While discussions of informal economies have become a prominent part of today’s debates in international development, perspectives from private sector associations are not pervasive. As conglomerates of formal businesses, however, those groups can provide a unique perspective on the topic.
Youths’ perceptions of informal economies also provide enlightening insight on the future of informal business. Through CIPE’s ChamberL.I.N.K.S. program, CIPE staff recently had the opportunity to sit down with young leaders from private sector associations around the world. While we meant to speak broadly about entrepreneurship in the participants’ home countries of Bangladesh, Brazil, Russia, Sierra Leone, Sri Lanka, and Tanzania, one topic in particular kept reappearing in our conversation: informal sector businesses (those that provide lawful goods and services without legal registration or license.)
When businesses are informal, they do not have recourse to legal protection. When a corrupt official comes to collect a bribe, they do not have any formal means to contest. An informal business owner cannot easily grow his or her operations because without formal registration papers, there is less access to capital. If a business cannot use legal dispute-resolution mechanisms, there is increased risk for hiring employees outside of one’s family.
In many countries, however, prohibitive barriers to formalization keep entrepreneurs in the informal sector. For example, business registration offices may be located only in major cities and rural entrepreneurs cannot access them. Formalization may also entail an overly burdensome tax responsibility. In some cases, business owners lack the information and know-how to register their businesses, even if they wanted to do so.
CIPE’s ChamberL.I.N.K.S. participants also mentioned that there are sector disparities in how easy or difficult it is to register one’s business. Export-driven sectors in particular may be difficult to register if state-owned enterprises are responsible for the lion’s share of a country’s exports.
Formalization can benefit informal enterprises by facilitating access to broader markets, jobs, incomes, and security. For that to happen, the benefits of registering and participating in formal markets must outweigh the costs.
CIPE’s young guests shared their concern for that cause. Some of their associations have even begun directly addressing barriers to formalization. For example, the Federation of Chambers of Commerce and Industry of Sri Lanka has brought registration centers to rural areas without access to the main registration offices in the big cities. Even if chambers did not have their own programs to include informal businesses, all participants in the discussion agreed that pervasive informal economies represent an important limitation development.
Are there more young professionals in private sector associations who care about this issue? And what does the future hold for informal businesses?
Published Date: December 21, 2010