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Figure 4 Regulatory Environment and InformalityGreater ease of doing business is associated with less formalityInformal sector (share of GDP)HigherImplied cut in the informal sector from improving tothe top on ease of doing business40%30%20%}Implied cutImpliedshare aftercutLower10%Least difficultMost difficultCountries ranked by ease of doing business, quintilesLeast difficultNote: Relationships are significant at 1% level and remain significant when controlling for income per capita.Source: World Bank (2005)Most difficulttion costs on businesses. In addition, the directcost of payments, such as licensing fees, alsorepresents a significant cost of doing business.Conversely, payments made to avoid detectionof non-compliance, or payoffs to government officialsare the costs of operating in the informalsector. The regulations imposed on business fallinto several categories. Some regulations governingbusiness start-up raise the costs of enteringthe formal sector, others govern ongoing businessactivity, and additional regulations are dictated bythe central authority or by regional or municipalgovernments. Furthermore, small businesses facegovernment-imposed costs in the areas of labourpractices, payroll charges, health and safety standards,taxation, and foreign trade.Governance Issues: In many developing countries,corruption and rent-seeking reduce informationflows and weaken contract enforcement, reducingeconomic activity, especially foreign investment.Every major study on barriers to formalisation andindeed on barriers to growth generally, refers tothe problem of corruption.Often it is not the financial cost itself thatcreates the largest transaction cost obstacleto setting up a small business, but rather thetime and energy required to navigate the bureaucraticmaze, along with the opportunity costsinvolved. A well-known example was provided byHernando de Soto when he measured the cost ofestablishing a small garment manufacturing enterprisein Lima, Peru. He found that it requiredmany different steps over an extended periodof time to set up a small formal manufacturingcompany. 60 Although Peru has substantially reformedand simplified the process of setting upa small business, de Soto’s overall conclusionsremain as valid for many other Latin Americancountries today as they did in Peru in the late1980s. This is why entrepreneurs frequentlyresort to bribes or professional ‘fixers’ in order toexpedite the registration and licensing process.Fixers’ fees to establish a company range fromUS$600 to US$800 to establish a company inmost Latin American countries; they rise quitesharply as the size of the firm increases.225