"What is the Cost of Formality? Experimentally Estimating the Demand for Formalization“ Suresh de Mel (University of Peradeniya), David McKenzie (World Bank)
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"What is the Cost of Formality? Experimentally Estimating the Demand for Formalization“ Suresh de Mel (University of Peradeniya), David McKenzie (World Bank) and Christopher Woodruff (University of Warwick) Discussion prepared by Leora Klapper, Senior Economist, World Bank WBGES 2010 1 Do Firms Transition From Informality? • Less than 2% of firms in Latin America report in the Enterprise Survey that they started operations before registration • Over 40% of firms in Cote d’Ivoire, Madagascar, and Mauritius are started not because the owner sees a good business opportunity, but because the (largest) owner could not find alternative employment opportunities (“unwilling” entrepreneurs) (World Bank, 2010) • Registration information and elimination of fees is not enough to incentivize operating informal firms to register (de Mel, et al, 2010) WBGES 2010 2 -20% WBGES 2010 Zambia Philippines Uganda Kenya Bolivia Colombia Dominican Republic Guatemala Indonesia Thailand Burkina Faso Algeria Cambodia Morocco Chile Argentina Sri Lanka Jordan Montenegro South Korea Azerbaijan Kosovo Georgia Albania Kazakhstan Uruguay Moldova Israel Italy Belarus Spain Russia Macedonia France Romania Canada Lithuania Croatia Belgium Latvia Denmark Estonia New Zealand Where do firms register? Ratio of Nascent to formal Entrepreneurs 70% 60% 50% 40% 30% 20% 10% 0% -10% 3 Why do firms register? Costs Benefits • Registration fees • Less informal payments • Taxes • Govt. assistance • Annual reporting • VAT tax ID’s • Greater visibility • Formal (e.g. Govt.) contracts • Labor, Safety and other • Bank financing (i.e. new Regulations investment) • Formal labor contracts • Courts, police protection, etc. WBGES 2010 4 Who Benefits from Registration? Is the initial choice to register exogenous? 100% Services Services 75% Industry 50% Finance Industry 25% Wholesale & Retail 0% Developing WBGES 2010 Finance Wholesale & Retail Industrialized 5 Wish list: • Could taxation be explicitly reimbursed (or waived?) • Could this study be replicated for a sample of individuals that report wanting to start a business (‘nascent’ entrepreurs)? WBGES 2010 6