Business Environment Reform and Poverty, Meta-analysis of evaluations

2.1 ENABLING ENVIRONMENT

2.1.3 Supportive legal frameworks development, adoption and implementation

Recommendation: 5. Support appropriate and relevant reform of the tax system to accommodate formalisation of IE work. Take into consideration that appropriate reforms may lead to an overall increase in the number of registered firms and possible corresponding increases in employment. Take into consideration that formal enterprises are more productive and profitable when compared with informal ones.

Reference: White, Simon & Fortune, Peter, 2015, Business Environment Reform and Poverty, Meta-analysis of evaluations, DFID, London, Evaluation on projects and reforms concerning labour law, tax system, administration and business registration rules, Covered  countries: Mexico, Sri Lanka, Uganda, Vietnam, Brazil, Bolivia, Algeria, Indonesia, Zambia, Bangladesh, Ghana, Tanzania, India.

Evidence sample: One study carried out by Fajnzylber and Montes-Rojas (2011) examined the effects of tax reform in Brazil, which were found to reduce the tax burden on small firms by about 8%. According to this study, more firms registered for tax and formalised so as to benefit from the reform. Both the existing and newly created firms that opted to operate in the formal sector had higher revenues and profits, and employed more workers. This was found to lead to an overall employment increase of 12%. 

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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.

Reference: White, Simon & Fortune, Peter, 2015, Business Environment Reform and Poverty, Meta-analysis of evaluations, DFID, London, Evaluation on projects and reforms concerning labour law, tax system, administration and business registration rules, Covered countries: Mexico, Sri Lanka, Uganda, Vietnam, Brazil, Bolivia, Algeria, Indonesia, Zambia, Bangladesh, Ghana, Tanzania, India.

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.

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2.2. DECENT WORK AND ENTERPRISE GROWTH

2.2.2 Formalising work in IE

Recommendation: 4. Be aware that group formation of IE operators and workers into registered associations, cooperatives and other groups can also be a means to formalise the informal economy. Note that it is a misconception that formalising the informal economy entails only the registering of individual IE operations.

Reference: White, Simon & Fortune, Peter, 2015, Business Environment Reform and Poverty, Meta-analysis of evaluations, DFID, London, Evaluation on projects and reforms concerning labour law, tax system, administration and business registration rules, Covered countries: Mexico, Sri Lanka, Uganda, Vietnam, Brazil, Bolivia, Algeria, Indonesia, Zambia, Bangladesh, Ghana, Tanzania, India.

Evidence sample: Boly (2015) surveyed 2,500 firms in Vietnam to investigate the process of firm formalisation. His results show that becoming formal leads to an increase in profits, value added and revenue, in total amount or per employee. Formalisation was also found to be beneficial for firms, irrespective of their size. While the benefits of formalisation were found to materialise in the short term, they also persisted over time. The benefits of formalisation run through better access to improved equipment, a larger customer base, advertising, and business association membership.