives and 7 different nouns have been employed to depict what in this book is termed the “informal economy”. Although “informal” is by far the most common adjective used, other

1.2  What Is the Informal Economy?

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adjectives applied include “black”, “cash-in-hand”, “hidden”, “irregular”, “invisible”, “marginal”, “non-observed”, “peripheral”, “precarious”, “shadow”, “undeclared”, “underground”, “undocumented”, “unrecorded”, “unreported”, “unorganised”, and “unregulated”. Meanwhile, although “economy” is by far the most popular noun used, other nouns include “sector”, “market”, “work”, “employment”, “sphere”, and “realm”, to name just some of the most popular alternative adjectives and nouns employed. Analysing these adjectives used, it is apparent that all variously describe the “informal” either as a residue (e.g. it is marginal, peripheral), normatively negative in the sense of being inferior in some regard relative to the formal economy (e.g. it is unregulated, unorganised, irregular, precarious), or as having something missing (e.g. it is unreported, undeclared, unobserved). Put another way, these adjectives describe a “hierarchy of ‘formal’ as the norm and ‘informal’ as abnormal and/or inferior” (Banks et al., 2020: 225). Indeed, all the negative adjectives describing the informal have an antonym describing positively the formal economy (e.g. it is secure rather than precarious, regulated rather than unregulated, regular rather than irregular, organised rather than unorganised), even though this is often far from the lived practice in the contemporary world. This recognition regarding the adjectives used is not stated here for resolution, such as by searching for some more normatively neutral adjective. Instead, it is stated to appreciate the dominant description of the informal economy, namely, that it is a residue, normatively inferior, insufficient, or lacking in some regard relative to the formal economy. Meanwhile, all the nouns depict the informal as separate from the formal, namely, the informal is a sector, economy, sphere, realm, work, or employment that has a discrete formal equivalent. Therefore, a dualistic depiction dominates of discrete formal and informal economies. This portrayal of separate formal and informal economies is well explained in the theory of hierarchical binaries discussed by Derrida (1967). As he explains, western thought is grounded in a mode of thought that conceptualises activities or ideas in terms of binary either/or opposites which are ordered hierarchically both normatively and temporally. On one side of any binary is the superordinate that is large, normatively positive, and temporally ascendant, while on the other side is the subordinate that is peripheral, normatively negative, and temporally receding. This hierarchical binary conceptualisation is apparent in many of the adjectives and nouns used, which portray the formal and informal economies as normatively and temporally ordered, discrete and separate, superordinate and subordinate realms (Williams, 2009). What, therefore, is the informal economy that is depicted in this manner? To bring some order to the 102 different definitions identified by Luque (2022), it is necessary to recognise that all definitions either use enterprises, jobs, or paid activities as the unit of analysis. Definitions using the enterprise as the unit of analysis define what is missing, normatively insufficient, inferior, absent, or lacking in informal enterprises compared with formal enterprises; definitions using jobs as the unit of analysis by what is missing, normatively insufficient, inferior, absent, or lacking in informal jobs relative to formal jobs; and definitions using paid activity as the unit of analysis by what is missing, normatively insufficient, inferior, absent, or

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lacking in informal economic activities compared with formal economic activities. Here, each is in turn considered. Starting with definitions using enterprises as the unit of analysis, the 15th International Conference of Labour Statisticians (ICLS) in 1993 decided to address the different definitions that had arisen over earlier decades. Adopting the enterprise as the unit of analysis, it defined employment in the informal sector as “all jobs in informal sector enterprises, or all persons who, during a given reference period, were employed in at least one informal sector enterprise, irrespective of their status of employment and whether it was their main or a secondary job” (Hussmanns, 2005: 3). An enterprise in the informal sector was defined as a small or unregistered, private unincorporated enterprise. In this definition, “small” referred to whether the number employed in the enterprise was below a specific threshold, determined nationally (thus explaining in part the 102 different definitions identified). “Unregistered” referred to whether an enterprise was registered in terms of the specific requirements of national-level legislation (e.g. tax or social security laws, factory and/or commercial acts, sectoral regulatory acts), explaining yet further the reason for the multitude of different definitions identified by Luque (2022). “Private unincorporated” referred to if an enterprise is owned by individuals or households and not a separate legal entity with accounts available that enable a financial separation of the production of the business from its owner’s other activities (Hussmanns, 2005; ILO, 2012, 2013). When this 1993 consensus definition was applied in lived practice in subsequent years, two major problems arose. Firstly, some erroneously defined all micro-­ enterprises as informal enterprises. Secondly, it was realised that this definition using an enterprise as the unit of analysis omitted informal employment in formal enterprises. For this latter reason, the 17th ICLS in 2003 made the decision to add a definition using jobs as the unit of analysis. The outcome was that “informal employment” was defined as “jobs that generally lack basic social or legal protections or employment benefits and may be found in the formal sector, informal sector or households” (ILO, 2012: 12). This definition of informal employment using jobs as the unit of analysis enabled the inclusion of jobs in both informal and formal production units (Hussmanns, 2005) held by both employers and own-account self-employed workers in informal sector enterprises, contributing family workers, as well as employees whose employment, in law or in practice, is not subject to national labour legislation, income taxation, social protection, or entitlement to certain employment benefits, including notice of dismissal, annual paid leave, or severance and sick pay (Hussmanns, 2005; ILO, 2012, 2013). The dominant approach across the developing world has been to combine these definitions using the enterprise and job as the unit of analysis, and reached through consensus, to define the informal economy. While the “informal sector” is defined using the enterprise as the unit analysis definition and covers formal and informal jobs in informal sector enterprises, and “informal employment” is defined using the job as the unit of analysis and covers informal jobs in both informal and formal enterprises, the “informal economy” combines both units of analysis and covers

1.2  What Is the Informal Economy?

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workers who in their main job are employed in the informal sector or in informal employment, but including only once those who are both (Hussmanns, 2005; ILO, 2012). As defined at the 19th International Labour Conference in 2002, as well as in the ILO Recommendation No. 204 in 2015, the informal economy is defined as all economic activities by workers and economic units that are, in law or in practice, not covered or insufficiently covered by formal arrangements (ILO, 2002, 2015). This definition of the informal economy using both the enterprise and job as the unit of analysis is dominant across practitioners and scholars in developing countries (i.e., in the majority world). However, this is not the case in the more developed countries and many post-socialist transition countries. This is due to the way in which these definitions portray enterprises and jobs in binary terms as either informal or formal. In the developed world and transition economies, it has been increasingly recognised that enterprises and jobs can be both formal and informal (Banks et al., 2020; Williams, 2019). Many formal enterprises do not report some of their transactions for tax or social contribution purposes (Small Business Council, 2004; Williams, 2006), and some formal employees receive from their formal employer a portion of their wage as a reported declared salary and the rest of their wage as an unreported undeclared (“envelope”) salary (Horodnic & Williams, 2021; Williams & Horodnic, 2017; Woolfson, 2007). Given that these enterprises are excluded from the definition of the informal sector using the enterprise as the unit of analysis because they are formal enterprises, and these jobs are excluded from the definition of informal employment using the job as the unit of analysis because they are formal employment, paid activity has been instead used as the unit of analysis (European Commission, 2007; Vanderseypen et al., 2013). The most prominent definition using paid activity as the unit of analysis is that formulated in 2002 by the Organisation for Economic Cooperation and Development (OECD) in collaboration with the International Monetary Fund (IMF), ILO, and Interstate Statistical Committee of the Commonwealth of Independent States (CIS STAT) as a supplement to the System of National Accounts (SNA) 1993. This defines the “informal economy” (or what they term “underground production”) as: all legal production activities … deliberately concealed from public authorities…: to avoid payment of income, value added or other taxes; to avoid payment of social security contributions; to avoid having to meet certain legal standards such as minimum wages, maximum hours, safety or health standards, etc.… (OECD, 2002: 139)

Other definitions using paid activity as the unit of analysis mirror this OECD definition. The European Commission (2007: 2) defines “undeclared work” as “any paid activities that are lawful as regards their nature but not declared to the public authorities, taking into account the differences in the regulatory system of Member States”. Such definitions thus depict that absent, insufficient, or lacking from the informal economy is that this paid activity is hidden from, unregistered with, or undeclared to the state for tax, social security, and/or labour law purposes when it should be registered, reported, and/or declared (Williams & Windebank, 1998). However, this does not mean that it is unregulated activity or even deemed illegitimate. As neo-institutionalist theory recognises (Baumol & Blinder, 2008; North,

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1990), all societies possess formal institutions which are the laws and regulations stipulating the legal rules of the game, and informal institutions, which are the “socially shared rules, usually unwritten, that are created, communicated and enforced outside of officially sanctioned channels” (Helmke & Levitsky, 2004: 727). Viewing the informal economy as unregulated fails to recognise that although not regulated by formal institutions, it is regulated by the rules of informal institutions. Moreover, even if work in the informal economy is defined as “illegal” by the rules of the formal institutions, it is often believed to be “legitimate” in terms of social norms (Webb et al., 2009; Williams et al., 2017). Reflecting this, and using paid activities as the unit of analysis, the informal economy can be defined as socially legitimate paid activities that are legal in all respects other than that they are not declared to, hidden from, or unregistered with the authorities for tax, social security, and/or labour law purposes when they should be declared, reported, and/or registered (Williams, 2019). If these paid activities are illegal in other ways and/or are deemed illegitimate in terms of social norms, then these are criminal activities and part of the wider “shadow economy” which includes both criminal and informal economic activities (Medina & Schneider, 2018). These criminal activities are both formally illegal and perceived as illegitimate in terms of social norms and trade illegal goods and services (e.g. selling stolen and counterfeit goods or illegal drugs, forced labour). Meanwhile, the goods and/or services exchanged in the informal economy are both legal and such exchanges are perceived as socially legitimate. Given that work in the informal economy involves paid activities, neither are unpaid activities included. Nevertheless, blurred boundaries sometimes exist between informal, criminal, and unpaid activities. A good or service that is illegal in one country may be legal in another country (e.g. prostitution, cannabis), meaning that it is part of the criminal economy in the former but might belong to the informal economy in the latter country if not complying with tax, social security, and/or labour laws. Moreover, paid and unpaid activity is not a binary but a spectrum. This is because activities can be reimbursed in-kind by reciprocating labour, or gifts can be given rather than money. Nonetheless, normally solely paid activities involving monetary transactions are deemed to be the informal economy (Williams, 2006), and this is the case in this book. In conclusion, throughout this book, paid activities are used as the unit of analysis, and the informal economy is defined as socially legitimate paid activities that are legal in all respects other than they are unregistered with, hidden from, and/or undeclared to the state for tax, social security, and/or labour law purposes when they should be registered, reported, and/or declared. Compared with the definitions using enterprises or jobs as the unit of analysis, this definition includes not only informal enterprises and informal employment, as defined by the ILO, but in addition includes formal registered enterprises not declaring all their paid activities to the state for tax, social security, and/or labour law purposes and formal registered jobs where a portion of the wage is an undeclared (“envelope”) salary. Given this definition, attention now turns to explaining why action is needed to formalise the informal economy.

1.3  Why Is Formalisation of the Informal Economy Necessary?

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1.3 Why Is Formalisation of the Informal Economy Necessary? On the issue of the actions that countries could take regarding the informal economy, there are five hypothetical options available. They can either do nothing; informalise the formal economy; grow the informal economy; eradicate the informal economy; or formalise the informal economy. Here, by evaluating the consequences of the informal economy, the approach of formalising the informal economy will be shown as the only viable option. Indeed, this has been the conclusion of supra-­ national institutions, including the ILO in its Recommendation No. 204 (ILO, 2015) and the report of the Global Commission on the Future of Work (ILO, 2019: 24) which states that its objective is “to facilitate the formalisation of those in informal employment”. It is also the approach of the European Platform Tackling Undeclared Work which seeks to transform undeclared work into declared work (European Commission, 2016; Williams & Horodnic, 2022), the OECD (OECD, 2016), and World Bank (World Bank, 2020), as well as national governments (Williams & Horodnic, 2022). Here, therefore, the reasons for the emergence of a consensus that formalising the informal economy is the way forward is explained. This will be achieved by evaluating the consequences of the informal economy for the diverse range of stakeholders affected, namely, informal employees, formal employees, informal enterprises, formal enterprises, customers, governments, and the wider society and economy. Each is considered in turn.

