africa

Yale Center for the Study of Globalization
and private contributions to public finances. Such a dialogue toward this mutual
need for reform must include actors from the informal economy and not be confined
to constituents focused on defending the status quo.
10.4 Skills development and business services
Research finds a strong relation between basic skills and labor outcomes, particularly
in the informal sector, despite the sector’s lower average returns. Large
differences in access to education and to other basic services between formal and
informal actors lead to differences in skills, productivity, and earnings. Many studies
have found a large productivity and earnings gap between formal and informal
firms in Africa, as elsewhere. For example, Roubaud and Torelli (2013) estimate
that wages are twice as high in the formal sector as in the informal sector in Cameroon
and DRC, three times in Senegal, and 3.6 times in Côte d’Ivoire. In addition,
when informality is differentiated along a continuum, the level of formality and productivity
are strongly and positively correlated. Figure 10.2 displays box plots of
the distribution of productivity levels for the formal and informal sectors, using the
continuous definition of informality at firm level, for Burkina Faso. On the x axis, we
have levels of informality spanning from 0 (most formal) to 5 (most informal). On the
vertical axis, we have labor productivity. Median labor productivity is represented
by the horizontal line crossing over the shaded area of each rectangle. Figure 10.2
shows that firm-level labor productivity diminishes as the firm’s informality rises. The
informal sector relies on practices that hinder productivity growth, including firms’
lack of transparency and limited knowledge of their own accounts, long-established
traditions based on well entrenched control of territory and rents, and sub-optimal
allocation of productive factors (including reliance on family sources for credit).
Informality also prevents companies from acquiring modern management skills and
training workers—limiting their growth potential and access to the world market.
Low productivity may also lead to informal-sector status through self-selection of
firms according to their quality of management. Boosting the productivity of small
informal firms is therefore a priority.
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