Nandu Sasidharan
University of Siena
Abstract
This paper presents a behavioural macro-dynamic model to study the relationship between informality, structural change, and public debt. Building on a structuralist framework, I innovate by using discrete choice theory to address the probability of workers being formal or informal. The formal sector combines manufacturing and business activities, while informality refers to the non-business low-productivity sector. It is shown analytically
and through numerical simulations that when capital accumulation (g) is greater than interest rates (i), the unique equilibrium point is stable and formalisation implies higher debt. Reducing informality and public debt is possible only when i < g. However, in this case, the equilibrium becomes unstable as the economy becomes prone to debt spirals.
Numerical experiments using BRICS data show Russia, India, and China belong to the first case, while Brazil and South Africa might correspond to the second. Introducing a production “chain effect” makes the model compatible with multiple equilibria. A closer look at India suggests it is in a low-debt, high-informality trap. Overcoming this requires careful consideration of government consumption composition between sectors and realising
that a more formal economy requires accommodating higher public debt.
Keywords
Structural change; Dual economies; Informality; Public debt; Fiscal policy
Jel Code
O11, 017,E62, 041, E6