1.3.1 Consequences for Informal Employees For informal employees, the consequences of the informal economy are both harmful and beneficial. The harmful consequences for informal employees are that: • They have lower wage rates than formal employees (Liwinski, 2022; Ohnsorge et  al., 2021), with women informal employees suffering a double penalty, not only receiving lower wages as informal employees than formal employees but also lower wages relative to men (Duval-Hernández, 2021; OECD/ILO, 2019; Williams & Gashi, 2022). On average, informal workers are paid 19% less than formal workers, and the larger is the informal economy in a country, the wider is this wage gap (World Bank, 2019). • They lack access to the same employment rights enjoyed by formal employees, such as annual and other leave, redundancy and sickness pay, and training (ILO, 2015; TUC, 2008). • They cannot easily benefit from other legal rights, such as maximum working hours, the minimum wage, tax credits (Dellot, 2012; Vanderseypen et al., 2013), and the same legal health and safety standards in their workplace as formal employees (Benavides et al., 2022; ILO, 2015; Montero-Moraga et al., 2020; OECD, 2017).

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• They cannot build up entitlement to a state pension and any other contributory benefits or contribute to an occupational pension scheme (Dellot, 2012). • They lack the job security of formal employees, since employers can dismiss them without redundancy pay or legal recourse (Kovács, 2014). • They lack the same collective bargaining rights as formal employees (Fudge, 2020; ILO, 2015). • They diminish their future employability due to lacking evidence of their employment track record as an informal employee (Dellot, 2012). • They lack the ability to receive an employer reference when applying for formal employment (TUC, 2008). • They lack the same access to credit (e.g., bank loans and mortgages) as formal employees due to their inability to formally display their real income (World Bank, 2019). • They continuously fear being detected by state authorities (Grabiner, 2000). The beneficial consequences of the informal economy for informal employees are that it can provide them with: • A source of income in contexts where formal employment and/or social protection is not available (World Bank, 2019). • A degree of potential flexibility concerning the location, timing, and content of their work. However, the harmful consequences far outweigh the possible benefits for informal employees.

1.3.2 Consequences for Formal Employees The consequences of the informal economy for formal employees are entirely harmful. The informal economy: • Decreases formal salary levels (OECD/ILO, 2019; Williams & Gashi, 2022). • Diminishes the ability of formal employees to effectively negotiate with their employers and collectively bargain because employers may decide to exit the formal economy if wages and conditions become too high (ILO, 2015). • Decreases the number of formal jobs available when employers use informal employees (ILO, 2021). • Results in quasi-formal employment where formal employers pay formal employees some of their salary on a declared basis and the rest as an undeclared (envelope) wage, which diminishes formal employees’ entitlements to full pension and other contributory benefits along with their ability to access loans and mortgages due to their lower official wage (Franić, 2019, 2020). • Diminishes working conditions. When formal employees receive an undeclared envelope wage, their formal employer can easily withdraw it to force them to leave voluntarily, removing the need for severance pay and formal redundancy

1.3  Why Is Formalisation of the Informal Economy Necessary?

9

proceedings, and employers can withdraw or reduce the envelope wage to force employees to accept additional conditions outside of their formal contract (Franić, 2020; Williams & Padmore, 2013; Woolfson, 2007). The most frequent are to not take full statutory entitlement to annual leave, work longer hours than in the formal contract, and take on other tasks and responsibilities to those in the formal contract (Franić, 2020). There are no known beneficial consequences of the informal economy for formal employees.

1.3.3 Consequences for Informal Enterprises For informal enterprises, the consequences of the informal economy are both harmful and beneficial. The harmful consequences for informal enterprises and own-­ account workers are that: • They lack access to formal finance and bank credit to develop their business venture because they have no formal accounts, lack documentation of their assets, and have inadequate financial statements (ILO, 2015; La Porta & Shleifer, 2014; Turkson et al., 2022; World Bank, 2019). As Ohnsorge and Yu (2021) identify, in developing countries with above-median levels of the informal economy, one-third of enterprises report that access to finance is a major constraint, which is 8 percentage points higher than in developing countries with below-median levels of the informal economy. • They are unable to access government subsidies and incentives, public services, and create formally enforceable commercial contracts (Rosaldo, 2021; Williams et al., 2017). • They cannot benefit from business advice and support to aid their development and growth (OECD, 2017). • They are unable to openly advertise their business venture to attract customers and grow their business for fear that they will be detected by state enforcement authorities (Williams et al., 2012a). • They must remain small to keep out of view of the public authorities (World Bank, 2019), resulting in lower levels of investment, such as in new technologies (Gandelman & Rasteletti, 2017). • They are unable to develop intellectual property rights for their process and product innovations (Mustapha et al., 2021; Sheikh & Bhaduri, 2020). However, the potential beneficial consequences for informal enterprises and own-account workers are that: • They can access a livelihood when excluded from the formal economy and social protection (Williams & Shahid, 2016). • They can transcend the barriers to entry into work not only in developing economies when work in the informal economy is labour intensive, requires few skills,

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1  Introduction to Formalising the Informal Economy Using an E-government Approach

and has low startup capital but also in developed economies where businesses often start up by engaging in work for closer acquaintances (Williams, 2016). • They have an alternative and escape route from the formal economy when formal regulations hinder business development and are burdensome (De Soto, 1989, 2001). • They have a means of evading corrupt practices from public sector officials demanding bribes (Berdiev & Saunoris, 2018; Tonoyan et al., 2010). • They potentially have flexibility in the location, timing, and content of their work, which is particularly relevant for women who remain responsible for child- and elder-care (Chen, 2012).

1.3.4 Consequences for Formal Enterprises For formal enterprises, the consequences of the informal economy can be again both harmful and beneficial. Commencing with the harmful consequences, formal enterprises are often disadvantaged by the informal economy for at least three reasons: • Unregistered enterprises and registered enterprises not declaring all their paid activities to the state for tax and social security contribution and/or labour law purposes undercut and unfairly compete with registered fully formal enterprises due to their lower labour and therefore production costs (OECD, 2017; Small Business Council, 2004). • This undercutting by fully and partially informal enterprises decreases the productivity of registered fully formal enterprises (Beltrán, 2020). As Amin and Okou (2020) reveal, informal competition lowers the productivity of formal enterprises by 20–24%. Consequently, formal enterprises competing with fully or partially informal enterprises are on average only three-quarters as productive as those not competing with informal enterprises (World Bank, 2019). Indeed, Amin (2022) reveals across 119 countries that the employment growth rate in formal sector manufacturing small- and medium-sized enterprises (SMEs) declines by 1 percentage point for each one standard deviation increase in informal competition. • If this competition has major consequences for the productivity and profitability of registered fully formal enterprises, they too might decide to not comply with the formal rules (Small Business Council, 2004; Williams & Windebank, 1998). However, there are some also potentially beneficial consequences of the informal economy for formal enterprises: • For larger registered enterprises who sub-contract and outsource some or all their production, using unregistered and informal enterprises and informal workers is a beneficial cost reduction strategy (Ketchen et al., 2014; Slavnic, 2010).

1.3  Why Is Formalisation of the Informal Economy Necessary?

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• The informal economy can function as a business incubator for startup ventures to “test-trade” their viability before registering and fully formalising (Williams & Martinez-Perez, 2014a). In the United Kingdom, for instance, one-fifth of registered enterprises report test-trading in the informal economy before registering (Williams & Martinez-Perez, 2014c). However, although beneficial for individual enterprises, this is only beneficial for the society and economy if the startups eventually register and formalise. It is not beneficial for the society and economy if they do not do so. • Enterprises that start up unregistered and register later have higher subsequent productivity, sales, and employment growth rates than enterprises registering at the outset before trading. By initially avoiding the costs of registration and dedicating their resource to other liabilities of newness, this results in higher future growth than in enterprises registering before trading (Williams et al., 2017) and a higher propensity to export their products and services (Larsen & Witte, 2022). This displays that in many countries, especially those with low institutional quality, the benefits of starting up in the informal economy outweigh the benefits of registration and formalisation (Misganaw et al., 2022; Williams & Kedir, 2017).

1.3.5 Consequences for Purchasers Purchasers of goods and services from the informal economy are another stakeholder group for whom there are again both harmful and beneficial consequences. The harmful consequences for those who purchase products and services from the informal economy are that: • They will have difficulties in pursuing legal action if a supplier does not complete the job or undertakes work that is insufficient, inadequate, or of inferior quality (OECD, 2017; Williams, Nadin, et al., 2012a). • The insurance of the purchaser may not be valid (OECD, 2017), and the probability that health and safety requirements have been met will be lower (Williams et al., 2012a). • It is not the case that products and services purchased in the informal economy are necessarily cheaper. This is because informal traders in “bottom of the pyramid” (BOP) markets are frequently less productive and less efficient and thus less able to charge lower prices for products and services (London et al., 2014; World Bank, 2019). Turning to the beneficial consequences for purchasers and reflecting that there is debate about the consequences of the informal economy, other scholars assert that the informal economy provides purchasers with cheaper products and services. Some argue that this occurs in BOP markets (Ketchen et  al., 2014) and some in wider markets when value-added tax (VAT) is not charged and no receipts are issued (Williams & Martinez-Perez, 2014b; Williams et al., 2012b).

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1  Introduction to Formalising the Informal Economy Using an E-government Approach

1.3.6 Consequences for Governments For governments, there are again both harmful and beneficial consequences. For governments, the harmful consequences of the informal economy are that: • There is reduced state revenue resulting from participants in the informal economy evading direct and indirect taxes as well as social contribution payments (OECD, 2017; World Bank, 2019). • There are negative impacts on the quality and quantity of public goods provided (e.g. health care, transport infrastructure, education) and for social cohesion since the public money available to governments to undertake social integration initiatives, provide social protection, and pursue mobility initiatives is diminished (OECD, 2017; Vanderseypen et al., 2013). • There is a diminution in the ability of governments to control the quality of employment (ILO, 2013; Vanderseypen et al., 2013). The beneficial consequences of the informal economy for governments, at least from the viewpoint of some scholars, are that: • It prevents governments from introducing over-burdensome regulations since businesses can choose to exit the formal economy to evade these regulations (De Soto, 1989, 2001; World Bank, 2019). • Informal training provided by informal employers decreases the need for state and formal private sector provision of formal training (Magidi & Mahiya, 2021; World Bank, 2019).

1.3.7 Consequences for Economies and Societies Finally, and for the economies and societies, there are again harmful and beneficial consequences of informal economies. The harmful consequences are that: • Even if individual informal business ventures can outcompete formal businesses due to the cost advantages of operating informally, which compensates for their low productivity and inability to produce efficiently, the net macro-level economic impact is a reduction in overall productivity and efficiency, which hinders economic development and growth (La Porta & Shleifer, 2008, 2014; World Bank, 2019). • Participation in the informal economy can lead to a less compliant wider attitude to the rule of law (Ojo et al., 2013). • Engagement in the informal economy results in weaker trade union representation and collective bargaining (Schminke & Fridell, 2021; TUC, 2008). • Economies with more extensive informal economies have lower levels of GDP per capita and suffer from greater levels of bribery and corruption, lower social protection levels, greater inequality, and higher poverty levels (see Chap. 2).

1.4 What Is an E-government Approach Towards Formalising the Informal Economy?

13

Turning to the beneficial consequences of the informal economy for societies and economies, it can be asserted that the informal economy: • Provides a means of livelihood for those excluded from formal work and welfare provision, even if this is normally precarious and lower paid (Ketchen et  al., 2014; World Bank, 2019). • Acts as a breeding ground for enterprise culture and entrepreneurship by providing a testbed for startups (Williams, 2006, 2017; Williams & Martinez-­ Perez, 2014a). • Makes available income generated in the informal economy for spending in the formal economy, resulting in greater demand for formal goods and services and higher official economic growth (Schneider & Williams, 2013; World Bank, 2019). In conclusion, this review reveals that there are both harmful and beneficial consequences of the informal economy. Although the net overall consequence of the informal economy is seldom, if ever, quantified, the overarching consensus in the literature is that the harmful consequences far outweigh any beneficial consequences and that the beneficial consequences are commonly only beneficial if there is a subsequent formalisation of the informal economy. Therefore, given that the net overall impact of the informal economy (across all stakeholders) is harmful, returning to the five hypothetical options mentioned at the start of this section, there is little rationale for doing nothing, informalising the formal economy, or growing the informal economy. This leaves the options of eradicating the informal economy or formalising the informal economy. Given the beneficial consequences of the informal economy, such as in promoting entrepreneurship, enterprise culture, and business development, pursuing the eradication of the informal economy as the goal of countries and governments when tackling the informal economy would contradict its wider policy goal of promoting entrepreneurship, enterprise culture, and business development as a means of pursuing economic development and growth. Given this, and that these are only beneficial consequences if the economic activity is subsequently formalised, formalising the informal economy is the only viable option. With this understanding in hand, attention now turns towards an emergent innovative approach for formalising the informal economy that is the subject of this book, namely, an e-government approach. In reviewing what is important to know about this approach, the structure and content of this book will be outlined.

