Understanding informality through new data

|

This page in:

The informal business sector is a source of livelihood for millions of people around the world. Despite its size and importance, business-level data that provide an in-depth understanding and cross-country analysis of the sector are lacking. To fill this gap, the World Bank has collected comprehensive data based on a representative sample of informal businesses using an innovative survey methodology. A recent working paper provides insights on businesses that operate without formal registration. It covers twenty-four cities in seven countries —namely, India, Iraq, the Lao People’s Democratic Republic, Mozambique, Somalia, Zambia, and Zimbabwe— using these publicly available data. Here, we summarize the paper’s key results, focusing on four aspects: salient features of the owners and their businesses; general business practices; performance, and finally, perceptions about registration and reasons for remaining informal.

 

Informal sector business owners are young, have limited formal education, and are primary breadwinners for their households. About half of informal sector businessowners are 35 years old or younger, and 37 percent have not completed high school (sampling weights are used, with rescaling that gives each country a weight of one). Only 14 percent of informal business owners have any kind of post-secondary certification, compared with 41 percent of their formal micro-enterprise counterparts (Figure 1). Over two-thirds of informal business owners reported starting the business because they could not find work elsewhere. Contrary to popular belief that informal businesses are part-time side hustles, only 12 percent of owners reported being employed elsewhere, compared to 33 percent of formal micro-enterprise owners. Nevertheless, over 70 percent of business owners reported that they were the primary income earners for their household. These statistics paint a precarious picture for most informal owners, who lack the training to find other work, yet must eke out some means of providing primary support for their families.

 

Figure  1. Informal businesses owners are more likely to be female and to have less schooling

 

Informal businesses are small, relatively new, and overwhelmingly in the retail sector (Figure 2). The data confirm one of the most well-documented facts about informal businesses— they are very small . The median informal business employs just two persons, including the owner/manager. Not everyone is paid, with 33 percent having no paid employee, and with just one such employee on average, including the owner/manager.

Informal businesses are relatively new, averaging approximately 5.5 years in operation. Of these, 28 percent have been in business for a year or less.  Formally registered micro-enterprises are, on average, 2.5 years older than informal businesses, a difference of over 45 percent.

Over two thirds of informal businesses are in the retail sector, including hawkers, those in markets, and small shops. Only 16 percent are in manufacturing and related sectors, mostly in food processing, woodworking, and furniture production. The remaining 16 percent are in non-retail services such as hairdressing or cleaning.

 

Figure 2. Informal businesses are mostly small, relatively new, and in the retail sector

 

 

Informal businesses are not side hustles, but rather full-time operations, yet lack key business practices, particularly record keeping. In contrast to popular belief that informal businesses are part-time side hustles, they operate almost all year round (on average 11.6 months), and on a full-time basis (on average 57 hours a week) . Contrary to another commonly held belief about the informal sector, we find that only around 10 percent report being harassed, and only 13 percent report having to pay bribes to remain in operation. The ability of informal businesses to choose where or how they carry out their activities in order to avoid crime and harassment probably explains these figures.

The data also suggest that informal businesses seldom keep detailed records of their performance or engage in long-term planning (Figure 3). Only a quarter prepare profit and loss statements and less than one in five budget their expenses for the upcoming year. These averages are significantly lower than their peers in formal sector.

 

Figure 3. Informal businesses operate full-time, face less harassment than expected, and find record-keeping challenging

 

 

Despite nearly full-time commitment of informal business owners, these businesses earn only a fraction of the median monthly sales per worker enjoyed by their formal micro-enterprise counterparts.  Notably, this gap varies by country.  For example, in Zimbabwe it is only 15 percent of formal sector sales per worker, but in Somalia it is 63 percent.  These estimates confirm previous findings that informal businesses are less productive than formal sector firms of a similar size. Informal sector productivity exhibits tremendous variation both within and across countries, with median monthly sales per worker ranging from a mere 33 USD in Mozambique to a more adequate 343 USD in Iraq.  Although half of informal businesses report earning a profit, these profits are quite meagre, averaging only 137 USD per month (Figure 4). These incredibly low numbers also mask regional variations, as all the African countries in the sample have median monthly sales per worker of 50 USD or less. These figures suggest that most informal business struggle to barely turn a profit.

 

Figure 4. Median sales per worker (USD, last month

 

Costs to register (time and fees), and lack of perceived benefit from formally registering are the most cited reasons why these businesses remain informal. Some policymakers and researchers have suggested that a lack of information on the part of owners acts as a major barrier to formalizing a business. However, our data show otherwise (Figure 5). In countries where this question was asked, less than 13 percent of businesses stated that a lack of information was the main reason they chose not to register. Instead, businesses appear to remain informal because they view formal registration as an additional cost with few, if any, benefits. Overall, over 75 percent of businesses consider either a perceived lack of benefit or the presence of additional costs (such as taxes, time, or fees) to be the primary reason for not registering.

 

Figure 5. Main reasons for not registering

 

Our working paper provides a much larger overview of the informal business sector. As the amount of new data grows, further research and analysis will yield a clearer understanding of this large, yet vastly underexplored segment of the economy. The World Bank's Enterprise Analysis unit is carrying out the Informal Sector Enterprise Surveys in several countries. To stay updated on current projects or to access the data, visit https://www.enterprisesurveys.org/.

Authors

Adam Aberra

PhD student at the Department of Economics at McGill University in Montreal

Gemechu Ayana Aga

Economist, Enterprise Analysis Unit, World Bank

Join the Conversation