Loayza, N.V., L. Serven and N. Sugawara 2010 “Informality in Latin America and the Caribbean”, World Bank, Washington DC

2.2 DECENT WORK AND ENTERPRISE GROWTH

2.2.2 Formalising work in IE 

Recommendation: 2. Foster formalisation in both the regulatory framework and the quality and availability of public services while avoiding drastic enforcement of strict anti-informality legal frameworks. Note that where formalisation is purely based on enforcement without developing supportive regulatory frameworks, it will likely lead to unemployment and low growth.

Evidence sample: In a cross-country macro-level analysis of informality in Latin America, Loayza (2010) found that informality has a statistically and economically significant impact on growth and an equally significant positive impact on the incidence of poverty across countries. The impact of formalisation can, however, be extremely ambiguous, depending on the way in which countries achieved informality. Countries where informality is kept at bay by drastic enforcement will fare worse than countries where informality is low because of light regulations and appropriate public services. If formalisation is purely based on enforcement, it will likely lead to unemployment and low growth. However, where it is based on improvements in both the regulatory framework and the quality and availability of public services, it is associated with more efficient use of resources and higher growth.

Reference: Loayza, N.V., L. Serven and N. Sugawara 2010 “Informality in Latin America and the Caribbean”, World Bank, Washington DC