The size of the informal economy (IE), as a percentage of official GDP, is increased over the last thirty years with a huge heterogeneity across countries. The literature focusing on the main drivers of IE include some fiscal and economic aspects as well as institutional elements. Among them, the role of social progress has not been properly considered. Countries with higher social progress experience better and higher education, increased access to service, reduced rates of poverty. More importantly, social progress favours civil society organizations, also enhancing transparency and citizens' participation to the policy-decision making. Thus, it enables individuals to increase awareness about the repercussion of illegal activities and deter them from carrying out those activities that can hamper economic development. This poses the question of whether social progress can be considered as a strategic tool to reduce the size of informal economy. The aim of this project is investigating the role of social progress, which encompasses by definition both economic and cultural aspects, as a specific determinant of IE. Exploring this nexus is compelling as it may provide insights that are relevant from a policy perspective. An open challenge concerns the design of the "right" indicator for social progress. It seems to be an utopic goal requiring the joint contributions of social scientists from different disciplines, involving difficult ethical issues. In this project, we measure social progress by using the Human Development Index (HDI) provided by the United Nations. It allows a worldwide geographical coverage and a comprehensive well-being definition including income, health and education dimensions, which represent the key elements of social progress identified by the Sustainable Development Goals. This research emphasises the multidimensional nature of social progress by exploiting the informational power of the HDI and studying the impact of its components on IE.
Our research contributes to the existing literature in different ways providing new insights on the linkages between informal economy and social progress around the world. First, we propose an empirical study focusing on 156 countries, including developed and developing countries, transitional and emerging economies, observed over the last thirty years. Previous studies have employed smaller samples and shorter time span (e.g., Dell'Anno, 2010; Ruge, 2010; Kelmanson et al., 2019). Moreover, as the size of IE can be considerable at different levels of social progress, we test the possible existence of a non-linear relationship between social progress and informal economy. That is for countries at high level of social progress, a further increase in social progress might not be reflected in a reduced size of IE. Thus, once a threshold of social progress is reached, we could observe an increase or, at most, a brake for the IE. For instance, in more advanced societies in terms of standards of living and education levels, individuals value more the time they can spend for the activity that they like. In this context, more individuals would be attempted to look for some informal jobs to gain more work flexibility or to reach a better life-work balance.
Another contribution of our research deals with the multidimensional nature of social progress. We account for it by exploiting the informational power of the HDI and studying the impact of its components on IE. The HDI regularly published by UNDP (since 1990) is probably the most successful indicator used as a proxy of social progress. The HDI is a multidimensional indicator that measures the countries' degree of human development along different lines. Based on the Sen (1985) idea of functionings and capabilities, the HDI expresses both the process of widening people's choices and the level of their achieved well-being. Actually, other indexes have been produced following the spirit of the HDI but they are less parsimonious and are characterized either by a narrow geographic or by a shorter time coverage or by both. Examples are: the Index of Economic Well-Being developed only for 7 countries for the period spanning from 1980 to 1999; the Sustainability Society Index covering 151 countries, but available only from 2006; the Better Life Index only covering OECD countries and available from 2011; the Social Progress Index covering 149 countries but available only from 2014; the Happy Planet Index covering about 140 countries but available only from 2006. In sum, several indicators can be constructed to measure social progress; the preferred approach will depend on both the research question to be addressed and the underlying framework, including the sample characteristics for the empirical analyses. Among the measures proposed and already used by the literature, we choose the HDI since, for the reasons depicted above, it is the index that best proxies social progress for the perspective of analysis adopted in this project. In this framework, we also analyse the effect of each HDI component, i.e. health, education, and income, on the size of IE.
As a third contribution, we try to shed some light on more homogenous groups of countries in order to increase cross-country comparability and explore, at the same time, whether any differences in the investigated relationship arise between such groups. Indeed, it is wide acknowledged that although social progress has increased in the last decades across countries, it is still quite unequal around the world (UNDP 2019). The institutions that contribute to shape its evolution vary considerably from region to region in the world. In this fashion, the role of social progress in shrinking the size of informal economic activities can be mitigated by a variety of cultural characteristics of a given region.