ABSTRACT
Since the publication of Hernando de Soto's The Other Path (1986), an analysis of Peru's informal economy, there has been a general assumption among many scholars, policy makers and practitioners that informality is inefficient by definition, is a reality that must be addressed urgently and is potentially a lower-cost intervention compared to other forms of aid. Contained within this concept of informality—or extralegality, as de Soto prefers to call it—are several assertions. First, the decision to operate outside the formal legal system results from burdensome laws. Second, better laws would lead to greater economic efficiency. Third, these formal laws, be they market regulations, property rights or contract enforcement, are additive, that is, incremental improvements in any one will contribute to overall efficiency in the economic environment.
