The article examines the theoretical and practical effects of the policy of legalizing the informal economy sector to enhance economic diversification in the last 10 years. The concept of a “legalizing policy” is highlighted. The dynamics of the informal economy are analyzed, including contemporary challenges of economic in Arab region which consider the consequences of undergoing unprecedented disruption across health, social, and economic systems, shaped by sequential waves of events. One of them, is the COVID-19 (coronavirus) which drives global recession, the deepest since the Second World War, with output in emerging market and developing economies. Additionally the economic consequences of Russia's war in Ukraine, including instability in individual commodity markets, inflation, and migration, are discussed. The article also emphasizes studying the economic and social consequences of the informal economy in the Arab region by focusing on informal labour. It analyzes the facilitation of government legalization procedures to transform informal economy activities to formal activities to combat concerns related to corruption, tax evasion organized crime as well as an unprecedented increase in poverty and inequality, ultimately impacting GDP growth. The main focus of the essay is on examining the economic effects of the legalization policy of the informal economy sector not only on GDP growth and the stability of individual commodity markets but also on enhancing economic diversification.