Synthesis documents

Business Environment Reforms and the Informal Economy, Zinnes/DCED, 2009

    This Discussion Paper, written by Professor Clifford Zinnes, examines informality in the developing world, and considers its relation to business environment reform. Some of the key questions addressed in the discussion paper are:

    1. How does business environment reform affect the size of the informal economy?
    2. Which areas of the business environment require attention for reducing the informal economy?
    3. Why do some businesses choose informality over formality?
    4. How should reforms be designed to address informality in firms that are rural, owned by women, or in specific sectors?
    5. What institutions are the most appropriate programme partners?
    6. Does BER focused on informality impact economic growth and poverty reduction?
    7. How can a donor support informality-reducing business environment reforms?

    Summary of results
    The paper finds that at present, reforms mainly focus on reducing the costs of formality. The author instead argues for greater attention to reforms that produce benefits to formalisation. Secure property ownership, a safer work environment, greater availability of low-cost alternative mediation and dispute resolution and easier access to finance are among the postitive incentives to formalise a business that donors can promote. This requires active empowerment of the poor to take advantage of them. Unless formalisation is made to provide tangible benefits to the poor, forcing it upon them may in fact make the poor worse off.

    The author finds that the quality of institutions, and not economic growth per se, is the key factor in reducing informality. Throughout, the paper recognises the importance of local culture and politics in reform processes. Donors must therefore take a long-term view, seeking to build consensus among stakeholders in order to ensure that reforms are viewed as legitimate and thus implemented in practice. An example of this is in gender-neutral property rights, considered desirable, but which remain controversial in some societies.

    This paper will play a key part in the discussions at the DCED's upcoming conference on Business Environment Reform and the Informal Economy, to be held in Cape Town, 13-15 April 2010. For further details, click on the link at the bottom of this page. A summary of this document in French, kindly produced by le Gret on behalf of SDC, is also available to the right.

    Associated Activities and Documents
    Synthesis documents
    »Donor Committee Conference: Business Environment Reform and the Informal Economy, Cape Town, South Africa, 12-15 April 2010