Understanding the Determinants of Economic Informality in Paraguay A Kaleidoscope of Measures Michael J Pisani Fernando G Ovando Rivarola Understanding the Determinants of Economic Informality in Paraguay Michael J. Pisani • Fernando G. Ovando Rivarola Understanding the Determinants of Economic Informality in Paraguay A Kaleidoscope of Measures Michael J. Pisani Department of Management Central Michigan University Mount Pleasant, MI, USA Fernando G. Ovando Rivarola Centro de Análisis y Difusión de la Economía Paraguaya Asunción, Paraguay ISBN 978-3-030-24392-0 ISBN 978-3-030-24393-7 (eBook) https://doi.org/10.1007/978-3-030-24393-7 © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2019 This work is subject to copyright All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed The use of general descriptive names, registered names, trademarks, service marks, etc in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations This Palgrave Pivot imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland This book is dedicated to my wife Jana for her love and support through life’s journey together It is also dedicated to the Cáceres family (Asunción, Paraguay) for their friendship and kindness to a foreigner in their country —Michael J. Pisani A mis padres Elsa y Carlos por la paciencia y apoyo de siempre —Fernando G. Ovando Rivarola Preface Paraguay is a bastion of informality But few know this as Paraguay is often a bypassed and forgotten land-locked South American country Paraguay, in spite of its isolation and land-locked location, has achieved remarkable economic growth in the last few years Paraguay is poised to reap the benefits of its relatively small but very young and urbanizing population and its abundant natural resources amid a government institutional base that is quickly professionalizing Paraguay is a country on the move that others may seek to learn from Yet in Paraguay, not only are most workers actively engaged in the informal economy, but a majority of formal business concerns are quick to employ informal competitive methods Everywhere one turns, the informal economy is on display Whether tacit or explicit, informality connects nearly everybody in Paraguay Yet informality is woefully understudied in Paraguay Rare are informed reports or serious studies conducted on the topic; more common are speeches or editorials condemning informality without understanding the basic concepts or foundational evidence This book seeks to provide a strong empirical basis for understanding informality and its determinants in Paraguay This book began as a series of research projects seeking to elucidate the informal economy’s role in the formal business sector and to offer different methods of enumerating informality in Paraguay Quickly, the projects expanded and then consolidated into a book to more fully approach informality to fill a gap in knowledge that was empirically based, by utilizing more sophisticated and multivariate statistical tools vii viii PREFACE This book is a byproduct of a US Fulbright Scholar appointment to Paraguay during 2019 The Center for the Analysis and Diffusion of the Paraguayan Economy, CADEP (Centro de Análisis y Difusión de la Economía Paraguaya) served as the first author’s host institution in Paraguay for five months At CADEP, a partnership formed between the authors uniting a strong knowledge of informality from Mesoamerica with strong knowledge of Paraguayan data and local context Additionally, the first author taught a class on economic informality at La Universidad Católica de la Nuestra Sora de Asunción The interchange in the class added to the impetus and to the importance of a book on the subject for Paraguay Beyond CADEP and the classroom, the first author was invited by the Central Bank of Paraguay (Instituto Central del Banco de Paraguay) to speak on the informal economy in April of 2019 Nearly 100 government officials, functionaries, academics, and economists were in attendance and engaged vigorously in the topic confirming the continued importance of informality in and outside the government We hope that this book better informs policy-makers inside Paraguay to make decisions utilizing empiricism rather than conjecture We also hope academics and those interested in economic informality in the Americas and beyond find this work to be of value both as a case study and as a comparative tool to understand informality Mount Pleasant, MI, USA Asunción, Paraguay Michael J. Pisani Fernando G. Ovando Rivarola Acknowledgments Mike Pisani acknowledges the following supporters, institutions, and individuals This book would not have been possible without the support of the Fulbright US Scholar Program, the Council for International Exchange of Scholars (CIES), and the US embassies in Nicaragua and Paraguay My original 2018–2019 Fulbright award was to Nicaragua, but my