THE "strikingly large" percentage of workers and firms operating informally in Emerging Market and Developing Economies (EMDEs) will likely hold back their recovery unless governments adopt a comprehensive set of policies to address the drawbacks of the informal sector, a new World Bank Group study released on Tuesday said.

The first comprehensive World Bank analysis examining the extent of informality and its implications for an economic recovery, finds the informal sector accounts for more than 70 per cent of total employment and nearly one-third of the Gross Domestic Product (GDP) in EMDEs.

"That scale diminishes these countries’ ability to mobilise the fiscal resources needed to bolster the economy in a crisis, to conduct effective macroeconomic policies, and to build human capital for long-term development," said the multilateral body.

In economies with widespread informality, government resources to combat deep recessions and to support subsequent recovery are more limited as official revenue channels totaled about 20 per cent of GDP – 5-12 percentage points below the level in other EMDEs.

Government expenditures also were lower by as much as 10 per cent of GDP. Similarly, central banks’ ability to support economies is constrained by the underdeveloped financial systems associated with widespread informality.

"Informal workers are predominantly women and young people who lack skills. Amid the COVID-19 crisis, they are often left behind, with little recourse to social safety nets when they lose their jobs or suffer severe income losses," said Ms Mari Pangestu, World Bank Managing Director for Development Policy and Partnerships.

High informality undermines policy efforts to slow down the spread of COVID-19 and boost economic growth. It also generally means weaker development outcomes. Countries with larger informal sectors have lower per-capita incomes, greater poverty, greater income inequality, less developed financial markets, and weaker investment and are farther away from achieving the goals of sustainable development.

The study shows that while it remains prevalent, informality has been on a declining trend for three decades before the COVID-19 pandemic. Between 1990 and 2018, on average, informality fell by about 7 percentage points of GDP to 32 per cent.

Informality in EMDEs varies widely across regions and countries — as a percentage of GDP, it is highest in Sub-Saharan Africa, at 36 per cent. It is lowest in the Middle East and North Africa, at 22 per cent. In South Asia and Sub-Saharan Africa, pervasive informality is largely the result of low human capital and large agricultural sectors.

In Europe and Central Asia, Latin America and the Caribbean, and the Middle East and North Africa, heavy regulatory and tax burdens and weak institutions have been important factors in driving informality.