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Alvarez Villa, Daphne (December 2018): Explaining Informality: Extractive States and the Persistent Incentives for Being Lawless. Discussion Papers in Economics 2018
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Abstract

This paper explains informality not as a recent feature of developing countries, but as an underlying historical cause of underdevelopment today. I argue that colonial extractive states not only caused underdevelopment through persistent bad institutions for property rights protection, but also through persistent incentives to enforce property rights out of the law; i.e., through a persistent gap between de jure and de facto institutions. I present historical accounts of the emergence of an informal sector in the colonial period considering Antioquia, a large gold producer region under Spanish rule. I provide empirical evidence of a signiffcant persistent link between this colonial informal sector and current informality outcomes within Antioquia; for this purpose, I use the fact that colonial informal miners only extracted gold from rivers and not from mountains. This paper further shows that this persistence is not explained by constant geographical conditions, availability of resources, nor by differences in other development outcomes. I propose social capital as a channel to understand long-term path dependence and provide a theoretical model.