location was changed due to the civil unrest in Nicaragua in 2018 During my Fulbright orientation in Austin in the summer of 2018, I was directed to explore either Panama or Paraguay as alternative sites Quickly, Paraguay became Plan B thanks to the support of Fulbright alums Dr Karen Andes of Emory University and David González of Paraguay David connected me to several groups in Paraguay, chief among them was Centro de Análisis y Difusión de la Economía Paraguaya (CADEP) At CADEP, Belén Servín and Fernando Masi graciously agreed to host me while I was in Paraguay Fernando Masi happily translated two early reports related to informality Fernando Ovando quickly became the go-to person for all things related to the EPH (encuesta permanente de hogares) and data sources at CADEP. Fernando Ovando cheerfully agreed to co- author this book and without him, this book would never have been written He is more than a co-author; he is a friend and colleague Other members of CADEP that assisted me during my time in Paraguay include Dr Dionisio Borda, Renatta Samaniego, Belén Servín, Rosita Cete, Julio Ramírez, Christopher Valiente, Ariel Cáceres, Gloria Correa, María Cristina Notario, David Borda, and Brenda Colffer Special thanks go to mi amigo Gustavo Rojas, my good friend and lunch buddy at CADEP ix x ACKNOWLEDGMENTS Helpful in the Fulbright application process, orientation, and country placement are CIES personnel Peter Raucci, Maya Andelson, and Angelica Serna Special thanks go to Angelica Serna as it was under her watch that the switch from Nicaragua to Paraguay was made and she was extremely helpful in the transition Most helpful at the US Embassy in Asunción, Paraguay are Jazmín Ramírez and Daniel Getahun from the Public and Cultural Affairs sections Jazmín Ramírez was always attentive to my many questions At La Universidad Católica, Dr Emilio Trepowski put me in contact with the economics club Two student members of the club, Max Rieder and Alcides Cáceres, took me under their wings and administered our economic informality course with passion, compassion, and perfection Both are friends and mean more to me than they can know I thank the 30 plus members of the class as a whole for robust discussions and their diligence in working on their course projects María Elena González and Sebastián Acha, the two members of Pro Desarrollo, shared with me their interest in the informal economy Jonas Richter from the World Bank in Paraguay shared with my class his work with firm formalization in Paraguay, and with me his master’s thesis on the same topic My home institution, Central Michigan University (CMU), was also instrumental in making my stay in Paraguay possible Past College of Business Administration Dean Chuck Crespy permitted me to adjust my teaching schedule to be in Paraguay during the spring 2019 semester Interim Dean Karl Smart actively supported my Fulbright award as did my department chair, Dr Luis Perez-Batres, and Provost, Michael Gealt Professor Emeritus Van Miller, dear friend, scholar, and mentor encouraged me all the way Special thanks go to Dr John Sargent, University of Texas Rio Grande Valley, who mentored me through my doctoral studies and wrote a letter in support of my Fulbright application In Paraguay, the Alcides Cáceres family took me in as one of their own and showed me what it means to be Paraguayan Their friendship and support showed me the meaning of family, love, and generosity Thank you does not them justice, but thank you to Alcides (dad), Vivi (−ana), Alcides (ito), Noelia, Chini (abuelita), Rosa (tía), Sara (tía), Cristi (tía), José (tío), and Víctor (tío) May good blessings follow you all always My wife Jana sacrificed much for me to be in Paraguay Jana is my life partner in all ways and experienced a bit of Paraguay to boot Our children (William, Carina, and Geoffrey) are not children anymore, we are so proud of all their accomplishments, but more proud of the fine people they have ACKNOWLEDGMENTS xi become (that includes you too, Leila) A special shout out to Geoffrey who came to Paraguay to share time with his dad… we had an awesome time I wish to express my gratitude to Palgrave Macmillan for the foresight to publish academic scholarship innovatively in the digital era through the Pivot series The publishing team at Palgrave Macmillan has been a joy to work with, especially Elizabeth Graber and Sophia Siegler Also appreciated are the reviewers who made insightful comments in pushing us to improve our scholarship Fernando Ovando acknowledges the following supporters, institutions, and individuals I especially thank Mike Pisani for the opportunity he has given me to learn about the Paraguayan job market during his entire stay in Paraguay The application of rigorous econometric methods for the analysis of household data has allowed us to obtain different views for the same problem: