Bolivia s informal sector is the largest in Latin America, by many definitions and measures. Bolivia s high informality rate has been blamed on many factors including the burden of regulation, the weakness of public institutions, and the lack of perceived benefits to being formal. The high level of informality has a number of negative implications related to for low productivity, low growth, and low quality of jobs. This book presents fresh ualitative and quantitative analyses to better understand the reasons why firms are informal and the impact of normalization on their profitability, in order to inform policy actions appropriate to the reality of Bolivia. The crucial finding of the analysis is that the impact of tax registration on profitability depends on firm size and the ability to issue tax receipts. The smallest and the largest firms in the sample have lower profits as a result of tax registration because their cost of formalizing exceeds benefits. Firms in the middle range benefit from tax registration in large part due to increasing the customer base by issuing tax receipts. It presents a set of prioritized policy implications for policy makers. In the short term, the priority should be to increase the benefits of formalization through training, access to credit and markets, and business support. The second is to increase information on how to formalize and its benefits. In the medium term, the priority is to simplify formalization, regulatory and taxation procedures and reduce their costs. Increasing even-handed enforcement of taxation and regulation is also important but not a priority for micro and small firms. Measures to boost the productivity of micro and small firms in general will both help overall economic growth, employment, and, formalization.
Author(s): Yaye Sakho
Year: 2009
Language: English
Pages: 160
9780821380239......Page 1
Contents......Page 2
Preface......Page 6
Abstract......Page 7
Acknowledgments......Page 8
Abbreviations and Acronyms......Page 9
Overview of Informality......Page 11
Productivity and Profitability of Informal Firms......Page 12
Policy Recommendations......Page 14
What Lies Behind Bolivia’s Large Informal Sector?......Page 16
How Does this Study Address the Problem?......Page 17
Notes......Page 19
How Big Is the Informal Sector in Bolivia?......Page 20
Figure 1.4. Distribution of hourly earnings for salaried workers in the formal and informal sectors and self-employed workers, 2005......Page 25
Figure 1.12. Share of informal employment in all employment, by size of firm, 2005......Page 34
Why Should We Care about the Informal Sector?......Page 48
Conclusions......Page 50
Annex 1.1. The complexity of defining informality......Page 51
Annex 1.2. Sociodemographic characteristics of formal and informal workers under the productive definition, 2005......Page 56
Notes......Page 57
Annex 1.4. Detailed information on labor regulation in Latin American countries......Page 58
Why Does Productivity Matter for Micro and Small Firms?......Page 60
Box 2.2. Incentives for formality from the focus groups......Page 64
Table 2.3. Constraints on firms’ productivity posed by the operational, regulatory, and institutional environment, by firm size......Page 77
Conclusions......Page 80
Notes......Page 81
Annex 2.1. Interest rates for microcredit institutions in Bolivia and other Latin American countries (at end June 2005)......Page 83
3. Informality and Profitability in Micro and Small Firms......Page 84
What Is the Level of Informality among the Surveyed Firms?......Page 85
Figure 3.2. Characteristics of formality, by firm size......Page 89
How Does Informality Affect Profitability?......Page 94
What Are Some of the Channels through which Formality Increases Profits?......Page 100
Conclusions......Page 103
Annex 3.1. What is the scope of the new survey?......Page 104
Annex 3.2. Personal, geographic, and industry characteristics of entrepreneurs holding municipal licenses and tax numbers......Page 106
Annex 3.3. Personal, geographic, and industry characteristics of entrepreneurs who hold municipal licenses and have registered with FundEmpresa or obtained tax numbers......Page 107
Annex 3.4. Estimation methods......Page 108
Annex 3.5. Impact of a tax number on log profits......Page 110
Table 3.A.5.1. Impact of a tax number on access to credit and use of financial services......Page 111
Notes......Page 112
4. Policy Recommendations......Page 113
Box 4.1. Policy and practice recommendations for reducing regulatory and administrative barriers to formalization......Page 114
