Since the concept of the “informal sector” was coined half a century ago, countries all over the world have promoted the formalization of small- and medium-size enterprises. The perceived benefits of formalization include better access to credit, justice, large formal clients, and, for the government, higher tax revenues. But according to recent literature, most formalization efforts resulted in modest and short term increases in formality rates.
- To broaden and increase the tax base
- To enable firms to access the formal economy and help spur firm growth through the potential benefits of being formal (such as access to financial services and government contracts)
- To increase the sense of rule of law by having the default be that everyone is obeying the law
- To have firms provide information about themselves to the state, which can help the government better understand the structure of the economy and to better target business programs.
The most common way of trying to achieve these aims has been through regulatory reforms that make it easier for firms to formalize. This has taken the form of “one-stop-shops” which have been implemented in at least 115 countries and which enable firms to register both as a business and as a tax entity all at once. However, a number of randomized experiments that have followed such reforms have seen very few informal firms formalize. This raises the question of whether regulatory simplification alone is not enough, and whether trying to achieve all of the above four goals with one instrument causes none of them to be attained.
Separating business and tax registration, and an experiment in Malawi
In a new working paper (replication data) (joint with Francisco Campos), we conducted an experiment with informal firms in Malawi that aimed to test whether governments can bring firms into at least part of the formal system and thereby achieve at least some of the above goals, and whether firms need additional help to realize the benefits of becoming formal.
In the spring of 1997 I conducted the research for a study of Mongolia’s informal sector. It was the first such study in the country and there was a blank slate in terms of information. I was fascinated by how rapidly it had grown, by questions about the size of the sector, by how people working in the informal sector see and organized themselves, by informal entrepreneurship and the spontaneity of markets.
I had as much fun as I have had in my career before or since, poring through statistics, interviewing taxi drivers and shoe shine boys. I interviewed officials on how they decide to provide permission for kiosks to set up shop and how they collaborate with informal (i.e., private, independent) buses. I worked with the NSO and the Ulaanbaatar city statistics department to do a survey to put some numbers with the stories.
In his section, Bill Gates outlined his dream of an “energy miracle”. This is easily one of the most important priorities for the globe. Experts are united that clean energy is the way forward. Falling oil prices might just present a serious challenge to this push, but hopefully this is a temporary glitch that will not derail investments in research and development in the search for clean energy. This search also ties in with the Gates’ traditional areas of strength, which are science and technology-driven, looking to extend the frontiers of knowledge in an effort to improve human welfare.
As critical as advances in science and technology are, Gates does well to remind us of the power that governments have and thereby, points to the importance of generating a political consensus:
“Governments have a big role to play in sparking new advances, as they have for other scientific research. U.S. government funding was behind breakthrough cancer treatments and the moon landing. If you’re reading this online, you have the government to thank for that too. Research paid for by the U.S. government helped create the Internet.”
Photo: Global Environment Facility/Flickr
Waste pickers are the principal actors in reclaiming waste for the recycling industry. Across the world, large numbers of people from low-income and disadvantaged communities make a living collecting and sorting waste, and then selling reclaimed waste through intermediaries to the recycling industry. Where others see trash or garbage, the waste pickers see paper, cardboard, glass, and metal. They are skilled at sorting and bundling different types of waste by color, weight, and end use to sell to the recycling industry. Yet waste pickers are rarely recognized for the important role they play in creating value from the waste generated by others and in contributing to the reduction of carbon emissions.
Fortunately, around the world, waste pickers have been organizing and cities have begun to promote the virtuous circle that comes with integrating waste pickers, the world’s recyclers, into solid waste management.
Brazil was the first country to integrate waste pickers, through their cooperatives, into municipal solid waste management systems and the first to adopt a National Waste Policy, recognizing the contributions of waste pickers and providing a legal framework to enable cooperatives of waste pickers to contract as service providers. The national movement of waste pickers in Brazil was awarded a contract to clean the stadiums during the World Cup.
Despite rapid economic growth in South Asia, the majority of workers in the region have low-paid jobs in the informal economy, where productivity is sub-standard and social protection is lacking. In fact, a new report on labor in India – by the Institute for Human Development (IHD) in New Delhi – estimates that 276 million workers live below a poverty line of $2 per day . What can be done to create better jobs in the region? Preet Rustagi, a Professor at the IHD, argues that the key will be improving the quality of human capabilities, notably through better education and skills training.
In the developing world, the informal workforce is at least half of the total workforce, and therefore subject to with low incomes, high risks, and no formal contracts or benefits. We recently spoke with Martha Chen, a Lecturer at the Harvard Kennedy School and the International Coordinator of the WIEGO Network. In part 1 of this two-part series, she argues that "informal is normal."