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THE INFORMAL SECTOR IN FRANCOPHONE AFRICA
La Porta and Shleifer (2008) distinguish between the cost of becoming formal, the cost of remaining formal, and the benefit of becoming formal. To determine the cost associated with becoming formal, they take the log of the number of procedures required to start an enterprise legally. To measure the cost associated with remaining formal, they define three categories of proxy variables: the cost of having to pay taxes, the cost of abiding by work legislation, and the cost associated with bureaucratic red tape. The authors define the benefits of remaining or becoming formal as having easier access to public goods and services and being able to defend one’s legal rights in a court of law. Analyzing data from several countries, they determine that these three categories of variables are strongly correlated with the size of the informal sector. Apart from these variables, gross domestic product (GDP) per capita has a strong negative correlation with the size of the informal sector, as found in other studies. Beyond tax and regulatory issues, governmental behavior and enforcement capabilities have a strong impact on private sector behavior. Perry et al. (2007) argue that actors’ decisions are strongly influenced by their perception of and relationship with the government. Willingness to abide by laws and pay taxes is strongly influenced by one’s perception of the level of honesty and efficiency of the government. Informal sector firms are also particularly vulnerable to arbitrary state action such as extortion and confiscation of assets by police, customs officials, and others. De Soto (1989) argues that in order to protect themselves against abuse of power by the government, firms in the informal sector pay between 10 and 15 percent of their income in bribes, compared with only 1 percent for firms in the formal sector. Moreover, informal businesses are obliged to remain small so as not to attract attention, inhibiting their development and the consequent gains to the overall economy.
Enforcement of Regulations Kanbur (2009) argues that a key determinant of informality is lack of enforcement of regulations. Gelb et al. (2009) also find that firms opt for formality when access to public utilities and credit are favorable and where tax and registration rules are enforced. Comparing several countries in Eastern and Southern Africa, they test a probit model, also following Lucas (1978), where the market sorts the more talented managers and productive firms into the formal sector. They find that the model is far more applicable in countries with stronger business climates and better enforcement of regulations. In some countries with weaker business climates, they find that formal and informal firms are similar to each other in all other aspects besides formal registration. They explain: To the extent that enforcement and provision of public services are characterized by a high degree of arbitrariness and variability, the concealment func-