Publication: Re-thinking the Approach to Informal Businesses: Typologies, Evidence and Future Exploration
Loading...
Published
2020-12-09
ISSN
Date
2020-12-14
Editor(s)
Abstract
Interventions over the past decades to encourage increased business formalization have shown mixed results and produced limited knowledge on how to address informality systematically. The scale of the informal sector in emerging and developing economies, which accounts for 25 to 40 percent of GDP and often more than 60 percent of employment, merits rethinking approaches to formalization. Based on a review of relevant literature on informality and efforts to promote formalization, this paper will discuss the use of the term “informality” to align with the heterogeneity that exists within the informal sector and to identify factors that drive formality. From there, the paper proposes four specific areas for additional research and pilot interventions: (1) supporting informal clusters; (2) providing support to informal businesses without formalization as a target; (3) developing simplified, intermediate, and temporary legal statuses for informal businesses to better align with business needs and government goals; and (4) understanding behavioral insights that influence businesses’ decisions to remain informal and that can contribute to effective policy making. Throughout this discussion, the authors aim to motivate development and testing of new approaches to informality based on a deepened understanding of the needs of informal businesses.
Link to Data Set
Citation
“Nielsen, William Iver; Marusic, Andreja; Ghossein, Tania; Solf, Sylvia. 2020. Re-thinking the Approach to Informal Businesses: Typologies, Evidence and Future Exploration. Finance, Competitiveness and Innovation Insight;. © World Bank. http://hdl.handle.net/10986/34926 License: CC BY 3.0 IGO.”
Digital Object Identifier
Associated URLs
Associated content
Other publications in this report series
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Re-thinking the Approach to Informal Businesses(World Bank, Washington, DC, 2020-11-18)Interventions to incentivize business formalization over the past decades have shown mixed results (Bruhn and McKenzie, 2013; Bruhn and McKenzie, 2018; Floridi et al., 2019) and brought limited knowledge on how to address informality in a systematic way. Adding to the challenge is determining whether informality should be a direct target, or is rather something indirectly impacted through development, improved governance, better regulation and improved public services (Loayza 2016; Loayza, 2007; Perry et al., 2007; World Bank, 2009). The informal sector includes businesses, workers, and activities operating outside the legal and regulatory systems (Loayza 2016). The scale of the informal sector in emerging and developing economies, which accounts for 25 to 40 percent of GDP and often more than 60 percent of employment (World Bank 2020), merits rethinking approaches to formalization. To support greater rates of formalization, this note proposes four specific areas for further research and pilot interventions: 1) supporting informal clusters, 2) providing support to informal businesses without a target of formalization, 3) simplified, intermediate and temporary legal statuses of informal businesses to better align with business needs and government goals, and 4) understanding behavioral insights that influence businesses’ decisions to inform policymaking.Publication Small Business Tax Policy, Informality, and Tax Evasion : Evidence from Georgia(World Bank Group, Washington, DC, 2014-08)Using a panel of administrative data and regression discontinuity analysis, this paper examines how the introduction of preferential tax regimes for Georgian micro and small businesses in 2010 affects formal firm creation and tax compliance. The results show that the new tax regime for micro businesses increased the number of newly registered formal firms by 18-30 percent below the eligibility threshold during the first year of the reform, but not in subsequent years. The analysis does not find an effect of the new tax regime for small businesses on formal firm creation in any year. Policy makers are often concerned about abuse risks stemming from differentiated tax treatment of micro and small businesses. The analysis in this paper reveals reduced tax compliance in 2010 around the micro business eligibility threshold, but does not find significant evidence of reduced compliance by Georgian firms in later years. The results also do not show any significant evidence of strategic sorting around the regime eligibility thresholds.Publication Small Business Taxation : Reform to Encourage Formality and Firm Growth(World Bank, Washington, DC, 2009-02)Reforming a tax system for small businesses is complicated. No single best practice can solve all the issues that arise in trying to implement a tax system that is simple, administer-able, and equitable. This note presents a menu of considerations and 'good practice' options. It is the first in a series of five notes addressing issues that governments of developing countries face in reforming their tax systems.Publication Informality and the Playing Field in Vietnam's Business Sector(Washington, DC: World Bank and the International Finance Corporation, 2003-08)The development story in Vietnam in recent years has been one of remarkable progress (Dollar 2002). Over the 1990s, the economy doubled and the incidence of poverty declined by half. Although these are indeed notable achievements, they are but the first steps across a difficult terrain. About 30 million people, or more than a