1.4 What Is an E-government Approach Towards Formalising the Informal Economy? When examining the relationship between digital technologies and the informal economy, most of the literature has focused upon how such technologies have harmful consequences for formality, exemplified by the literature on how digital

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platforms are having detrimental consequences on the quality of employment in the formal economy (e.g. Hauben et al., 2020; ILO, 2021). However, in recent years, a small emergent literature has begun to highlight how digital technologies, when applied in public initiatives, programmes, and policy, can improve the ability and effectiveness of governments in facilitating the formalisation of the informal economy (Alm, 2021; Bhattarai, 2018; Chacaltana et al., 2018; Divald, 2021; ILO, 2022; Kring & Leung, 2021). Studies have discussed this emergent e-government approach in the Asia-Pacific region (Bhattarai, 2018), Africa and Asia (Kring & Leung, 2021), and Europe (Williams, 2021). To conclude this introductory chapter, what is important to know about this emergent e-government approach towards formalising the informal economy is here briefly established. In doing so, the structure and arguments of this book will be outlined. To understand the importance of an e-government approach, it is first necessary to understand how the informal economy can be explained and then to evaluate whether an e-government approach addresses the determinants of the informal economy. This is the aim of Chap. 2. The starting point of this chapter is recognition that the evolution of thought on explaining the informal economy has over the past decade moved towards a consensus position. Neo-institutionalist theory has synthesised the previous theorisations of the informal economy by explaining the informal economy as arising when formal institutional failings lead to a gap between the formal rules of the game and social norms. Therefore, the first section of this chapter presents this neo-institutionalist theoretical perspective, how it has synthesised previous theorisations, and the evidence to support this explanation. Having revealed that the informal economy is now commonly explained as arising when formal institutional failings lead to a gap between the formal rules of the game and social norms, it then reveals how an e-government approach addresses these formal institutional failings and social norms that cause participation in the informal economy. An e-government approach will be shown to address these determinants of participation in the informal economy either directly or indirectly. Government e-initiatives can directly address the lack of modernisation of formal institutions and public sector corruption and the lack of power of formal institutions, as well as trust in government, and is a central facet of any policy approach to address these institutional failures. E-government also addresses more indirectly the level of development and state intervention in work and welfare, the instability and uncertainty of formal institutions, and lack of horizontal trust, which are the remaining determinants of the informal economy. To reinforce this view that an e-government approach addresses the full range of determinants of the informal economy directly or indirectly, the studies that have investigated the relationship between improving e-government and participation in the informal economy will be then reviewed. This will reveal the growing empirical evidence of a statistically significant positive relationship between improving e-government and formalising the informal economy. Countries that have made more progress on e-government having smaller informal economies. What, therefore, should countries do in lived practice to implement an e-government approach towards the informal economy?

1.4  What Is an E-government Approach Towards Formalising the Informal Economy?

15

To answer this, Chap. 3 will provide a comprehensive review of the e-­government tools that can be used to formalise the informal economy. First, it sets out the digital technologies that public authorities, such as tax, social security, and labour authorities, can use to enforce compliance. On the one hand, this includes e-government deterrence tools to increase the real and/or expected costs of participation in the informal economy. These either: • Improve the risks of detection – e-initiatives include advanced data mining tools, smart identity cards, electronic complaint reporting tools, data-driven notification (“nudge”) communications, and certified cash registers. • Improve sanction systems – e-initiatives include new sanction systems to facilitate formalisation made possible due to the existence of e-registers and online non-compliance/“naming and shaming” lists. On the other hand, there are e-government initiatives that make participation in the formal economy easier and beneficial. These are again of two types: • Incentives on the supply side that enable businesses and workers to operate in the formal economy more easily and beneficially. E-government tools include making formalisation easier using online e-registration of businesses and workers, pre-filling tax returns, and using entrepreneurial accounts to simplify tax payments, online tax calculators, and online tax behaviour rating tools. • Incentives on the demand side that reward purchasers for using formal goods and services. E-government tools include receipt lotteries, e-initiatives to incentivise electronic payments and deter and limit cash payments, and social label e-­initiatives to encourage the purchase of formal goods and services. Second, it sets out the digital technologies that public authorities can use to encourage voluntary compliance. These are again of two types: • Education and awareness raising tools to change social norms  – E-initiatives include smart cards and apps to inform workers of their rights, use of Facebook messenger to provide advice and support, apps to allow citizens to evaluate the impact of their participation in the informal economy, and an array of online videos, virtual reality films, and interactive games and quizzes to inform either suppliers or purchasers of the benefits of formality or costs of informality. • E-tools to modernise formal institutions – Initiatives include e-services to make join-up operations across government and make governments more customer-­ friendly and easily approachable so as to improve trust in government and ­prevent participation in the informal economy by enhancing perceptions of procedural and redistributive justice and fairness across government. Having revealed the full range of e-tools available to governments to formalise the informal economy, Chap. 4 then draws some conclusions about this e-­government approach and sets out a future roadmap for the transition to formality using digital technologies. First, the findings from this introductory chapter on how the informal economy is defined and its consequences are summarised. Second, the findings from Chap. 2 on theorising an e-government approach towards formalising the

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informal economy will be summarised. Third, the findings from Chap. 3 on the plethora of e-initiatives will be summarised. And fourth and finally, some concluding remarks will be made on how governments can formulate a future roadmap that uses digital services to encourage the transition to formality.

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Kring, S., & Leung, V. (2021). Renewing the social contract through e-formalization in the world of work. ILO. https://www.ilo.org/wcmsp5/groups/public/%2D%2D-­ed_emp/documents/publication/wcms_826464.pdf La Porta, R., & Shleifer, A. (2008). The unofficial economy and economic development. Brookings Papers on Economic Activity, 47(1), 123–135. https://doi.org/10.3386/w14520 La Porta, R., & Shleifer, A. (2014). Informality and development. Journal of Economic Perspectives, 28(3), 109–126. https://doi.org/10.1257/jep.28.3.109 Larsen, M., & Witte, C.  T. (2022). Informal legacy and exporting among sub-Saharan African firms. Organization Science. Advance online publication, 34, 987. https://doi.org/10.1287/ orsc.2022.1623 Liwinski, J. (2022). Informal employment and wages in Poland. International Journal of Manpower, Advance online publication. https://doi.org/10.1108/IJM-­03-­2021-­0196 London, T., Esper, H., Grogan-Kaylor, E., & Kistruck, G.  M. (2014). Connecting poverty to purchase in informal markets. Strategic Entrepreneurship Journal, 8, 37–55. https://doi. org/10.1002/sej.1173 Luque, A. (2022). Analysis of the concept of informal economy through 102 definitions: Legality or necessity [version 2; peer review: 2 approved]. Open Research Europe, 1, 134. https://doi. org/10.12688/openreseurope.13990.2 Magidi, M., & Mahiya, I. T. (2021). Rethinking training: The role of the informal sector in skills acquisition and development in Zimbabwe. Development Southern Africa, 38(4), 509–523. https://doi.org/10.1080/0376835X.2020.1799759 Medina, L., & Schneider, F. (2018). Shadow economies around the world: What did we learn over the last 20 years? IMF. https://www.imf.org/-­/media/Files/Publications/WP/2018/ wp1817.ashx Mendonça, P., Kougiannou, N.  K., & Clark, I. (2022). Informalization in gig food delivery in the UK: The case of hyper-flexible and precarious work. Industrial Relations: A Journal of Economy and Society. Advance online publication, 62, 60. https://doi.org/10.1111/irel.12320 Misganaw, B. A., Assefa, D. Z., & Colovic, A. (2022). Is starting and staying unregistered longer beneficial for firms? The moderating role of institutional quality. International Journal of Entrepreneurial Behaviour & Research, Advance online publication, 29, 433. https://doi. org/10.1108/IJEBR-­07-­2022-­0582 Montero-Moraga, J. M., Benavides, F. G., & Lopez-Ruiz, M. (2020). Association between informal employment and health status and the role of the working conditions in Spain. International Journal of Health Services, 50(2), 199–208. https://doi.org/10.1177/0020731419898330 Mustapha, N., Petersen, I., Jegede, O., Bortagaray, I., & Kruss, G. (2021). Measurement of innovation in the informal sector in Africa: The importance to industrial policy. Innovation and Development. Advance online publication, 12, 325. https://doi.org/10.108 0/2157930X.2021.1887614 North, D.  C. (1990). Institutions, institutional change and economic performance. Cambridge University Press. OECD. (2002). Measuring the non-observed economy. OECD. https://www.oecd.org/sdd/ na/1963116.pdf OECD. (2016). Informal sector entrepreneurship: A policy briefing. OECD. https://ec.europa.eu/ social/BlobServlet?docId=13791&langId=en OECD. (2017). Shining light on the shadow economy: Opportunities and threats. OECD. https:// www.mpf.gob.ar/procelac-­lavado/files/2020/04/OECD.2017.Shinning-­light-­on-­the-­shadow-­ economy.pdf OECD/ILO. (2019). Tackling vulnerability in the informal economy. OECD. https://doi. org/10.1787/939b7bcd-­en Ohnsorge, F., & Yu, S. (2021). Tackling informality: Policy options. In F.  Ohnsorge & S.  Yu (Eds.), The long shadow of informality: Challenges and policies. World Bank. https://thedocs. worldbank.org/en/doc/37511318c092e6fd4ca3c60f0af0bea3-­0350012021/related/Informal-­ economy-­full-­report.pdf

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Ohnsorge, F., Okawa, Y., & Yu, S. (2021). Lagging behind: Informality and development. In F.  Ohnsorge & S.  Yu (Eds.), The long shadow of informality: Challenges and policies. World Bank. https://thedocs.worldbank.org/en/doc/‌37511318c092e6fd4ca3c60f0af0bea3­0350012021/related/Informal-­economy-­full-­report.pdf Ojo, S., Nwankwo, S., & Gbadamosi, A. (2013). Ethnic entrepreneurship: The myths of informal and illegal enterprise in the UK. Entrepreneurship and Regional Development, 25(7–8), 587–611. https://doi.org/10.1080/08985626.2013.814717 Rosaldo, M. (2021). Problematizing the ‘informal sector’: 50 years of critique, clarification, qualification, and more critique. Sociology Compass, 15(9), Article e12914. https://doi.org/10.1111/ soc4.12914 Schminke, T. G., & Fridell, G. (2021). Trade union transformation and informal sector organising in Uganda: The prospects and challenges for promoting labour-led development. Global Labour Journal, 12(2), 95–112. https://doi.org/10.15173/glj.v12i2.4394 Schneider, F., & Williams, C. C. (2013). The shadow economy. Institute of Economic Affairs. https:// iea.org.uk/wp-­content/uploads/2016/07/IEA%20Shadow%20‌Economy%20web%‌20rev%20 7.6.13.pdf Sheikh, F.  A., & Bhaduri, S. (2020). Grassroots innovations in the informal economy: Insights from value theory. Oxford Development Studies, 48(1), 85–99. https://doi.org/10.1080/1360081 8.2020.1717453 Slavnic, Z. (2010). Political economy of informalisation. European Societies, 12(1), 3–23. https:// doi.org/10.1080/14616690903042724 Small Business Council. (2004). Small business in the informal economy: Making the transition to the formal economy. Small Business Council. Tonoyan, V., Strohmeyer, R., Habib, M., & Perlitz, M. (2010). Corruption and entrepreneurship: How formal and informal institutions shape small firm behaviour in transition and mature market economies. Entrepreneurship Theory and Practice, 34(5), 803–831. https://doi. org/10.1111/j.1540-­6520.2010.00394.x TUC. (2008). Hard work, hidden lives: The short report of the commission on vulnerable employment. TUC. https://www.tuc.org.uk/publications/ hard-­work-­hidden-­lives-­short-­report-­commission-­vulnerable-­employment Turkson, F. E., Amissah, E., & Gyeke-Dako, A. (2022). The role of formal and informal finance in the informal sector in Ghana. Journal of Small Business & Entrepreneurship, 34(3), 333–356. https://doi.org/10.1080/08276331.2020.1724002 Vanderseypen, G., Tchipeva, T., Peschner, J., Rennoy, P., & Williams, C. C. (2013). Undeclared work: Recent developments. In European Commission (Ed.), Employment and social developments in Europe 2013 (pp. 231–274). European Commission. https://ec.europa.eu/social/main. jsp?catId=738&langId=en&pubId=7684 Webb, J. W., Tihanyi, L., Ireland, R. D., & Sirmon, D. G. (2009). You say illegal, I say legitimate: Entrepreneurship in the informal economy. Academy of Management Review, 34(3), 492–510. https://doi.org/10.5465/amr.2009.40632826 Williams, C. C. (2006). The hidden enterprise culture: Entrepreneurship in the underground economy. Edward Elgar. Williams, C.  C. (2009). Formal and informal employment in Europe: Beyond dualistic representations. European Urban and Regional Studies, 16(2), 147–159. https://doi. org/10.1177/0969776408101686 Williams, C. C. (2016). Developing a holistic approach for tackling undeclared work: Background paper. European Commission. Williams, C.  C. (2017). Entrepreneurship in the informal sector: An institutional perspective. Routledge. Williams, C. C. (2019). The informal economy. Columbia University Press. Williams, C.  C. (2021). E-formalisation in Europe. ILO. https://www.ilo.org/wcmsp5/groups/ public/%2D%2D-­ed_emp/documents/publication/wcms_823279.pdf

