Increasing Formality and Productivity of Bolivian Firms (World Bank Country Study)

Bolivia s informal sector is the largest in Latin America, by many definitions and measures. Bolivia s high informality rate has been blamed on many factors including the burden of regulation, the weakness of public institutions, and the lack of perceived benefits to being formal. The high level of informality has a number of negative implications related to for low productivity, low growth, and low quality of jobs. This book presents fresh ualitative and quantitative analyses to better understand the reasons why firms are informal and the impact of normalization on their profitability, in order to inform policy actions appropriate to the reality of Bolivia. The crucial finding of the analysis is that the impact of tax registration on profitability depends on firm size and the ability to issue tax receipts. The smallest and the largest firms in the sample have lower profits as a result of tax registration because their cost of formalizing exceeds benefits. Firms in the middle range benefit from tax registration in large part due to increasing the customer base by issuing tax receipts. It presents a set of prioritized policy implications for policy makers. In the short term, the priority should be to increase the benefits of formalization through training, access to credit and markets, and business support. The second is to increase information on how to formalize and its benefits. In the medium term, the priority is to simplify formalization, regulatory and taxation procedures and reduce their costs. Increasing even-handed enforcement of taxation and regulation is also important but not a priority for micro and small firms. Measures to boost the productivity of micro and small firms in general will both help overall economic growth, employment, and, formalization. 9780821380239......Page 1 Contents......Page 2 Preface......Page 6 Abstract......Page 7 Acknowledgments......Page 8 Abbreviations and Acronyms......Page 9 Overview of Informality......Page 11 Productivity and Profitability of Informal Firms......Page 12 Policy Recommendations......Page 14 What Lies Behind Bolivia’s Large Informal Sector?......Page 16 How Does this Study Address the Problem?......Page 17 Notes......Page 19 How Big Is the Informal Sector in Bolivia?......Page 20 Figure 1.4. Distribution of hourly earnings for salaried workers in the formal and informal sectors and self-employed workers, 2005......Page 25 Figure 1.12. Share of informal employment in all employment, by size of firm, 2005......Page 34 Why Should We Care about the Informal Sector?......Page 48 Conclusions......Page 50 Annex 1.1. The complexity of defining informality......Page 51 Annex 1.2. Sociodemographic characteristics of formal and informal workers under the productive definition, 2005......Page 56 Notes......Page 57 Annex 1.4. Detailed information on labor regulation in Latin American countries......Page 58 Why Does Productivity Matter for Micro and Small Firms?......Page 60 Box 2.2. Incentives for formality from the focus groups......Page 64 Table 2.3. Constraints on firms’ productivity posed by the operational, regulatory, and institutional environment, by firm size......Page 77 Conclusions......Page 80 Notes......Page 81 Annex 2.1. Interest rates for microcredit institutions in Bolivia and other Latin American countries (at end June 2005)......Page 83 3. Informality and Profitability in Micro and Small Firms......Page 84 What Is the Level of Informality among the Surveyed Firms?......Page 85 Figure 3.2. Characteristics of formality, by firm size......Page 89 How Does Informality Affect Profitability?......Page 94 What Are Some of the Channels through which Formality Increases Profits?......Page 100 Conclusions......Page 103 Annex 3.1. What is the scope of the new survey?......Page 104 Annex 3.2. Personal, geographic, and industry characteristics of entrepreneurs holding municipal licenses and tax numbers......Page 106 Annex 3.3. Personal, geographic, and industry characteristics of entrepreneurs who hold municipal licenses and have registered with FundEmpresa or obtained tax numbers......Page 107 Annex 3.4. Estimation methods......Page 108 Annex 3.5. Impact of a tax number on log profits......Page 110 Table 3.A.5.1. Impact of a tax number on access to credit and use of financial services......Page 111 Notes......Page 112 4. Policy Recommendations......Page 113 Box 4.1. Policy and practice recommendations for reducing regulatory and administrative barriers to formalization......Page 114 What Can Be Done to Increase Productivity of Micro and Small Firms?......Page 119 Box 4.5. Government and private actions on productivity and formality......Page 123 References......Page 127 Table 1.1. Distribution of urban employment among formal and informal sectors, by productive and legalistic definitions of informality, 2005 (percentage of total employed population)......Page 22 Table 1.3. Costs and benefits of being formal......Page 36 Table 1.4. Costs and procedures to set up a business in Latin American countries......Page 39 Table 1.5. Detail of costs and procedures to formally set up a business in Bolivia......Page 40 Table 1.6. Tax regulation burden in Latin American countries......Page 42 Table 1.7. Labor regulation burden in Latin American countries......Page 44 Table 2.1. Percentage of formal firms reporting the following factors as major constraints to their functioning, by size......Page 67 Box 2.4. Constraints to higher productivity for female entrepreneurs......Page 75 Table 3.1. Percentage of firms registering for tax identification numbers and municipal licenses, by the age of the firm at registration......Page 87 Table 3.2. Percentage of formal firms, by dimensions of formality and by industry......Page 88 Table 3.3. Registered firms’ perceptions of the main benefit of having a tax number and municipal license......Page 90 Table 3.4. Percentage increase in profits associated with different dimensions of formality, by firm size......Page 96 Table 3.5. Percentage of firms using different types of financial instruments, by firm size......Page 101 Table 3.A.3.1. Survey sample by size, sector, and city......Page 105 Table 4.1. Bolivia’s current strategy to increase formality and productivity......Page 125 Table 4.1. (continued)......Page 126 Figure 1.1. Share of the informal sector in GDP in Latin America and other regions......Page 21 Figure 1.2. Annual change in informal employment in Latin American countries......Page 23 Figure 1.3. Share of informal workers in the employed population in Bolivian urban areas, 1989–2005......Page 24 Figure 1.5. Distribution of workers by sector and labor income quintile, 2005......Page 26 Figure 1.7. Share of informal employment in all employment, by education and ethnicity, 2005......Page 28 Figure 1.8. Employment in the formal and informal sectors, by workers’ age, 2005......Page 29 Figure 1.9. Share of informal self-employment in all employment, by age and gender, 2005......Page 30 Figure 1.10. Average number of years spent in employment, by sector......Page 31 Figure 1.11. Share of informal employment in all employment, by economic sector and gender, 2005......Page 33 Figure 1.13. Share of formal and informal workers who desire being independent or salaried, by sector, 2005......Page 35 Figure 1.14. Firms’ ranking of reasons to formalize at the municipal level—IFC scorecards......Page 37 Figure 1.15. Summary of the regulatory burden in Bolivia......Page 38 Figure 1.16. Governance indicators for Bolivia and averages for Latin America, 1996–2004......Page 45 Figure 1.17. Most problematic factors for doing business, according to formal entrepreneurs operating in Bolivia......Page 46 Figure 1.18. Summary on corruption and irregular payments indicator......Page 47 Figure 1.A.1.1. Selected indicators of informality in Latin America......Page 53 Figure 1.A.1.2. Methods to measure the size of the informal sector......Page 54 Figure 2.1. Constraints on higher productivity for micro firms, by formality......Page 65 Figure 2.2. Constraints on higher productivity for small firms, by formality......Page 66 Figure 2.3. Constraints on registration and licensing at the municipal level......Page 79 Box 3.1. The formalization process in Bolivia......Page 86 Figure 3.3. Percentage difference in profitability of formal and informal firms after controlling for different observable characteristics......Page 95 Box 1. Are informal firms less profitable, or are less profitable firms just more likely to remain informal?......Page 18 Box 1.1. Most important tax regimes in Bolivia......Page 43 Box 2.1. The focus group methodology......Page 61 Box 2.3. Supply of credit to micro and small firms......Page 68 Box 3.2. Getting a NIT pays off for small firms, but not for the micro or medium-size firms in our sample......Page 97 Box 3.3. Gender differences in formality and profitability......Page 99 Box 4.2 The role of training and business associations in raising the self-efficacy of informal entrepreneurs......Page 117 Box 4.3. Goals when reducing barriers to formalization......Page 118 Box 4.4. Childcare in Guatemala city......Page 122 This Book Presents Qualitative And Quantitative Analyses On Bolivia's Informal Sector, The Reasons Why Firms Are Informal, And The Impact Of Normalization On Their Profitability. The Analysis Finds That The Impact Of Tax Registration On Profitability Depends On Firm Size And The Ability To Issue Tax Receipts, And Presents A Set Of Prioritized Policy Implications For Policy Makers. In The Short Term, The First Priority Should Be To Increase The Benefits Of Formalization Through Training, Access To Credit And Markets, And Business Support. The Second Is To Increase Information On How To Formalize And Its Benefits. In The Medium Term, The Priority Is To Simplify Formalization, Regulatory And Taxation Procedures And Reduce Their Costs. Increasing Even-handed Enforcement Of Taxation And Regulation Is Also Important But Not A Priority For Micro And Small Firms. Measures To Boost The Productivity Of Micro And Small Firms In General Will Both Help Overall Economic Growth, Employment, And, Formalization.--publisher's Description. Introduction : Increasing Formality And Productivity Of Bolivian Firms -- The Informal Sector In Bolivia Today -- The Productivity Of Micro And Small Firms -- Informality And Profitability In Micro And Small Firms -- Policy Recommendations. Includes Bibliographical References. Also Available Online. Bolivia’s informal economic sector is the largest in Latin America and has been attributed to many factors including the burden of regulations, the weakness of public institutions, and the lack of perceived benefits to formality. 'Increasing Formality and Productivity of Bolivian Firms' presents fresh qualitative and quantitative analyses to help understand the reasons why firms are informal and the impact of formalization on their profitability, in order to better inform appropriate policies. A crucial finding of the study is that the impact of tax registration on profitability depends on firm size and the ability to issue tax receipts. The smallest and largest firms have lower profits as a result of tax registration because their cost of formalizing exceeds benefits. The study concludes by recommending policy priorities to increase the benefits of formalization through information, training, access to credit and markets, and business support. Longer-term policy recommendations include simplifying formalization, regulatory, and taxation procedures and reducing their costs, as well as measures to boost the productivity of small and micro firms.