Start
August 2, 2024 - 3:30 pm
End
August 2, 2024 - 5:00 pm
Topic: Informal economies in transition and public debt dynamics
Presenter: Mr. Nandu Sasidharan Nair, PhD Scholar in Economics Tuscany Universities PhD at the University of Florence, Pisa and Siena
Abstract:
This paper develops a macro-dynamic model to study the relationship between public debt and informality in developing economies undergoing structural transformation. Building on a structuralist framework, I innovate by treating the probability of workers being formal or informal using discrete choice theory. Diverging from traditional narratives of economic development, the formal sector is treated as a combination of manufacturing and business activities, while informality corresponds to a low productivity non business sector. Numerical experiments using BRICS data show a direct and stable relationship between public debt levels and formality for economies such as Russia, India and China. When the rate of growth of capital stock (g) is greater than the interest rate on public bonds (i), the equilibrium is stable but formalisation implies higher debt. A negative relationship between debt and formality requires i > g, but in that case, the economy is unstable. These results imply that government consumption choices can influence fiscal spending composition facilitating transition process.
Keywords: Informal sector, structural change, dual economy, public debt, fiscal policy