informality In this way, we were able to arrive at a more complete diagnostic about the behavior of the Paraguayan economy that we hope others may learn from I also thank CADEP for giving me the space to participate in the writing of the book with Mike and the leaders and colleagues at CADEP for constantly motivating me to continue growing professionally in research activities 6 POLICY RECOMMENDATIONS AND CONCLUSIONS 165 Pisani, M. J., & Pagán, J. A (2004) Sectoral selection and informality: A Nicaraguan case study Review of Development Economics, 8(4), 541–556 Pisani, M. J., & Pisani, J. S (2018) ‘Off the books’ consumption: Determinants and practice in Belize, Central America The Latin Americanist, 62(2), 213–241 Richardson, C., & Pisani, M. J (2012) The informal and underground economy of the South Texas border Austin: University of Texas Press World Politics Review (2018, October 16) Can Paraguay’s dysfunctional education system be reformed? World Politics Review Available at: https://www worldpoliticsreview.com/trend-lines/26442/can-paraguay-s-dysfunctionaleducation-system-be-reformed Accessed 28 Apr 2019 Appendix Table A.1 Logistic regression: you have a pension plan [social security] (yes = 1) as a proxy for formality, EPH 2018 Variable Constant Gender (male = 1) Education (years) Language spoken most often at home Guaraní and Spanish Spanish Other language Head of household (yes = 1) Civil status Divorced/separated/widowed Single Region of residence Alto Paraná Rest of the country Urban or rural resident (urban = 1) Home ownership (yes = 1) Type of home flooring B S.E Wald Sig Exp(B) −2.329 0.554 0.091 65.191 0.005 0.001 0.001 11029.032 11411.626 2202.579 0.972 0.000‡ 0.000‡ 0.000‡ 0.097 1.740 1.096 0.085 −0.423 0.223 −0.213 0.007 0.017 0.007 0.006 0.012 0.006 −0.092 −0.243 0.105 −0.046 0.007 0.006 0.006 0.006 0.000‡ 0.000‡ 0.000‡ 0.000‡ 0.000‡ 0.000‡ 0.000‡ 0.000‡ 0.000‡ 0.000‡ 0.000‡ 0.000‡ 0.000‡ 1.089 0.655 1.249 0.808 −0.364 −0.389 166.101 653.395 976.416 1394.529 5336.710 902.246 4794.303 1805.196 176.780 1803.266 283.352 63.194 5253.895 0.695 0.678 0.912 0.784 1.110 0.955 (continued) © The Author(s) 2019 M J Pisani, F G Ovando Rivarola, Understanding the Determinants of Economic Informality in Paraguay, https://doi.org/10.1007/978-3-030-24393-7 167 168 Appendix Table A.1 (continued) Variable Dirt Wood/carpet/other Brick/cement Number of people living in household Household receives remittances (yes = 1) Potential experience Potential experience2 Industry Agriculture Manufacturing Utilities (electricity, gas, and water) Construction Wholesale and retail trade Transportation, storage and communications Real estate and finance Occupational sector Private sector worker Employer Self-employed (own account enterprise) Unpaid family worker Number of employees at workplace 2–5 6–10 11–20 21–30 31–50 51–100 101–500 501 or more Number of hours worked per week Length of time of working at the same company (years) B S.E Wald Sig Exp(B) −0.576 −0.579 −0.358 0.018 0.015 0.024 0.006 0.001 1427.275 596.015 4185.435 281.718 0.000‡ 0.000‡ 0.000‡ 0.000‡ 0.562 0.560 0.699 1.019 −0.339 0.021 270.802 0.000‡ 0.712 0.024 −0.001 0.001 0.000 0.014 0.009 0.029 0.000‡ 0.000‡ 0.000‡ 0.000‡ 0.000‡ 0.000‡ 1.024 0.999 0.973 0.951 0.564 1378.390 2494.540 38753.722 5163.090 10032.550 365.395 −0.684 1.066 0.498 0.013 0.009 0.012 2854.714 14692.649 1754.741 0.000‡ 0.000‡ 0.000‡ 0.505 2.903 1.646 0.865 0.010 0.010 0.020 65.191 0.000‡ 0.000‡ 0.000‡ 0.000‡ 0.747 2.376 −1.283 −5.722 −21.014 7410.069 82352.796 18214.731 81659.106 0.104 0.003 143966.202 0.051 0.047 0.042 0.039 0.037 0.039 0.035 0.037 274.544 27394.949 0.957 0.000‡ 0.821 0.829 0.838 0.843 0.847 0.844 0.852 0.848 0.000‡ 0.000‡ −19.400 358.962 −14.762 −14.121 −13.335 −12.936 −12.538 −12.852 −12.193 −12.470 0.003 0.066 65.191 65.191 65.191 65.191 65.191 65.191 65.191 65.191 0.000 0.000 2.645 2.589 1.757 0.277 0.003 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 1.003 1.068 (continued) Appendix 169 Table A.1 (continued) Variable Log of total monthly earned income N = 7278 (weighted) B 2.322 S.E Wald 0.012 38040.776 Sig Exp(B) 0.000‡ 10.198 −2 Log Likelihood | significance level: 1303880.926 | 0.000‡ Cox & Snell R2 | Nagelkerke R2: 0.476 | 0.704 Hit Ratio (%): Yes | No | Overall: 78.0 | 92.8 | 89.1 Notes: i Reference categories: Gender, male; Language most often spoken at home, Guaraní; Civil status, married/living together; Region, Metropolitan Region (Asunción and Central); Urban or rural resident, urban; Home ownership, yes; Type of home flooring, tile; Industry, services; Occupation, public sector worker; Number of employees at workplace, one; Household receives remittances, yes ii Proportional chance criterion a2 + (1−a)2 or (0.750)2 + (1–0.750)2 = 0.626; 1.25 times = 0.783; model predicts 0.891, better than 1.25 times chance iii ‡ represents significance at the P