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How relevant is the location of informal businesses for policy?

Mohammad Amin's picture

A distinction is often made between informal firms operating within, versus outside, household premises. In some sense, the former represent the quintessential informal firms beset with a number of problems, such as low efficiency, etc. Policies aimed at bringing informal firms into the fold of the formal sector could therefore be expected to have a bigger impact when targeted toward informal firms operating within, rather than outside, the household.

A survey of informal firms in Ivory Coast, Madagascar and Mauritius conducted by Enterprise Surveys provides some support to this idea. The survey shows that 81 percent of the firms in Ivory Coast, 72 percent in Madagascar and 49 percent in Mauritius operate within household premises. The figures below show the percentage of firms that report various benefits from registering. Overall, a larger percentage of firms located within household premises expect the various benefits from registration. These preliminary findings suggest that understanding the types of informal firms that operate within and outside household premises could be an interesting area for future research.

Perceived benefits from registering 


Submitted by Vijaya Ramachandran on
There seems to be a fair bit of variation by country as well. Using data from surveys of microenterprises in South Africa, Namibia, Botswana, Kenya, Uganda, Tanzania, and Rwanda, my coauthors Alan Gelb, Taye Mengistae, Manju Shah, and I find that the labor productivity of informal firms is virtually indistinguishable from that of formal firms in East Africa, but very different in Southern Africa. We assume that firms may evade taxes subject to a cost (or concealment cost) that is increasing and convex in the firm’s employment size. Consequently, the productivity distributions reflect the differences in concealment costs and the opportunity cost of formality. Greater enforcement of laws and better provision of services such as finance and electricity to formally registered firms in Southern Africa means that firms are more likely to register; those that do not are likely to be operating as “survivalist” firms. But in East Africa, weak enforcement of tax payment and no significant difference in access to services between formal and informal firms means that these variables do not explain the allocation of firms across the informal-formal divide. We conclude that in countries with weak business environments, informal firms are just as likely as formal firms to increase their productivity as they grow. Thus, interventions to increase productivity and lower the cost of formality may be helpful. But in countries with strong business environments such as those in Southern Africa, owners of informal firms are likely to be better off entering the labor market as wage labor. In the latter case, investment in education or vocational training is probably more important. The full paper is here:

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