third of the total population, continue to live in poverty, and 25 million, or about 60 percent of the labor force, are either underemployed or unemployed. To create jobs for the unemployed, underemployed, and new additions to the work force, Vietnam will have to double the economy again by the end of the decade, but this cannot happen unless both the level and the quality of investment increase substantially. According to World Bank estimates, average total investment must reach 30 percent of gross domestic product (GDP) by 2010, which represents a 5 percent increase over the 1990s, while average productivity will have to be about 40 percent higher (World Bank 2001). To achieve these objectives, Vietnam needs to encourage the private sector to contribute more to economic growth. This will require significant improvements in its business environment.Publication Informal Economy and the World Bank(World Bank, Washington, DC, 2014-05)Many countries have expressed an interest in the size, performance and motivation of the informal sector, especially where the informal sector provides the livelihood and employment for a critical segment of the population. This essay reviews recent literature, methodologies, and relevant Bank studies as a way to share information with country teams interested in expanding their knowledge of the informal sector and related policy debates. Research in a number of regions points to four main areas where development policy can be improved by taking the informal sector into account. First, improvements should be made along a continuum; the heterogeneity among informal firms points to different policy approaches for different types of firms. Second, there should be public-private collaboration on mutual reforms. Many efforts to improve firm performance focus on elements of the production function (labor skills, credit) while treating government mainly as a cost (taxes, cost of compliance with regulations). Yet research reveals that many characteristics of the public regime strongly influence the decisions of firms regarding informality. Third, research indicates a strong relation between basic skills and labor outcomes, particularly in the informal sector, despite the sector's lower average returns. Research also indicates the benefits of targeted training programs. Business services programs have a decidedly mixed record, yet ongoing research is refining results on what works best. Fourth, informal trade is pervasive in developing countries and the networks developed in informal trade -- wholesalers, credit suppliers and money-changers, transporters -- are a strong presence in the informal sector. Yet these kinds of complex and nontransparent trading systems can be discouraging to foreign investors and can otherwise undermine trade policy and the international competitiveness of developing countries. The paper concludes with recommendations.
Users also downloaded
Showing related downloaded files
Publication The World Bank Group in Tanzania, Fiscal Years 2012–22(Washington, DC: World Bank, 2025-07-22)This evaluation assesses the relevance and effectiveness of the World Bank Group's support to Tanzania between Fiscal Years 2012 and 2022. Over the past decade, Tanzania has experienced resilient growth, with an average annual per capita GDP increase of 2.2%. However, poverty remains widespread and slow to decline, underscoring the need for more inclusive growth. The report examines the Bank Group's strategic and operational approaches during this period, which were aligned with Tanzania's development priorities and focused on industrialization, human development, and public sector reforms. The evaluation includes thematic chapters on the Bank Group's support for private sector-led growth and spatial transformation, as well as lessons to inform future support to the country.Publication Evaluation Insight Note(Washington, DC: World Bank, 2024-11-12)This Evaluation Insight Note (EIN) aims to contribute to the World Bank’s goal of encouraging the use of data, digital technology, and innovation towards transforming agri-food systems in client countries. The EIN was guided by the overall question: “How are World Bank agriculture and irrigation projects using technologies and what insights can be drawn from them” In answering this question, the EIN draws from a portfolio identification and review of 158 active and 113 closed projects (FY16-23) World Bank agriculture and irrigation projects to describe the extent and utilization of agricultural technologies. It supplemented the findings from the review with insights drawn from four project evaluations (Project Performance Assessment Reports) prepared by IEG in Bangladesh, Brazil, Cote d’Ivoire, and Vietnam, which were selected because of their likely lessons on agriculture technology. The portfolio and systematic review provided the basis for seven main insights on coverage and nature of technologies used in World Bank agriculture projects, demand-based technological solutions, technology diffusion, collaboration, and investment in enabling environment factors, among others. (1) The World Bank Agriculture and Irrigation portfolio shows limited coverage of advanced technologies. (2) The technologies that are prevalent in projects are mainly focused on increasing agricultural productivity with limited focus on technologies for facilitating market linkages. (3) Among the technologies promoted in Bank agriculture and irrigation projects, some technologies, and applications such GIS, early warning systems and MIS are more concentrated than others. (4) Combining demand-based technological solutions with