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informal sector

A cheap intervention that helped partially formalize firms and increased profits – just don’t ask about taxes

David McKenzie's picture
Governments have at least four reasons to try and bring firms into the formal system:
  1. To broaden and increase the tax base
  2. 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)
  3. To increase the sense of rule of law by having the default be that everyone is obeying the law
  4. 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.

Should developing countries increase their minimum wages? Guest post by Andrés Ham

Development Impact Guest Blogger's picture
In the closing scene of Christopher Nolan’s The Dark Knight, Police Commissioner Gordon tells his son that Batman is “the hero Gotham deserves but not the one it needs right now” (video). This quote provides an interesting policy analogy with minimum wage increases. The benefits of raising minimum wages are something we believe workers deserve: better pay. Unfortunately, the costs tend to involve higher unemployment, which no country needs right now.