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Williams, C.  C., & Gashi, A. (2022). Evaluating the wage differential between the formal and informal economy: A gender perspective. Journal of Economic Studies, 49(4), 735–750. https://doi.org/10.1108/JES-­01-­2021-­0019 Williams, C. C., & Horodnic, I. (2017). Evaluating the illegal employer practice of under-­reporting employees’ salaries. British Journal of Industrial Relations, 55(1), 83–111. https://doi. org/10.1111/bjir.12179 Williams, C.  C., & Horodnic, I. (2022). Progress of national authorities towards a holistic approach: Study using a common assessment framework. European Labour Authority. https://www.ela.europa.eu/sites/default/files/2022-­05/UDW_Study_report_on_progress%20 towards%20%20holistic%20approach_2022-­EN_1.pdf Williams, C. C., & Kedir, A. (2017). Evaluating the impacts of starting-up unregistered on firm performance in Africa. Journal of Developmental Entrepreneurship, 22(2), Article e017500170. https://doi.org/10.1142/S1084946717500170 Williams, C.  C., & Martinez-Perez, A. (2014a). Do small business start-ups test-trade in the informal economy? Evidence from a UK small business survey. International Journal of Entrepreneurship and Small Business, 22(1), 1–16. https://doi.org/10.1504/IJESB.2014.062127 Williams, C.  C., & Martinez-Perez, A. (2014b). Is the informal economy an incubator for new enterprise creation? A gender perspective. International Journal of Entrepreneurial Behaviour and Research, 20(1), 4–19. https://doi.org/10.1108/IJEBR-­05-­2013-­0075 Williams, C.  C., & Martinez-Perez, A. (2014c). Why do consumers purchase goods and services in the informal economy? Journal of Business Research, 67(5), 802–806. https://doi. org/10.1016/j.jbusres.2013.11.048 Williams, C. C., & Padmore, J. (2013). ‘Envelope wages’ in the European Union. International Labour Review, 152(3–4), 411–430. https://doi.org/10.1111/j.1564-­913X.2013.00186.x Williams, C. C., & Shahid, M. (2016). Informal entrepreneurship and institutional theory: Explaining the varying degrees of (in)formalisation of entrepreneurs in Pakistan. Entrepreneurship and Regional Development, 28(1–2), 1–25. https://doi.org/10.1080/08985626.2014.963889 Williams, C.  C., & Windebank, J. (1998). Informal employment in the advanced economies: Implications for work and welfare. Routledge. Williams, C. C., Nadin, S., Barbour, A., & Llanes, M. (2012a). Enabling enterprise: Tackling the barriers to formalisation. Community Links. https://www.community-­links.org/wp-­content/ uploads/sites/22/Enabling_Enterprise_Web.pdf Williams, C. C., Kedir, A., Fethi, M., & Nadin, S. (2012b). Evaluating ‘varieties of capitalism’ by the extent and nature of the informal economy: The case of South-Eastern Europe. South Eastern Europe Journal of Economics, 10(2), 87–104. http://www.asecu.gr/Seeje/issue19/ issue19-­williams.pdf Williams, C. C., Martinez-Perez, A., & Kedir, A. M. (2017). Informal entrepreneurship in developing economies: The impacts of starting-up unregistered on firm performance. Entrepreneurship Theory and Practice, 41(5), 773–799. https://doi.org/10.1111/etap.12238 Woolfson, C. (2007). Pushing the envelope: The ‘informalization’ of labour in post-­communist new EU member states. Work, Employment and Society, 21(5), 551–564. https://doi. org/10.1177/0950017007080016 World Bank. (2019). Global economic prospects: Darkening skies. World Bank. http://documents.worldbank.org/curated/en/307751546982400534/ Global-­Economic-­Prospects-­Darkening-­Skies World Bank. (2020). Re-thinking the approach to informal businesses: Typologies, evidence and future exploration. World Bank. http://hdl.handle.net/10986/34814

Chapter 2

Theorising an E-government Approach Towards Formalising the Informal Economy

Abstract  This chapter explains the reasons for participation in the informal economy and then shows how an e-government approach addresses these reasons. To do so, the starting point is recognition that over the past decade there has emerged a consensus on how to explain the informal economy. Previous theorisations of the informal economy have been synthesised by neo-institutionalist theory which explains the informal economy as arising when formal institutional failings lead to a gap between the formal rules of the game and social norms. Therefore, the first section of this chapter presents this neo-institutionalist theory. With this explanation in hand, the second section then discusses how an e-government approach can address the formal and informal institutional failings that result in participation in the informal economy. Third, and to display that there is indeed a relationship between improving e-government and participation in the informal economy, the current empirical evidence is reviewed that overwhelmingly reveals the statistically significant positive relationship between e-government and formalisation.

2.1 Introduction The aim of this chapter is to explain the reasons for participation in the informal economy and then to show how an e-government approach addresses these reasons. To do so, the starting point is recognition that over the past decade there has emerged a consensus on how to explain the informal economy. Previous theorisations of the informal economy have been synthesised by neo-institutionalist theory which explains the informal economy as arising when formal institutional failings lead to a gap between the formal rules of the game and social norms. Therefore, the first section of this chapter presents this neo-institutionalist theory. With this explanation in hand, the second section will then discuss how an e-­government approach can address the formal and informal institutional failings that result in participation in the informal economy. Third, and to display that there is indeed a relationship between improving e-government and participation in the © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. C. Williams, Formalization of the Informal Economy, SpringerBriefs in Economics, https://doi.org/10.1007/978-3-031-37928-4_2

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informal economy, a review will be undertaken of the current empirical evidence, which overwhelmingly reveals the statistically significant positive relationship between e-government and formalisation.

2.2 Explaining Participation in the Informal Economy: A Neo-Institutional Theoretical Perspective Over time, there have been changes in how the informal economy is explained. For most of the twentieth century, modernisation theory was dominant which explained the informal economy as resulting from economic under-development and a lack of modernisation of governance (Geertz, 1963; Lewis, 1959). The dominance of this theorisation declined as it was recognised during the late twentieth century that the informal economy was persisting even in modern developed economies. Two new theoretical explanations emerged to explain its persistence. A neo-liberal theory explained the informal economy as resulting from too much intervention in the formal economy and welfare provision (De Soto, 2001), whilst a political economy theory explained this sphere as resulting from under-intervention in formal work and welfare provision (Castells & Portes, 1989; Davis, 2006; Portes, 1994). All these theories explained the informal economy using different macro-level structural determinants. As such, they could not explain why some businesses, employers, workers, and citizens in a country engage in the informal economy and others do not. Over the past decade or so, a new alternative explanation has emerged which now dominates thought. Neo-institutionalist theory synthesises and incorporates the tenets of these past theories and furthermore explains why some engage and others do not. In this theory, institutions refer to the rules of the game that exist in all societies that prescribe and govern human behaviour. These rules take two forms in all socioeconomic systems. On the one hand, there are formal institutions (i.e. laws, directives, and regulations) that are the formal rules of the game and, on the other hand, informal institutions that are the socially shared informal rules articulated in the norms, beliefs and values of employers, workers, and citizens about what is acceptable (Baumol & Blinder, 2008; Denzau & North, 1994; Helmke & Levitsky, 2004; North, 1990). Viewed through this institutional lens, work in the informal economy conforms to the social norms about what is acceptable but not the formal rules (Webb et al., 2009; Welter et al., 2015). To explain the informal economy, there have been three waves of neo-­ institutionalist thought. A first wave explained the informal economy as resulting from formal institutional failures. A second wave then added informal institutions into the explanation. A third wave has synthesised the two previous waves, positing that formal and informal institutional failures result in greater engagement in the informal economy. Formal institutional failings produce a rift between the formal rules and social norms, beliefs, and values of businesses, employers, workers, and citizens regarding the acceptability of engaging in the informal economy. This then

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leads to a greater prevalence of the informal economy (Williams, 2017, 2019). Here, each wave is briefly reviewed in turn to outline the current synthesis and consensus on how the informal economy can be explained, expressed in third wave neo-­ institutionalist theory.

2.2.1 First-Wave Neo-institutionalist Explanation: Formal Institutional Failings First-wave neo-institutionalist theory synthesised the earlier modernisation, neo-­ liberal, and political economy theoretical perspectives by bringing together the macro-level structural determinants voiced in each earlier theory found to be associated with participation in the informal economy. These were re-read in neo-­ institutionalist theory as the formal institutional failings that result in participation in the informal economy. As Williams et al. (2017) has shown, four types of formal institutional failing were identified as explaining engagement in the informal economy, each of which will be here briefly reviewed in turn: • • • •

Lack of modernisation of government institutions and public sector corruption Level of development and state intervention in work and welfare Lack of power of formal institutions Uncertainty and instability in formal institutions

2.2.1.1 Lack of Modernisation of Government Institutions and Public Sector Corruption Seen through the lens of neo-institutionalist theory, the explanation of modernisation theory that the informal economy arises from a lack of modernisation of government institutions and public sector corruption is a discussion about the inefficiencies and resource misallocations of formal institutions. These inefficiencies and resource misallocations that result from a lack of modernisation of government institutions are of three main types: • A lack of redistributive justice in state service provision. Businesses, employers, workers, and citizens do not believe that they receive the public goods they deserve for the tax and social contributions they pay, which results in participation in the informal economy (Kinsey & Gramsick, 1993; Richardson & Sawyer, 2001). • A lack of procedural justice in state authorities. Businesses, employers, workers, and citizens do not believe that state authorities treat them impartially, respectfully, and responsibly (Murphy, 2005), which results in engagement in the informal economy (Hartner et al., 2008; Murphy, 2003; Murphy et al., 2009).

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• A lack of procedural fairness. Businesses, employers, workers, and citizens believe that they are unfairly treated compared with others (Kinsey & Gramsick, 1993), which again results in engagement in the informal economy (McGee et al., 2008; Molero & Pujol, 2012). Inefficiencies and resource misallocations in formal institutions arise not only from these types of lack of modernisation of government institutions but also from public sector corruption (Khan & Quaddus, 2015). Again, there are three types: • The “misuse of public office for private gain” when public sector officials request and/or receive gifts and bribes for misusing their position to benefit others (Svensson, 2005). For instance, businesses might receive a public service quicker than others (e.g. a construction permit, operating license) or citizens’ quicker access to healthcare for an informal payment to healthcare professionals (Horodnic et al., 2021). The outcomes are delays for the majority and resource misallocations and inefficiencies (Myrdal, 1968). As highlighted in relation to businesses, although those paying such bribes witness higher subsequent firm performance levels than those who do not, the net impact is negative on the overall economy (Williams & Kedir, 2016; Williams & Martinez-Perez, 2016). • State capture, which is the process by which a business or group of businesses shape legislation and policies to their advantage through illicit or non-transparent means (Fries et al., 2003). The outcome is that they are preferentially treated by the state (e.g. with public resources allocated to them). For those beyond this powerful elite, the result is fewer public goods and services provided for the taxes and social contributions paid (De Soto, 1989). • Using personal connections to circumvent formal procedures and/or gain preferential access to public goods and services is a third and final type of corruption. This is variously termed guanxi in China (Chen et al., 2012), blat in Russia and Ukraine (Ledeneva, 2013; Williams & Onoshchenko, 2015), wasta in the Arab world (Smith et  al., 2012), jeitinho in Brazil (Ferreira et  al., 2012), “pulling strings” in the English-speaking world (Smith et  al., 2012), vrski in North Macedonia (Williams & Bezeredi, 2017), veze in Serbia, Croatia and Bosnia and Herzegovina, and vruzki in Bulgaria (Williams & Yang, 2017). In all studies, it is deemed a widespread phenomenon and immutable part of doing business. Indeed, it is so embedded that seldom is it seen as nepotism, cronyism, and corruption, despite its negative impacts on those adhering to the formal rules (Williams & Yang, 2017). There is strong empirical support for the modernisation view that the informal economy results from a lack of modernisation of government institutions and public sector corruption. Studies have found that: • The higher is the quality and/or effectiveness of government institutions, the lower is participation in the informal economy (Canh et al., 2021; Estevặo et al., 2022; Huynh & Nguyen, 2020; Kelmanson et al., 2019; Mara, 2021; Omri, 2020; Torgler & Schneider, 2009).

