ESTIMATING THE SIZE OF THE INFORMAL ECONOMY IN BARBADOS

In Barbados, and the Caribbean as a whole, very little research has been done on the topic of the informal economy. This paper estimates the size of the Barbadian informal sector for the period 1972-2007. In light of our analysis of the stationary properties of the data, which suggests a mixture of I(0) and I(1) variables, this study specifies an unrestricted error correction model and employs a general-to-specific (GETs) modelling procedure, allowing us to minimise the possibility of estimating spurious relations while retaining the long-run information. Our estimates indicate that this sector is quite large and has grown over time to about one-third the size of the official economy. These results are consistent with the stylised fact about the Barbadian economy, in particular the large number of persons employed in small businesses and trading as well as the number of tax returns filed on an annual basis versus the stated level of employment. The finding of a significant informal sector also has implications for the conduct of both monetary and fiscal policy. At the minimum it means that possible spillover effects between the two sectors must be taken into consideration in the design and execution of policies.