training and technical assistance supported uptake of those solutions. (5) Technology diffusion worked well when there was strong collaboration between key research and extension agencies, each with well-defined roles and responsibilities in the projects. (6) When technology dissemination efforts are combined with investments in enabling environment factors such as infrastructure (i.e., roads, markets), they facilitated technology adoption. (7) Building sustainable institutional models – key for technology uptake and use – continue to be challenging in Bank supported projects.Publication FY 2025 China Country Opinion Survey Report(Washington, DC: World Bank, 2025-08-04)The Country Opinion Survey in China assists the World Bank Group (WBG) in better understanding how stakeholders in China perceive the WBG. It provides the WBG with systematic feedback from national and local governments, multilateral/bilateral agencies, media, academia, the private sector, and civil society in China on 1) their views regarding the general environment in China; 2) their overall attitudes toward the WBG in China; 3) overall impressions of the WBG’s effectiveness and results, knowledge work and activities, and communication and information sharing in China; and 4) their perceptions of the WBG’s future role in China.Publication The World Bank Group in Georgia, 2014-23(Washington, DC: World Bank, 2025-07-30)This Country Program Evaluation assesses the performance and effectiveness of the World Bank Group’s support to Georgia in achieving the country’s development objectives. In the decade leading up to the evaluation period, Georgia pursued economic reforms to attract critical investments for becoming a regional trade and transport hub. Ambitious economic reforms went hand in hand with efforts to improve human development and strengthening social protection systems. Growing geopolitical tensions and internal political polarization have challenged Georgia’s reform progress in recent years. The Bank Group’s strategy adapted well to Georgia’s development needs and was well coordinated with other development partners. It successfully employed a range of instruments to help increase competitiveness, growth, and job creation, and effectively contributed to improved infrastructure and increased trade by using programmatic and innovative approaches. The Bank Group’s regular investments in analytical work and the switch to results-based programmatic support helped improve the efficiency and effectiveness of education and health care systems. The IEG offers the following lessons based on the evidence and analysis in the Country Program Evaluation: (i) Prioritizing Bank Group support around the move towards deeper regional integration was an effective anchor for key economic reforms for economic convergence. (ii) Pursuing a selective and adaptive approach in a country with high implementation capacity and institutions, strong coordination among development partners, and access to a wide range of external resources can allow the Bank Group to exercise significant influence in areas of comparative advantage and global expertise. (iii) A stronger focus on outcome-based programmatic approaches helped to build local capacity and crowd-in partner financing.Publication Digital Africa(Washington, DC: World Bank, 2023-03-13)All African countries need better and more jobs for their growing populations. "Digital Africa: Technological Transformation for Jobs" shows that broader use of productivity-enhancing, digital technologies by enterprises and households is imperative to generate such jobs, including for lower-skilled people. At the same time, it can support not only countries’ short-term objective of postpandemic economic recovery but also their vision of economic transformation with more inclusive growth. These outcomes are not automatic, however. Mobile internet availability has increased throughout the continent in recent years, but Africa’s uptake gap is the highest in the world. Areas with at least 3G mobile internet service now cover 84 percent of Africa’s population, but only 22 percent uses such services. And the average African business lags in the use of smartphones and computers as well as more sophisticated digital technologies that catalyze further productivity gains. Two issues explain the usage gap: affordability of these new technologies and willingness to use them. For the 40 percent of Africans below the extreme poverty line, mobile data plans alone would cost one-third of their incomes—in addition to the price of access devices, apps, and electricity. Data plans for small- and medium-size businesses are also more expensive than in other regions. Moreover, shortcomings in the quality of internet services—and in the supply of attractive, skills-appropriate apps that promote entrepreneurship and raise earnings—dampen people’s willingness to use them. For those countries already using these technologies, the development payoffs are significant. New empirical studies for this report add to the rapidly growing evidence that mobile internet availability directly raises enterprise productivity, increases jobs, and reduces poverty throughout Africa. To realize these and other benefits more widely, Africa’s countries must implement complementary and mutually reinforcing policies to strengthen both consumers’ ability to pay and willingness to use digital technologies. These interventions must prioritize productive use to generate large numbers of inclusive jobs in a region poised to benefit from a massive, youthful workforce—one projected to become the world’s largest by the end of this century.