GOOD PRACTICES: To what extent should the formalization of the work of people depending on the informal economy be supported?

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The issue of formalisation of work is ambiguous (Loayza, N.V., L. Serven and N. Sugawara 2010 Informality in Latin America and the Caribbean, World Bank, Washington DC) as there is a statistically and economically significant impact of informality on growth and on the incidence of poverty across countries. In the meantime, the formalisation of work in the informal economy may also have a positive impact but only some key factors are to be taken into account.

The potential positive effects are clear, both for its workers and for the economy itself. It can lead to higher profits, better access to improved equipment, reduced taxes and less corruption. For workers, it may lead to improved access to decent work conditions through enforcement of labour laws and policies and access to social protection. In particular, many evaluations have found that a significant determinant of whether workers can access social protection is based on whether they are in the formal or informal economy (ILO, 2015, Small and medium-sized enterprises and decent and productive employment creation Report IV, ILO-104th Session 2015, Meta-analysis of evaluations, ILO, Geneva.).

Several studies also highlight that to obtain these benefits of work formalisation, one should avoid drastic enforcement of strict anti-informality legal frameworks and note that where formalisation is purely based on enforcement without developing supportive regulatory frameworks, it will likely lead to unemployment and low growth. On a related note, research shows that one should take into account all the possible hurdles, implications and reactions of the system and design tailor-made strategies for formalisation that are in line with the local context an approach. For instance, a randomized study conducted in Sri Lanka showed that providing information and reimbursing the cost of registration did not induce more firms to register than those who were not provided with reimbursements (De Mel, Suresh; McKenzie, David; Woodruff, Christopher, 2012, The demand for, and consequences of formalization among informal firms in Sri Lanka, Impact evaluation, IZA, Bonn, Field experiment in Sri Lanka about formalisation and its consequences).

In addition, when it comes to business development projects, one should also be aware that the benefit in terms of creation of formal employment of people dependent on the informal economy may vary depending on the type of enterprise and the level of technology to be used. Where modern technology is introduced it may even reduce employment among workers of the informal economy, as a DANIDA evaluation showed, (Evaluation Department, Ministry of Foreign Affairs of Denmark, 2014, Evaluation of DANIDA Business to Business Programme 2006-2011, Final evaluation, Danida, Copenaghen, Covered countries: Mali, Benin, China, Vietnam, Uganda, Bangladesh.).