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• The lower is the perceived level of corruption, the less prevalent is the informal economy (Krasniqi & Williams, 2017; Navickas et  al., 2019; Williams & Horodnic, 2019), and the higher is the control of corruption, the lower is the size of the informal economy (Torgler & Schneider, 2009). 2.2.1.2 Level of Development and State Intervention in Work and Welfare A second formal institutional failing incorporates the claim of modernisation theory that the informal economy arises from economic under-development and addresses the debate between the neo-liberal and political economy theories in previous decades. Neo-liberals assert that informality results from too much intervention in the economy and welfare provision, whilst political economy theorists assert that it arises from under-intervention in the economy and welfare provision. Over the past two decades, a multitude of evidence-based studies have evaluated both this modernisation theory about economic under-development and these two competing theories by examining which weaknesses and voids in formal institutions are significantly associated with engagement in the informal economy and the direction of their association. Indeed, the latter is what this debate between neo-­ liberals and political economy theorists was about. These studies reveal that the following weaknesses and voids are significantly associated with engagement in the informal economy and the following directions of association: • The greater is the level of gross domestic product (GDP) per capita, the lower is engagement in the informal economy (Ginevicius et  al., 2020; ILO, 2018; Krasniqi & Williams, 2017; Navickas et al., 2019; Williams & Horodnic, 2019). • Increased healthcare expenditure is associated with lower engagement in the informal economy (Krasniqi & Williams, 2017). • Greater social expenditure as a percentage of GDP is associated with lower engagement in the informal economy (Krasniqi & Williams, 2017; Mara, 2021; Williams & Horodnic, 2019). • Increased expenditure on active labour market policy interventions targeting vulnerable groups (i.e. active labour market policies) is associated with lower engagement in the informal economy (Williams & Horodnic, 2016, 2017; Williams et al., 2017). • When social transfers are more effective in reducing poverty, engagement in the informal economy is lower (Krasniqi & Williams, 2017; Williams & Horodnic, 2015, 2016, 2017). • Increasing the expense of government as a share of GDP is associated with lower engagement in the informal economy (Luong et  al., 2020; Williams & Horodnic, 2019). • Higher current taxes are associated with lower engagement in the informal economy (Williams, 2014; Williams & Horodnic, 2016, 2017).

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• Higher levels of tax on revenue as a percentage of GDP is associated with lower engagement in the informal economy (Williams, 2014; Williams & Horodnic, 2019). In other words, the empirical evidence is overwhelmingly supportive of both the modernisation theory that informality is associated with economic under-­ development and the political economy explanation that the informal economy results from too little intervention in work and welfare provision, whilst little support is found for the neo-liberal stance that it results from too much intervention in work and welfare provision. 2.2.1.3 Lack of Power of Formal Institutions The power of formal institutions to formulate laws and regulations and make businesses, employers, workers, and citizens abide by them is a third formal institutional failing identified in first-wave neo-institutional theory that results in informality. Power here refers to the ability of public institutions such as enforcement authorities to deter engagement in the informal economy and provide incentives to make engagement in the formal economy easier and more beneficial, meaning that the cost/benefit ratio confronting businesses, employers, workers, and consumers is altered to make informality unprofitable. When formal institutions lack the power to provide sufficient deterrents and incentives, the outcome is low costs and high benefits of engagement in the informal economy, along with the low benefits and high costs of engagement in the formal economy. For instance, benefits of engaging in the formal economy might include access to credit, training of the labour force, contracts with larger businesses, access to public sector procurement contracts, and the ability to become more capital-­ intensive, whilst the ease of formality might be influenced by easier registration procedures for businesses and workers and easier arrangements for tax and social security contribution payments. If these benefits are absent and burdensome processes exist for registration and compliance, then participation in the informal economy will be higher. Evidence that pursuing the simplification of registration and compliance prevents participation in the informal economy, and that offering incentives for formalisation prevents engagement in the informal economy, is provided in many studies (see Chap. 3). 2.2.1.4 Uncertainty and Instability of Formal Institutions Uncertainty about formal institutions and a perceived instability of formal institutions are direct outcomes of constant alterations in the laws and regulations (Levitsky & Murillo, 2009; Williams & Shahid, 2016), and it is widely recognised that political and government instability is significantly correlated with greater engagement in the informal economy (Torgler & Schneider, 2009). For instance, businesses,

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employers, workers, and citizens in many developing and transition economies face continuous alterations in the formal rules, which results in them believing that today’s rules will not apply in the future (Urbano et al., 2019; Zhao & Li, 2019), such as whether they will receive pensions and unemployment benefits in the future in return for their compulsory social contribution payments. This uncertainty drives them to engage in the informal economy and to not comply with the rules on social contribution payments. A negative view of the solidity of the formal rules is further extenuated in many developing and transition economies by a perception that these formal rules are not self-determined by the population but imposed on the country from outside. For instance, in post-socialist Central and Eastern Europe, this was the perception in the early stages of transition (Williams et al., 2013). It is also commonly the case in some developing countries, often when structural conditions are imposed by the International Monetary Fund (IMF), meaning that businesses, employers, workers, and citizens view the formal rules as imposed from outside rather than decided by their elected government. In such contexts, especially when the formal rules are constantly in flux, the result is that businesses, employers, workers, and citizens turn away from the formal rules and adopt what they view as a more enduring set of social norms about what is acceptable, namely, their own informal rules. As Urbano et al. (2019: 24) assert, “These informal institutions that … endure a long time reduce the uncertainty”. Indeed, under-developed countries are so defined precisely because they possess under-developed formal rules that are often temporary and fluid and lead businesses, employers, workers, and citizens to turn to other socially shared norms, beliefs, and values that are separate and different to the formal rules (London et al., 2014). Grounded in this recognition that informal institutions often play a key role in governing economic behaviour, a second wave of neo-institutionalist theory emerged that no longer viewed solely formal institutional failings as resulting in greater engagement in the informal economy.

2.2.2 Second-Wave Neo-institutionalist Explanation: Informal Institutions Moving beyond solely the role of formal institutional failings, second-wave neo-­ institutionalist explanations for participation in the informal economy have highlighted the role of informal institutions (Fredström et al., 2021; Slade Shantz et al., 2018). The recognition in second wave thought is that the above formal institutional failings only lead to participation in the informal economy if the formal rules are not in symmetry with social norms (Godfrey, 2015; Webb et  al., 2009; Williams & Horodnic, 2015). In wider neo-institutional theory, three types of institution and legitimacy are identified, namely, regulatory, normative, and cultural-cognitive (Scott, 2008).

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Regulatory legitimacy refers to compliance with the formal rules, normative legitimacy to conforming with a moral basis, and cultural-cognitive legitimacy to compliance with social norms (Scott, 2008). In the second wave literature on the informal economy, the latter two are conflated under informal institutions. The argument is that when formal and informal institutions are in symmetry, engagement in the informal economy does not result from the above formal institutional failings. This is because the social norms of businesses, employers, workers, and citizens align with the formal rules. The only engagement in the informal economy is unintentional due to not understanding the formal rules. Formal institutional failings only drive businesses, employers, workers, and citizens into the informal economy when the formal and informal rules do not align and instead differently define what is legitimate (see Godfrey, 2015; Natpraypant et al., 2022; Webb & Ireland, 2015; Webb et al., 2009, 2019; Williams & Shahid, 2016; Windebank & Horodnic, 2017). Indeed, studies have found that the greater is the non-alignment between the formal and informal institutions, the greater is engagement in the informal economy (Horodnic & Williams, 2022; Shahid et  al., 2022; Williams & Shahid, 2016; Williams et al., 2015). To enumerate the degree to which the formal and informal rules of the game are not in symmetry, the dominant proxy indicator used when studying the informal economy has been tax morale, defined as “the intrinsic willingness to voluntarily pay taxes based on social and individual norms” (Martinez-Vazquez et al., 2022: 18). This is calculated by evaluating the acceptability of engaging in different types of informal work (see, e.g. Williams & Horodnic, 2021). Many studies reveal a statistically significant association between tax morale and participation in the informal economy, with Pearson r values between −0.46 and −0.66 (Alm & Torgler, 2006; Alm et al., 2006; Engel et al., 2020; Torgler, 2011; Torgler & Schneider, 2009). As Ohnsorge and Yu (2021) find, in developing economies with above-median informality, tax morale is weaker (2.5 on a 0–10 scale), with 10 indicating that underreporting of income for tax purposes is always justifiable, whilst in the average developing economy with below-median informality it is 0.4 index points less. In Europe and the United States, Alm and Torgler (2006) again find a strong negative correlation (Pearson r = −0.460) significant at the 0.05 level, with tax morale explaining over 20% of the total variance in the scale of the informal economy. In transition economies, Alm et  al. (2006) similarly find a strong negative correlation (Pearson r = −0.657), with the non-alignment of the formal and informal rules (i.e. tax morale) explaining over 30% of the total variance in the scale of the informal economy. Examining specifically the self-employed engaging in the informal economy, Berdiev and Saunoris (2019) reveal that countries with higher tax morale have lower levels of engagement in the informal economy and that if a country moved from the tax morale level found in Iraq (1.54) to the tax morale level found in Japan (2.68), the number of self-employed engaged in the informal economy would drop by three per 100 adult-age population. In a systematic literature review of the formal institutional failures that lead to lower tax morale (i.e. less alignment between the formal and informal rules), Horodnic (2018) finds that those formal institutional failings identified above

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arising from the modernisation and political economy theories are significantly correlated with tax morale. However, an additional determinant, identified as the most important, is trust. Akin to Frey and Torgler (2007) and Murtin et al. (2018), a differentiation is made between vertical trust (trust between populations and state authorities) and horizontal trust (generalised trust among populations). The systematic literature review of Horodnic (2018) reveals that if businesses, employers, workers, and citizens view the state as trustworthy and believe that others are not operating in the informal economy, they are less likely to participate in the informal economy (see also Berdiev et  al., 2020). Given the salience of both vertical and horizontal trust as determinants of engagement in the informal economy, each is here considered in turn. 2.2.2.1 Trust in Public Institutions (Vertical Trust) A lack of trust in public institutions, often termed vertical trust, is significantly associated with a lower alignment of the formal and informal rules. This is the case in relation to many public institutions, including government (e.g. Chan et al., 2018), parliament (e.g. Alm & Torgler, 2006), politicians and political parties (e.g. Chan et al., 2018), courts and the legal system (e.g. Alm & Torgler, 2006), the police (e.g. Leonardo & Martinez-Vazquez, 2016), public officials (e.g. Torgler et al., 2008), and tax authorities and tax inspectors (e.g. Torgler et al., 2008). Studies conducted across the globe have identified that the lower is the level of vertical trust, the lower is the likelihood of participation in the informal economy (Horodnic & Williams, 2022; Krasniqi & Williams, 2017; Littlewood et al., 2020; McCulloch et  al., 2021; Williams & Horodnic, 2015; Williams & Shahid, 2016; Williams et al., 2016). 2.2.2.2 Interpersonal Trust (Horizontal Trust) Less attention has been paid to interpersonal (or “horizontal”) trust relative to vertical trust in the neo-institutionalist literature when explaining the informal economy, such as businesses trusting competitors to abide by the formal rules. However, there is growing evidence that if businesses, employers, workers, and citizens believe that their peers operate in the informal economy, they will do likewise (Alm et al., 2017; Górecki & Letki, 2021; Lefebvre et al., 2015). In other words, the willingness to comply is conditional on the pro-social behaviour of others; they comply if they believe others are doing so (Frey & Torgler, 2007; Horodnic & Williams, 2022; Jiminez & Iyer, 2016; Lefebvre et al., 2015; Levenko & Staehr, 2022; Mendoza & Wielhouwer, 2015; Narsa et al., 2016; Williams & Horodnic, 2021). In Nigeria, a 2018 survey of 10,000 adults reveals that the intention to be compliant is higher the more people believe that others are compliant (McCulloch et al., 2021). Meanwhile, in Estonia, Levenko and Staehr (2022) find that perceived social

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norms and customs are important predictors of compliance (but vertical trust in government is not when measured in terms of perceptions of fairness and satisfaction with public services). Their conclusion is that you and your friends matter, not the government (i.e. horizontal trust, not vertical trust). Indeed, other research finds that some friends matter more than others. Di Gioacchino and Fichera (2020) find that improving the compliance of those with high influence in a network has the most significant impact on overall compliance in that network, whilst Paetzold and Winner (2016) find in Austria that work colleagues matter; non-compliance grows among those who move to jobs in businesses where more work colleagues are non-compliant. Horizontal trust also has a moderating effect on the effectiveness of other policies to tackle the informal economy. In a study of 14 East-Central European countries, Górecki and Letki (2021) reveal that sanctions are unnecessary when strong social norms of compliance exist and that the likelihood that raising tax rates reduces engagement in the informal economy is significantly less likely when there are perceived to be strong social norms of compliance. Therefore, and to summarise, second-­ wave neo-institutionalist theory has shown that engagement in the informal economy is more prevalent when there is greater non-alignment of the formal and informal rules and when there is a lack of trust in others.

