WBGES 2010 11

Discussion prepared by Leora Klapper, Senior Economist, World Bank

"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)

WBGES 20102

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 20103

Where do firms register?

New Z

ealan

d

Bulgar

ia

Latv

ia

Czech

Rep

ublic

Lithu

ania

Japa

n

Franc

e

Austra

liaSpa

in

Austri

aIs

rael

Ukrain

e

Kazak

hsta

nIn

dia

Kosov

o

Tajikis

tan

Mon

tene

gro

Kyrgy

zsta

n

Argen

tina

Mad

agas

car

Cambo

dia

El Salv

ador

Thaila

nd

South

Afri

ca

Domini

can

Repub

lic

Rwanda

Kenya

Nigeria

Zambia

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

Ratio of Nascent to formal Entrepreneurs

WBGES 20104

Why do firms register?Costs Benefits

• Registration fees

• Taxes

• Annual reporting

• Greater visibility

• Labor, Safety and other

Regulations

• Less informal payments

• Govt. assistance

• VAT tax ID’s

• Formal (e.g. Govt.) contracts

• Bank financing (i.e. new

investment)

• Formal labor contracts

• Courts, police protection, etc.

WBGES 20105

Who Benefits from Registration?

Is the initial choice to register exogenous?

Developing Industrialized0%

25%

50%

75%

100%

Wholesale &

Retail Wholesale &

Retail

Finance

Finance

Industry

Industry

Services

Services

WBGES 20106

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)?