What Can Be Done to Increase Productivity of Micro and Small Firms?......Page 119
Box 4.5. Government and private actions on productivity and formality......Page 123
References......Page 127
Table 1.1. Distribution of urban employment among formal and informal sectors, by productive and legalistic definitions of informality, 2005 (percentage of total employed population)......Page 22
Table 1.3. Costs and benefits of being formal......Page 36
Table 1.4. Costs and procedures to set up a business in Latin American countries......Page 39
Table 1.5. Detail of costs and procedures to formally set up a business in Bolivia......Page 40
Table 1.6. Tax regulation burden in Latin American countries......Page 42
Table 1.7. Labor regulation burden in Latin American countries......Page 44
Table 2.1. Percentage of formal firms reporting the following factors as major constraints to their functioning, by size......Page 67
Box 2.4. Constraints to higher productivity for female entrepreneurs......Page 75
Table 3.1. Percentage of firms registering for tax identification numbers and municipal licenses, by the age of the firm at registration......Page 87
Table 3.2. Percentage of formal firms, by dimensions of formality and by industry......Page 88
Table 3.3. Registered firms’ perceptions of the main benefit of having a tax number and municipal license......Page 90
Table 3.4. Percentage increase in profits associated with different dimensions of formality, by firm size......Page 96
Table 3.5. Percentage of firms using different types of financial instruments, by firm size......Page 101
Table 3.A.3.1. Survey sample by size, sector, and city......Page 105
Table 4.1. Bolivia’s current strategy to increase formality and productivity......Page 125
Table 4.1. (continued)......Page 126
Figure 1.1. Share of the informal sector in GDP in Latin America and other regions......Page 21
Figure 1.2. Annual change in informal employment in Latin American countries......Page 23
Figure 1.3. Share of informal workers in the employed population in Bolivian urban areas, 1989–2005......Page 24
Figure 1.5. Distribution of workers by sector and labor income quintile, 2005......Page 26
Figure 1.7. Share of informal employment in all employment, by education and ethnicity, 2005......Page 28
Figure 1.8. Employment in the formal and informal sectors, by workers’ age, 2005......Page 29
Figure 1.9. Share of informal self-employment in all employment, by age and gender, 2005......Page 30
Figure 1.10. Average number of years spent in employment, by sector......Page 31
Figure 1.11. Share of informal employment in all employment, by economic sector and gender, 2005......Page 33
Figure 1.13. Share of formal and informal workers who desire being independent or salaried, by sector, 2005......Page 35
Figure 1.14. Firms’ ranking of reasons to formalize at the municipal level—IFC scorecards......Page 37
Figure 1.15. Summary of the regulatory burden in Bolivia......Page 38
Figure 1.16. Governance indicators for Bolivia and averages for Latin America, 1996–2004......Page 45
Figure 1.17. Most problematic factors for doing business, according to formal entrepreneurs operating in Bolivia......Page 46
Figure 1.18. Summary on corruption and irregular payments indicator......Page 47
Figure 1.A.1.1. Selected indicators of informality in Latin America......Page 53
Figure 1.A.1.2. Methods to measure the size of the informal sector......Page 54
Figure 2.1. Constraints on higher productivity for micro firms, by formality......Page 65
Figure 2.2. Constraints on higher productivity for small firms, by formality......Page 66
Figure 2.3. Constraints on registration and licensing at the municipal level......Page 79
Box 3.1. The formalization process in Bolivia......Page 86
Figure 3.3. Percentage difference in profitability of formal and informal firms after controlling for different observable characteristics......Page 95
Box 1. Are informal firms less profitable, or are less profitable firms just more likely to remain informal?......Page 18
Box 1.1. Most important tax regimes in Bolivia......Page 43
Box 2.1. The focus group methodology......Page 61
Box 2.3. Supply of credit to micro and small firms......Page 68
Box 3.2. Getting a NIT pays off for small firms, but not for the micro or medium-size firms in our sample......Page 97
Box 3.3. Gender differences in formality and profitability......Page 99
Box 4.2 The role of training and business associations in raising the self-efficacy of informal entrepreneurs......Page 117
Box 4.3. Goals when reducing barriers to formalization......Page 118
Box 4.4. Childcare in Guatemala city......Page 122