2.2.3 Third-Wave Neo-institutionalist Explanation: Formal and Informal Institutional Failings First-wave neo-institutionalist theory viewed formal institutional failings as leading to a greater prevalence of the informal economy. Second-wave neo-institutionalist theory then recognised that social norms are also important. Third-wave neo-­ institutionalist theory has synthesised these previous two waves (Williams, 2017, 2019). It has argued that both the formal institutional failings identified in first-wave theory and the informal institutional failings discussed in second-wave theory lead to greater engagement in the informal economy. Formal institutional failings produce a rift between the formal rules and social norms, beliefs, and values of businesses, employers, workers, and citizens regarding the acceptability of engaging in the informal economy. This then leads to a greater prevalence of the informal economy. Therefore, this third-wave neo-institutionalist theorisation of the informal economy synthesises previous theorisations. Given this, the next section turns to how an e-government approach can directly or indirectly address these formal and informal institutional failings and better align businesses, employers, workers, and citizens attitudes with the laws and regulations of the formal institutions.

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2.3 Addressing Institutional Failings: An E-government Approach Having revealed that the informal economy can be explained as arising from both formal and informal institutional failings, this section introduces how an e-­government approach addresses these formal institutional failings and social norms that cause participation in the informal economy. This will show that an e-government approach addresses some of these determinants of participation in the informal economy directly and other determinants indirectly. It directly addresses the lack of modernisation of formal institutions and public sector corruption and the lack of power of formal institutions, as well as trust in government, and is a central component of any policy approach to address these institutional failures. E-government also addresses, albeit more indirectly, other determinants of participation in the informal economy, namely, the level of development and state intervention in work and welfare, the instability and uncertainty of formal institutions, and lack of horizontal trust. To display this, first, a working definition is required of what is here meant by an e-government approach. Following this, how this e-government approach can help solve each of these formal and informal institutional failings is evaluated. This will deal in turn with how the e-government approach can help address the lack of modernisation of formal institutions and public sector corruption, the level of development and lack of state intervention in work and welfare, the lack of power of formal institutions, uncertainty and instability of formal institutions, trust in public institutions, and interpersonal trust. Before doing so, a working definition of an e-­government approach is required.

2.3.1 What Is an E-government Approach? Akin to many concepts, multiple definitions exist of e-government (e.g. Chacaltana et al., 2018; OECD, 2003; Palvia et al., 2017; UNDESA, 2016). However, there is a broad consensus. There is agreement that electronic government (e-government) refers to the use of information and communication technologies (ICTs) by governments to offer businesses, employers, workers, and citizens the opportunity to interact and conduct business with government using digital means (Palvia et al., 2017). That is to say, e-government uses ICTs, or digital public services, to improve the effectiveness, accessibility, and responsiveness of public sector organisations and thus achieve better government (Chacaltana et al., 2018; OECD, 2003; UNDESA, 2016). The relationship between the government and their stakeholders (i.e. businesses, employers, workers, and citizens) is improved by making public service delivery more effective, accessible, and responsive to their needs, as well as by increasing participation in decision-making and making public authorities more transparent and accountable (UNDESA, 2016). The result is to improve the

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structures and operations of government (Field et  al., 2003) in that businesses, employers, workers, and citizens can conduct their interactions with government more easily, quickly, and at lower cost. This means greater efficiency and savings for governments and businesses, increased transparency, and greater participation of citizens, workers, employers, and businesses in political life. On the relationship between an e-government approach and tackling the informal economy, Kring and Leung (2021: 2) state that “e-government strategies… implicitly support formalisation, but this has rarely been explicitly expressed”. However, this has started to change in the last few years with the emergence of the concept “e-formalisation” or “e-formality”. This refers to the application of new technologies in public initiatives, programmes, and policies to facilitate the transition to formalisation (Chacaltana et al., 2018; Williams, 2021). Emerging in the International Labour Organisation (ILO) as a concept (Chacaltana et  al., 2018), various ILO reports have investigated how governments across the globe are promoting the application of digital public services to facilitate the transition from the informal to the formal economy. Bhattarai (2018) examines how digital technologies can enhance the impact of public policies addressing informality in the Asia-Pacific region; Divald (2021) has examined e-formality in Estonia; Kring and Leung (2021), based on examples in Africa and Asia, have presented the barriers to e-­ formality and proposed some guiding principles and building blocks for e-­ formalisation policy development; and Williams (2021) has examined e-­formalisation initiatives in Europe. 2.3.1.1 Barriers to E-government Implementation When developing an e-government approach, there are at least six challenges facing governments (see Kring & Leung, 2021 for an in-depth review). These are: • E-government requires customers to use mobile phones, computers, etc. via the Internet. This requires a reliable electricity supply, which is not always the case in many developing countries and represents a barrier to e-government (Kring & Leung, 2021). • Over one billion people globally have no basic identity credentials (especially in sub-Saharan Africa and South Asia), and in low-income developing economies, one in two women has no official identity. Globally, 24% of developing countries have no digital identity system (Asian Development Bank, 2018), and only half of African countries (UNDESA, 2020). This is a prerequisite for e-government. • Data collection, storage, sharing, and analysis are a challenge for many governments. The 2021 World Development Report reveals that many have under-­ invested in the collection and storage of data and there is inadequate data protection and the misuse of personal data. Data sharing between public authorities due to data interoperability issues between authorities is also common in many countries, as is a lack of institutional capacity and investment in data analysis (World Bank, 2021).

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• Digital exclusion prevails across the world. The Economic and Social Commission for Asia and the Pacific (ESCAP, 2020b) find that 55% of the population of Southeast Asia remains offline, whilst a 2019 study finds that just 19% of people in the least developed countries were able to use the Internet, with women 23% less likely than men to use mobile Internet services. This gender digital gap is widest in South Asia, where women are 58% less likely to use mobile Internet services than men, followed by sub-Saharan Africa where women are 41% less likely to do so (Broadband Commission for Sustainable Development, 2019). In 2019, just 95 countries had achieved the target that the cost of entry-level ­broadband services is less than 2% of monthly gross national income per capita. In the least developed countries, entry-level broadband services costs 5% or more of average monthly gross national income per capita and in 19 countries it is greater than 10% (Broadband Commission for Sustainable Development, 2020). This is a particular problem in sub-Saharan Africa (Broadband Commission for Sustainable Development, 2022), where one gigabyte of data costs 40% of an average monthly wage (Hewett, 2020) and in rural populations where digital exclusion is greater (ESCAP, 2020a). • Digital literacy (i.e., inadequate digital skills) is also a barrier to e-government implementation, especially among older people, women, and lower-skilled youth in both developing and developed economies. A 2016 EU survey finds that digital skills limit e-government service usage (Rodriguez-Hevia et al., 2020), whilst Schneider et  al. (2020) find that the perceived trustworthiness of e-services is determined by the level of digital skills. • Uptake of ICT is often limited, even if Internet penetration exists, especially among smaller (and informal) enterprises, due to the high costs, limited understanding of the benefits, lack of guidance, unfamiliarity with ICT, an unsupportive business environment, and lack of capacity and know-how to engage in e-commerce (UNDP, 2019). World Bank surveys reveal that only 1% of informal businesses in the Lao People’s Democratic Republic and Mozambique use computers, and only 1  in 200 informal enterprises in Mozambique and 2% in Zimbabwe use the Internet (Islam & Jolevski, 2019). The World Bank Enterprise Survey (WBES) also reveals the limited extent to which enterprises globally have their own website and use email to interact with clients and suppliers (World Bank, 2019). These barriers to the implementation of e-government need to be overcome if digital public services are to be used to tackle participation in the informal economy. If overcome, then the next question is whether an e-government approach alters engagement in the informal economy. To answer this, attention now turns towards each of the determinants of engagement in the informal economy discussed above by the dominant neo-institutionalist theorisation of the informal economy and whether and how an e-government approach can address these formal and informal institutional failings that lead to engagement in the informal economy.

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2.3.2 How Does an E-government Approach Address the Institutional Failings that Result in Participation in the Informal Economy? To discuss how this e-government approach can help solve the formal and informal institutional failings that lead to engagement in the informal economy, this section deals in turn with how the e-government approach can help address the lack of modernisation of formal institutions and public sector corruption; the level of development and lack of state intervention in work and welfare; the lack of power of formal institutions; uncertainty and instability of formal institutions; trust in public institutions; and interpersonal trust. 2.3.2.1 E-Government as a Tool to Modernise Formal Institutions and Reduce Public Sector Corruption An e-government approach can directly address the lack of modernisation of formal institutions and public sector corruption which results in engagement in the informal economy. On the one hand, e-government can directly improve the belief of businesses, employers, workers, and citizens that public authorities treat them impartially, respectfully, and responsibly (i.e., procedural justice). On the other hand, it can directly improve the belief of businesses, employers, workers, and citizens that they are unfairly treated compared with others (i.e., procedural fairness). E-government does this through the provision of digital platforms for businesses, employers, workers, and citizens that remove opportunities for public officials to engage in requests for bribes and improve easy access to, and the delivery of, public services (Pirannejad, 2011). E-services also improve the quantity and quality of public information (Pirannejad, 2011; Rose et al., 2015) and enable more customer-centred and personalised services such as online advice via chat functions (Karkin & Janssen, 2014). The result is to increase the quality, and lower the cost, of administrative processes, systems, and services (Ndou, 2004), bottlenecks in service delivery, as well as more effective, impartial, and competent service delivery. Meanwhile, and across the public sector, ICT can improve horizontal communication and collaboration between public authorities and officials (West, 2004) to facilitate greater productivity (Gichoya, 2005); greater coordination across, and joining-up of, different functions; reductions in errors; and greater efficiency by replacing manual data entry and calculation by electronic data functions (Ndou, 2004). This can result in stakeholders only having to submit information once to public institutions rather than multiple times to different authorities. Externally, ICT can make access to, and the delivery of, public services more effective and efficient, thus reducing costs (Bannister & Connolly, 2014) and increasing transparency (Picazo-Vela et  al., 2012). E-government also leads to improvements in the level of ethical behaviour and professionalism of public

