How Economic Informality Constrains Demand for Programmatic Policy

The forthcoming article “How Economic Informality Constrains Demand for Programmatic Policy” by Jessica Gottlieb is summarized by the author below.

Consider two middle-class individuals who make similar income. One is self-employed and doesn’t have a formal tax ID.  The IRS finds them from time to time and asks for income tax payment. The other works in a company and has income tax deducted monthly from their paycheck. The self-employed person mostly works alone and when they have problems with their business, they don’t have anyone to commiserate with. The employee works with colleagues who regularly talk about problems with their job – pay, taxes, benefits, etc.  

Even though they make similar amounts of income and may even face similar financial challenges, I argue that these two individuals should have very different expectations of and demands on the state. Relative to the company employee, the self-employed individual who pays tax irregularly is less likely to think other people pay tax and views the state as having lower overall revenue and capacity to implement programs. They are also less likely to coordinate demands on the state with others like them. 

In the developing world, most democracies are still clientelistic in nature – voters and politicians trade electoral support for targeted benefits. Most older democracies also started this way but eventually transition to a more programmatic form of politics where parties campaign on policies that apply more universally, not just to those who vote for the incumbent. Because most people in the developing world work in the informal economy, my argument helps explain why clientelism is so stable. Those in the informal sector are unlikely to expect the state can implement programmatic policy, and to coordinate with others to make such demands. 

The article uses data from Senegal to test this theory. I surveyed middle-class individuals in the informal sector and in the formal sector. Compared to the formal sector, informal business owners pay tax in a much more irregular way. But even within the informal sector, tax payment varies – both how often and to whom tax is paid. Both within and across sectors, greater informality of tax payment is associated with weaker perceptions of tax compliance, lower expectations of government, and weaker coordination capacity. Using data from a recent election that pitted one programmatic party against a highly particularistic incumbent, I also find that informality is associated with weaker support for the programmatic party.  

This argument and evidence highlight the role of beliefs about the tax-paying behavior and subsequent political expectations of other citizens. Uncertainty around how others experience the state contributes to the coordination problem faced by voters who may prefer to hold their politicians accountable for programmatic policies but cannot coordinate on such demands. The article uniquely reveals the role of the informal sector in propagating state weakness – both through its effect on muting citizen demands and coordinating capacity, and potentially through the resulting incentives this provides politicians to maintain high levels of informality. This latter implication should give pause to external actors attempting to boost the level of economic formalization in developing country contexts without sufficient consideration of the strategic incentives of elites and politicians. 

About the Author: Jessica Gottlieb is an Associate Professor at the Hobby School of Public Affairs at the University of Houston. Their research “How Economic Informality Constrains Demand for Programmatic Policy” is now available in Early View and will appear in a forthcoming issue of the American Journal of Political Science.