This article evaluates critically the neoliberal perspective that employment in the informal economy is a product of high taxes, public sector corruption and state interference in the free market and that reducing taxes, corruption and the regulatory burden via minimal state intervention is the remedy. Analysing the varying size of the informal economy across 36 developing and transition countries, little or no association is found with higher tax rates, greater levels of corruption and state interference. Instead, employment in the informal economy appears to reduce with higher levels of regulation and state intervention. The theoretical and policy implications are discussed.