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service delivery, and the proper and efficient use of public funds, reducing the risk of corruption and abuse of the law by public officials, thus improving trust in government and confidence (Twizeyimana & Andersson, 2019). In other words, e-­government improves fairness, equality, impartiality, honesty, accountability, and professionalism (Bannister & Connolly, 2014; Rose et al., 2015) and reduces bribery and corruption by public officials (Elkhan et al., 2022). This is not least because e-government helps remove face-to-face interactions with public officials by embedding rules in the software, resulting in fairness, honesty, and impartiality. 2.3.2.2 E-government to Improve the Level of Development and State Intervention in Work and Welfare E-government also addresses the level of development and state intervention in work and welfare. The widespread consensus is that the technological modernisation of businesses increases productivity and promotes economic development and growth (Elbahnasawy, 2021; Niebel, 2018). This technological modernisation can be facilitated by public institutions concomitantly pursuing an e-government approach to reduce the costs of government bureaucracy for businesses by enabling them to conduct their interactions with government more easily, quickly, and at lower cost. This means efficiency and savings for not only businesses but also governments from simplification and reduction in bureaucracy to make public administrations and government structures and processes more effective (Chandrasiri & Gunatilaka, 2021; Galazka, 2021; Faik et al., 2019; Šiugždinienė et al., 2019). A multitude of evidence-based studies cited earlier reveal that engagement in the informal economy is lower when there is increased healthcare expenditure; greater social expenditure as a percentage of GDP; increased expenditure on active labour market policy interventions targeting vulnerable groups (i.e., active labour market policies); social transfers that are effective in reducing poverty; increasing the expense of government as a share of GDP; higher taxes; and higher levels of tax on revenue as a percentage of GDP.  Although the macro-level policy initiatives are wider policy measures not directly associated with e-government, e-government is indirectly associated in that e-services can facilitate the more effective delivery of these public services. In this sense, e-government addresses, albeit indirectly, more effective and efficient state interventions in work and welfare provision that are determinants of the level of the informal economy. 2.3.2.3 E-government to Improve the Power of Formal Institutions An e-government approach directly addresses the lack of power of formal institutions which results in engagement in the informal economy. As Elbahnasawy (2021: 3) states, e-government “applications … have the ability to alter the relative costs and benefits of agents’ decisions” regarding their participation in the informal economy. Indeed, e-government is central and essential to improving the power of public

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authorities to deter engagement in the informal economy and provide incentives to make engagement in the formal economy easier and more beneficial, to change the cost/benefit ratio confronting businesses, employers, workers, and consumers. These e-tools used to increase the costs of engaging in the informal economy and to make engagement in the formal economy easier and more beneficial will be discussed in depth in Chap. 3. On the one hand, e-tools can be used by tax, social security, and labour authorities as well as wider government institutions, to enforce compliance. To achieve this, first, deterrence e-tools can be used to increase the real and/or expected costs of engaging in the informal economy. These either improve the risk of detection using data mining, smart identity cards, electronic complaint reporting tools, and certified cash registers or improve sanction systems using new sanction systems to facilitate formalisation made possible due to the existence of e-registers and online non-compliance lists. On the other hand, e-tools can be used to make formalisation easier and more beneficial. First, e-tools can be used to offer supply-side incentives for businesses and workers to formalise which include online e-registration of businesses and workers, e-services such as pre-filling tax returns, and online tax behaviour rating tools. Second, e-tools can offer demand-side incentives targeting purchasers to use formal goods and services. These include receipt lotteries, e-initiatives to incentivise electronic payments and deter and limit cash payments, and social label e-­initiatives to encourage the purchase of formal goods and services. Indeed, there is evidence that such e-tools are being widely adopted in enforcement authorities globally. Take, for example, their adoption in labour authorities. In 2015, the ILO conducted its first survey of the use of new technologies in labour authorities across the world (Galazka, 2015), with responses from 101 labour administration institutions in 81 countries. The findings reveal the growth of ICT use, with 69% of respondents reporting a significant increase, and 27% some increase, in the ICT capacity of labour authorities, with 92% of all respondents recognising the benefits of ICT in supporting more effective working practices in their labour authority. Some 56% had computerised inspection management systems, 46% digitalised complaint reporting procedures, 45% digitalised inspection procedures, and 44% online profiles of establishments to be inspected. Some 65% reported improvements in horizontal communication between labour inspectors and other authorities due to ICT developments, whilst 72% reported that ICT usage had improved vertical communication between officials at different levels of the labour authority. For half, it had led to improvements in productivity of the labour authority, and 60% asserted that accountability had improved. However, ICT adoption was higher in developed than developing countries. At one extreme was Lao People’s Democratic Republic where the Ministry of Labour reported no institutional intranet or databases for information storage and processing and employees using their own laptops and mobile phones at work. At the other extreme was Estonia (Divald, 2021) where digital platforms and services are provided across the working processes of the labour inspectorate. In a further subsequent analysis of this 2015 survey, Galazka et al. (2020) construct a scale of “ICT-ness” to measure the use of new technologies in labour

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administrations in different countries, ranging from “0” (no computerisation) to “1” (complete computerisation). Saudi Arabia came top in the extent to which digital technologies were integrated into labour inspection, public employment services, and labour dispute prevention and resolution functions. The full range of e-tools that can be used by enforcement authorities, including labour authorities, to encourage the transition from the informal to formal economy will be addressed in depth in Chap. 3. 2.3.2.4 E-government and Uncertainty and Instability of Formal Institutions Concerns about the uncertainty and perceived instability of formal institutions are a direct consequence of constant alterations in the laws and regulations, including an uncertainty on tax, social security, and labour law liabilities. E-tools can indirectly reduce this uncertainty of businesses, employers, workers, and citizens, not least by making government more open and transparent. This can occur where e-tools improve open government and increase transparency of public sector operations (Karkin & Janssen, 2014), public engagement and information (Karkin & Janssen, 2014; Scott et al., 2016), and communication and direct involvement in decision-­ making (Karunasena et al., 2011; Scott et al., 2016). 2.3.2.5 E-Government and Trust in Public Institutions (Vertical Trust) Participation in the informal economy occurs when there is asymmetry between the formal and informal rules, which is determined by a lack of vertical trust. To reduce this asymmetry, either the formal institutions can be changed by modernising them or social norms can be changed to adhere to the formal rules through education and awareness raising. E-tools can directly achieve this. Indeed, a strong positive correlation has been identified between greater e-­government service use and higher levels of trust in government, and those satisfied with e-services are more trusting of government (Gracia & Ariño, 2015; Janssen et al., 2018). As such, online interaction increases process-based trust in government, although the quality of e-services provided is important. If they are perceived as high quality by customers, trust in government is improved. Conversely, if perceived as poor quality, trust in government is reduced (Gracia & Ariño, 2015; Janssen et al., 2018). This is not least because e-services make public authorities more customer-friendly and easily approachable and enhance perceptions of procedural and redistributive justice and fairness. In a survey of 1200 government officials from over 70 countries, 78% of respondents indicate that digital capabilities have enabled public officials to be more responsive to citizens’ needs and foster trust in government and public services (Jeppesen et al., 2020). E-tools can also be used to engage in education and awareness raising about the benefits of participating in the formal economy and costs of participating in the

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informal economy. E-initiatives to achieve this can include smart cards and apps to inform workers of their rights, the use of Facebook messenger to provide advice and support, apps to allow citizens to evaluate the impact of their participation in the informal economy, and an array of online videos, virtual reality films, and interactive games and quizzes to inform either suppliers or purchasers of the benefits of formality or costs of informality. These will be all reviewed in more detail in Chap. 3. 2.3.2.6 E-Government and Interpersonal Trust (Horizontal Trust) There is growing evidence that if businesses, employers, workers, and citizens believe that their peers operate in the informal economy, they will do likewise. E-government can indirectly influence this determinant of participation in the informal economy. Not only can open data be provided on the level of compliance of others by enforcement authorities, but also tailored messaging produced targeted at businesses, employers, workers, and citizens about the high levels of compliance in their area, sector, occupation, and so forth. This will encourage stakeholders to comply themselves if they believe that their peers are also compliant. In sum, an e-government approach addresses some determinants of participation in the informal economy directly and other determinants indirectly. It directly addresses the modernisation of formal institutions and levels of public sector corruption and the lack of power of formal institutions, as well as trust in government, and is a central component of a policy approach to address these formal institutional failures. Meanwhile, it more indirectly addresses the level of development and improving state intervention in work and welfare provision by improving the efficiency and effectiveness of government and public policy, the instability and uncertainty of formal institutions, and lack of horizontal trust. Having identified how this e-government approach addresses the determinants of the informal economy, the next question which needs to be answered is whether there is indeed a significant association between the implementation of e-­government and the level of participation in the informal economy. It is to this that attention now turns.

2.4 Relationship Between E-government and the Informal Economy For an e-government approach towards formalising the informal economy to be adopted by governments, evidence is required of a positive relationship. This section reports the small number of studies evaluating the association between the level of e-government and level of participation in the informal economy. As with all statistical associations, a caveat is required. Correlation does not necessarily imply

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causation. However, as Chap. 3 will display, there are rationales for assuming that in lived practice specific e-tools do directly lead to a formalisation of the informal economy. To evaluate this association, first, this section provides a review of the various indices that provide cross-national comparative data on the level of adoption of e-government. Secondly, the data available on cross-national variations in the magnitude of the informal economy is outlined and third and finally, the findings of studies evaluating the association between cross-national variations in the level of e-government and cross-national variations in the magnitude of the informal economy.

2.4.1 Measuring E-government Adoption Various indices exist measuring cross-national variations in the level of adoption of e-government. The main ones are the Organisation of Cooperation and Development (OECD), Digital Government Index (DGI) (OECD, 2020), the United Nations E-Government Development Index (EGDI) (UNDESA, 2020), and the Digital Economy and Society Index (DESI) in the European Union. Here, each is briefly reviewed in turn. 2.4.1.1 OECD Digital Government Index (DGI) The OECD Digital Government Index (DGI) has six main dimensions characterising a fully digital government and four transversal facets. The six main dimensions are: • Digital by design  – whether a government uses digital technologies from the outset to change and simplify public sector processes and procedures and create new channels of communication and engagement with stakeholders. • Data-driven public sector – extent to which a government generates public value through the reuse of data in planning, delivering, and monitoring public policies and adopts ethical principles for trustworthy and safe reuse of data. • Government as a platform  – extent to which government provides clear and transparent sources of guidelines, tools, data, and software that equip teams to deliver user-driven, consistent, integrated, and cross-sectoral service delivery standards. • Open by default – extent to which data, information, systems, and processes are open unless there is a compelling reason for them not to be. • User-driven – extent to which a government places customers’ needs at the centre of the shaping of processes, services, and policies. • Proactiveness  – extent to which a government anticipates people’s needs and rapidly responds so they do not even notice services are delivered. It aims to provide seamless and convenient service delivery.

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The four transversal facets, which provide a deeper evaluation of policies’ strengths and challenges across countries, are: • Strategic approach – extent to which governments set a clear vision, objectives, goals, and action in digital policy areas and whether these are reflected in national digital government strategies (NDGS) or linked documents such as public sector data and open data policies, digital skills, and development strategies. • Policy levers – the specific tools governments use to enable system-wide change and connect coherently countries’ other strategies with its e-government policies. • Implementation – capacity of governments to transform policy goals and strategies into effective and concrete initiatives. • Monitoring – extent to which evaluate the development, implementation, and/or impact of digital government policies. Using this OECD Digital Government Index (DGI) to examine the extent to which countries are transitioning towards an integrated and coherent development of digital government, the finding is that there is overall modest progress towards digital government, but limited efforts have been made to fully unlock the benefits of their user-driven and data-driven public sectors. Korea, the United Kingdom, Colombia, Denmark, and Japan have shown the most consistent comprehensive effort to implement coherent digital government reforms with overall high performance on all six dimensions (OECD, 2020). 2.4.1.2 United Nations E-Government Development Index (EGDI) The United Nations Department of Economic and Social Affairs (UNDESA, 2020) monitors progress in e-government through periodical surveys using its E-Government Development Index (EGDI). This measures e-government performance of countries relative to one another, as opposed to being an absolute measurement. It comprises three equally weighted sub-indices which analyse the following e-government dimensions: • Status of the development of telecommunication infrastructure (telecommunication infrastructure index) • Scope and quality of online services (online service index) • Inherent human capital (human capital index) A biannual survey comparatively ranks 193 countries. These biannual surveys conducted since 2001 reveal that e-government is rapidly growing around the world, with the global average EGDI value increasing from 0.55 in 2018 to 0.60 in 2020. Globally, 65% of United Nations member states in 2020 belonged to the high or very high EGDI group (above 0.50), and 22% of countries moved to a higher EGDI group between 2018 and 2020. Indeed, all five global regions improved their average EGDI values between 2018 and 2020. Europe remains the leader, followed by Asia, the Americas, Oceania, and Africa. Despite Africa scoring lowest, only 7 of its 54 countries are in the lowest EGDI group. The top overall country performers with the highest EGDI values

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include Denmark, the Republic of Korea, Estonia, Finland, Australia, Sweden, the United Kingdom, New Zealand, the United States, the Netherlands, Singapore, Iceland, Norway, and Japan. However, as Chacaltana et al. (2018) note about earlier surveys, progress on e-government is not necessarily correlated with the level of development of countries. Important determinants are political will, strategic leadership, and a commitment to expanding digital service provision (as measured by the online service index). These surveys reveal that the most common digital services offered worldwide are e-registration for new businesses, e-application for business licences, birth certificates, and the ability to pay electronically for public utilities. 2.4.1.3 Digital Economy and Society Index (DESI) The Digital Economy and Society Index (DESI) has been developed to measure progress in the adoption of digital technologies across the European Union (European Commission, 2020). The DESI is calculated as the weighted average of five main dimensions: connectivity (25%); human capital (25%); use of Internet (15%); integration of digital technology (20%); and digital public services (15%). A score from 0 minimum to 100 maximum is allocated. Examining digital public services, and thus the level of e-government, the DESI examines five indicators: • E-government users – people who sent filled-out forms to public authorities, over the Internet, previous 12 months. • Pre-filled forms – amount of data that is pre-filled in public services’ online forms. • Online service completion – the share of administrative steps related to major life events (birth of a child, new residence, etc.) that can be done online. • Digital public services for businesses – share of public services needed for starting a business and for conducting regular business operations available online for domestic and foreign users. Services provided through a portal receive a higher score, services which provide only information (but must be completed offline) receive a more limited score. • Open data – this composite indicator measures to what extent countries have an open data policy in place; the estimated political, social, and economic impact of open data; and the characteristics (functionalities, data availability, and usage) of the national data portals. The finding, akin to the above global indices, is that there is continuing progress over time towards a greater level of e-government across the European Union.

