How does a large informal economy affect tax collection and economic growth in Honduras?

In Honduras, the informal economy encompasses more than 70 percent of the labor force, a reality that significantly hinders the country's development. This widespread informality negatively impacts the nation in two primary ways:1

• Tax Collection: Because a vast majority of workers operate outside the formal sector, they are not employed by businesses or industries covered by standard labor regulations or tax frameworks. This significantly reduces the state’s capacity to collect tax revenue, which in turn limits the government's ability to fund public services and infrastructure.12
• Economic Growth: The prevalence of informal labor constrains overall economic growth. Many workers in this sector lack access to the protections and benefits established by the country's labor code, such as minimum wage and collective bargaining, which are typically associated with formal employment.12

Ultimately, this structural challenge, combined with issues like political instability and high levels of criminal violence, complicates efforts to improve economic management and social conditions, leaving the country highly vulnerable to external pressures.1