On finding the right bundles: social policy, growth, and equal development: an interview with Santiago Levy.

• Author: Calderon, Ania
• Position: Interview

The existence of high levels of informal labor in an economy is considered a barrier to sustained economic growth. However, this issue has not received sufficient attention by governments in Latin America. In this context, oftentimes policies intended to promote economic growth have produced unintended consequences. Santiago Levy, economist and vice president for Sectors and Knowledge of the Inter-American Development Bank, helps debunk misconceptions around the behavior of informality and its association with poverty in developing countries, while explaining how formal labor can result in larger productivity gains. Furthermore, Levy outlines a few necessary conditions for growth to lead toward equal development and emphasizes that policies to reduce inequality must be clearly distinguished from policies that reduce poverty. In an interview with the Journal's Ania Calderon, Levy calls for a combination of higher quality development policies and social programs with the right incentives.

Journal of International Affairs: In Good Intentions, Bad Outcomes: Social Policy, Informality and Economic Growth in Mexico, you talk about a dichotomy between the formal and informal sector in the labor market. What are the misconceptions regarding informality and would you say that this is an endemic characteristic in Latin America?

Santiago Levy: Informality is an endemic characteristic of economies in Latin America although it is not unique to the region. There are many other regions in the world, particularly Africa, that are also characterized by having a formal sector coexisting with an informal sector. Latin America does stand out as having a very segmented labor market, with some workers being formal and some informal. However, there are many misconceptions, but perhaps I should just mention two. One is that people think that informal workers are equivalent to poor workers, which is wrong. If you look at the distribution of wages for informal-sector workers and formal-sector workers, they overlap. There are some informal workers that earn more than formal workers, so not all poor workers are informal, and not all informal workers are poor. Informality is a different phenomenon than poverty, and that is a very important misconception that should be cleared up.

A second misconception is that there is one set of workers for the informal sector and a separate set of workers for the formal sector. That is, if Juan is informal, he is informal all his life, and, if Pedro is formal, he is formal all his life. The data is not consistent with that view. Evidence shows that many workers have spells of both formality and informality during their lifetime. Sometimes they are in the formal sector--they have a formal job, social security coverage, health insurance, and save for a pension--and sometimes they go into the informal sector. There is a lot of transit between both sectors. So, rather than speaking of formal workers and informal workers in many countries in Latin America, it is better to speak of workers who are in formal employment and in informal employment. These two misconceptions tell you that the informal sector is very complex in the region; it should not be confused with poverty, and it should not be assumed that there are barriers to entry between one and the other.

Journal: You have mentioned that informal employment can be efficient but also mentioned that informality is bad for both growth and workers. When is the informal sector beneficial and when do you think that a transition from informal to formal labor is a necessary condition in the path towards development?

Levy: One has to be careful with the definition of informality, and part of the confusion is that different...