2.4.2 Measuring Participation in the Informal Economy To evaluate cross-national variations in the magnitude of the informal economy, several datasets are available, namely, the World Bank Enterprise Surveys (WBES), the ILO surveys, the Multiple Indicators Multiple Causes (MIMIC) measurements

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(Medina & Schneider, 2018), and, at the European level, the Labour Input Method (LIM) (Williams et al., 2017; Franić et al., 2022). Here, each is considered in turn. The WBES covers 151 countries and has collected data from 2002 to 2021, with a harmonised questionnaire and common methodology used since 2006 of non-­ agricultural formal private sector businesses with five or more employees. It uses four indicators to assess the prevalence of the informal economy, namely, the percentage of firms competing against unregistered or informal firms, the percentage of firms identifying practices of competitors in the informal sector as a major constraint, the percentage of firms formally registered when they started operations, and the number of years these informal firms operated without formal registration. The ILO harmonised data uses national labour force surveys or similar national household surveys, across 112 countries representing 90% of the global workforce (ILO, 2018). In this harmonised survey covering the majority of the world’s workforce, a respondent is classified as engaging in informal employment only if it is their main job. A respondent is not classified as engaged in informal employment if they engage in a second job in the informal economy. This means that these data doubtlessly underestimate both the prevalence of the informal economy and intensity of informality globally. Its headline finding is that 61.2% of the total global workforce are in informal employment as their main job, which equates to some two billion of the world’s employed population aged 15 and older. There are also cross-national estimates based not on direct surveys but indirect measurement measures. The first indirect measurement method is the multiple indicators multiple causes (MIMIC) method using proxy indicators to estimate the size of the informal economy (Medina & Schneider, 2018). The second indirect measurement method is the labour input method (LIM) which looks at the variation in data on supply and demand sides using business surveys and labour force surveys to estimate the size of the informal economy. This method has so far analysed data on cross-national variations in the size of the informal economy across EU member states in 2013 and 2019 (Williams et al., 2017; Franić et al., 2022).

2.4.3 Evaluating the Relationship Between E-government and the Informal Economy A small but growing literature has in recent years drawn attention to the idea that pursuing e-government might facilitate formalisation (Bayar, 2016; Chacaltana et al., 2018, 2022; Elbahnasawy, 2021; Goel & Saunoris, 2016; Hendriyetty et al., 2023; Remeikiene & Gaspareniene, 2016; Son et  al., 2017; Uyar et  al., 2021; Veiga & Rohman, 2017; Zait & Horodnic, 2021). To evaluate whether this is the case, ten studies have so far evaluated whether there is a statistically significant correlation between cross-national variations in the level of e-government and cross-national variations in the magnitude of the informal economy. These have usually used one of the above discussed datasets on the uptake of e-government and the magnitude of the informal economy. Here, the results are reviewed along with some fresh new evidence.

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A first study by Chacaltana et al. (2018) compares the ILO harmonised dataset on the informal economy with the United Nations EGDI. A negative correlation is revealed between informality rates and EGDI scores, as well as the EGDI sub-index scores. Countries with high EGDI scores have lower rates of informality. In 2016, the average EGDI score in countries with low informality rates was double than the countries with high informality rates. Controlling for GDP per capita, the results confirm a significant negative correlation between informality rates and the level of adoption of e-government. A second study by Elbahnasawy (2021) compares the indirect measures of the size of the informal economy generated by the MIMIC method (Medina & Schneider, 2018) with the United Nations EGDI. The finding is a strong significant association robust to different estimation techniques, subsamples of developing countries, and a wide array of controls and alternative measures. An increase in the EGDI by 0.1 points (a 10% increase) is associated with a 1.4–2% reduction in the size of the informal economy depending on the model and an average decrease of 1.6% across all models. However, this study calls for care in assuming that e-­government always causes this reduction. Panel Granger causality tests reveal that causality can operate in both directions. The finding is that although past e-­government adoption lessens the current size of the informal economy, countries with previously larger informal economies find that this impedes e-government adoption. The lesson is that e-government adoption is not a short-term initiative. Its impact on preventing engagement in the informal economy is more powerful in the longer run than in the short term. A third study of the relationship between cross-national variations in e-­government and participation in the informal economy by Uyar et al. (2021) again uses MIMIC estimates, whilst for e-government, there is no awareness of the abovementioned indices and instead indicators are used from the Global Competitiveness Survey (WEF, 2020). This simply assesses the use of online services to facilitate the provision of information by governments to citizens on a scale from 0 to 100 (best). It finds a significant association between the provision of online public services and the size of the informal economy. The greater the provision of online public services, the lower is the participation in the informal economy. Reflecting the importance of the formal institutional failing related to the modernisation of bureaucracies and public sector corruption, a further finding is that the digitalisation of government services has a stronger effect on reducing the informal economy in more modernised societies where ICT adoption is higher and in countries where there is less public sector corruption. A fourth study by the same authors but in a different author order (Nimer et al., 2022) uses the same MIMIC estimates and indicators of e-government from the Global Competitiveness Survey (WEF, 2020) but covers the period 2006–2017 and whether education quality and Internet connection in schools strengthens the relationship between e-government services and the informal economy. Using time fixed-effects panel data analysis, they again find that greater levels of e-participation are significantly associated with smaller informal economies. Moreover, higher

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education quality further reinforces the significant negative correlation between e-government and informality, as does Internet connection in schools. A fifth study uses MIMIC estimates of the informal economy from 147 countries between 2003 and 2013 and EGDI scores (Veiga & Rohman, 2017). The finding is that increasing EGDI scores significantly reduces the size of the informal economy and that the marginal impact is greater in developed and higher-income countries. They find that a critical mass of e-government infrastructure is required before countries benefit significantly from e-government. Unless a country has achieved at least 26% fixed broadband subscribers and 70% Internet users, a significant effect of e-government development on the informal economy is not witnessed. A sixth study by Boitan and Ștefoni (2022) examine the European Union between 2013 and 2020 using again MIMIC estimates of the size of the informal economy (Medina & Schneider, 2018) and a basket of e-government indicators published by the European Commission, the IMD World Competitiveness Center, and the World Intellectual Property Organisation (WIPO). The usage of digital technologies is evaluated using two indicators: (i) Internet use by individuals and (ii) enterprises’ turnover generated by relying on e-commerce, and the quality of digital technologies is examined using (i) the Digital Competitiveness Index; (ii) the high-speed Internet coverage index, and (iii) the Information and Communication Technologies sub-index (as a component of the Global Innovation Index). The finding is that greater adoption and use of digital technologies, and improvements in the quality of ICT technologies, leads to a lowering of the size of the informal economy. A seventh study by Remeikienė et al. (2021) uses the MIMIC method (Medina & Schneider, 2018) and two different proxies for the development of ICTs (namely, the number of mobile cellular subscriptions and percentage of individuals using the Internet) from World Bank data to examine the association in 11 EU transition countries over the 1996–2015 period using second-generation panel cointegration and causality tests regarding the cross-sectional dependence. They find a negative relationship between ICT and the size of the informal economy both in both short and long term, and it is ICT adoption that leads to a reduction in the size of the informal economy. However, the impact of ICT on the informal economy varies depending on the penetration rate of ICT and country-specific characteristics. An eighth study by Kelikume (2021) uses panel dataset from 42 African countries for the period 1995–2017 to reveal a beneficial and significant effect between mobile penetration and Internet usage and the size of the informal economy and level of poverty reduction in African countries. The study shows that mobile penetration and Internet usage have a significant positive relationship with the informal sector. A ninth study by Ndoya et al. (2022) examines a sample of 45 African countries for the period 2000–2017 comparing MIMIC estimates of the size of the informal economy with mobile cellular and Internet penetration from the World Development Indicators (WDI). The finding is that ICTs reduce the size of the informal sector in Africa and that financial development, control of corruption, and human capital are the main mediators of the relationship between ICTs and informal economy.

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A tenth and final previous study examines European Union member states and evaluates the association between the DESI and the two indirect measures of the size of the informal economy in EU member states, namely, the MIMIC and LIM estimates (Williams, 2021). The finding is that there is a significant association between the adoption of digital technologies, measured by the DESI, and the prevalence of the informal economy, whether measured using LIM or the MIMIC method. Countries with a low level of adoption of digital technologies, measured by the DESI, have significantly higher levels of informal work. To analyse the relationship between the components of the digital public service sub-index of DESI, and the prevalence of the informal economy, bivariate correlations using Spearman’s rank correlation coefficient are reported. Although there is a significant association between cross-country variations in the overall DESI and both measures of the prevalence of informality, there is only a significant association between the development of e-government and the size of informality when the MIMIC estimates are used. The greater the use of online public services, the lower is the size of the informal economy. Breaking down e-government into its component parts, there is no significant association between the proportion of e-government users and the extent of the pre-filling of forms and participation in informality (whichever measure of the informal economy is used). However, there is a significant association between online service completion and informality and digital public services for businesses and informality on both measures of informality. Care, however, is required in interpreting the results since other determinants of informality are not held constant in these simple bivariate correlations, such as GDP per capita and social protection expenditure. To complete this evaluation of the relationship between e-government and the informal economy, new research is here presented using the DESI to measure cross-­ national variations in e-government in European Union member states and two indirect measures of the size of the informal economy in EU member states, namely, new MIMIC estimates (Elgin et al., 2021) and LIM estimates for 2019 (Franić et al., 2022). Table 2.1 reports the bivariate correlations using Spearman’s rank correlation coefficient. The finding is that there is a significant association between the adoption of digital technologies, measured by the DESI, and the prevalence of the informal economy, whether measured using the LIM or the MIMIC method estimates. Countries with a low level of adoption of digital technologies, measured by the DESI, have significantly higher levels of informal work. This is also the case for the relationship between e-government, measured by the DESI digital public services index, and the prevalence of the informal economy, whether measured using the LIM or MIMIC methods. Countries with a lower level of adoption of e-government have larger informal economies. Analysing the relationship between the components of the DESI digital public services sub-index, and the prevalence of the informal economy, the finding is that there is a significant association between cross-country variations in e-government users, digital public services for citizens and digital public services for businesses, and the size of informality, whether either the LIM or MIMIC estimates are used.

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Table 2.1  Relationship between informal economy and digital public services: EU countries, Spearman correlations Informal economy LIM estimates (% of labour input), Digital agenda indicatorsa 2019b Digital Economy and Society −0.509*** Index (a) Digital public −0.380* services/e-government sub-index (a1) e-Government users −0.349* (a2) Pre-filled forms −0.068 (a3) Digital public services −0.382* for citizens (a4) Digital public services −0.332* for businesses (a5) Open data −0.241

Informal economy MIMIC estimates (% of GDP), 2018c −0.523*** −0.436** −0.460** −0.164 −0.406** −0.340* −0.101

Sources: ahttps://digital-­agenda-­data.eu/datasets/desi/indicators; bFranić et  al. (2022); cElgin et al. (2021) Notes: Significant at ***p