In the Shadows? Informal Enterprise in Non-Democracies

Abstract 

Why do regimes allow some low-income business owners to avoid taxes by operating informally? Electoral incentives are central to prevailing explanations of governments’ forbearance of informal enterprise. Yet many unelected regimes host large informal economies. This article examines forbearance in non-democracies. We argue that unelected regimes forbear their supporters’ informal businesses. We test this argument in Jordan. Using survey data of over 3,800 micro and small enterprises (MSEs), we find that informal businesses are more likely to operate in districts with higher rates of public sector employment, the crown jewel of the Jordanian regime’s patronage. Interviews with over sixty of the surveyed firm owners across four strategically paired districts illustrate that business owners covet forbearance, and that kinship ties to public sector employees limit forbearance to regime supporters. Communities that attract higher rates of public sector employment forfeit higher levels of fiscal revenue by permitting informality. This complementarity between public sector employment and forbearance amplifies inequalities between regime supporters and opponents in non-democracies.