africa

Yale Center for the Study of Globalization
among household enterprises the majority are registered with some level of government.
Firm size is usually measured by number of employees, which can often be
misleading given the large number of unreported informal workers at both formal
and informal firms. Benjamin and Mbaye (2012a) examine the securing of a bank
loan as an indicator of formality. They find that informal firms show little interest in
bank loans and largely satisfy their financing needs from personal, family, or informal
sources, which provide a better way for them to manage risks. Similarly, the Investment
Climate Assessment (ICA) surveys in Africa 1 find that a large proportion of the
firms that qualify for bank loans elect not to borrow from the formal financial sector.
Because informality consists of a variety of characteristics, analysts of the informal
sector should classify firms along a spectrum, depending on the extent and number
of characteristics of informality that they display. Policies should reflect this
heterogeneity: at one extreme the very largest firms that could easily formalize, but
choose not to, should be sanctioned, and at the other extreme, microenterprises
require assistance in improving productivity. This heterogeneity should be further
investigated, and policies should be targeted to differing types of firms, with a view
to boosting productivity and employment.
Actions: Governments and the donor community should launch a research agenda
and action plan to investigate and implement policies that assist small informal
firms to improve their productivity while enforcing fiscal and regulatory obligations
for large informal actors.
10.3 Governance and public-private collaboration on mutual reforms
The dualistic nature of most African economies, characterized by a large unregulated
and untaxed informal sector alongside an often smaller formal economy, is an
obstacle to sustained growth. The formal sector—substantially consisting of foreign
investment—must shoulder a disproportionate tax burden, severely hampering its
competitiveness. Indeed, the informal sector provides almost no government revenue
in Africa even though it accounts for more than half of GDP. For three West
African countries, for example, Benjamin and Mbaye (2012a) reveal that large
formal enterprises contribute more than 95 percent of tax revenue, while firms in
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