Factors affecting the probability of formalizing informal sector activities in Sub Saharan Africa: evidence from World Bank enterprise surveys

Abstract

PurposeThis study aims to investigate the factors that affect the likelihood of formalizing informal sector activities in 13 Sub-Saharan African countries, using World Bank enterprise survey data collected between the periods 2009 and 2018. Notwithstanding the great contribution of the informal economy in Africa, developing countries may stand to gain more if they make inroads in formalizing the informal sector.Design/methodology/approachSince the dependent variable is binary taking the value of one if the firm is willing to formalize and zero otherwise, the study will employ a discrete choice probit model.FindingsResults inter alia show that firms that are more likely to formalize are young, owned by individuals with high levels of education and, have registered before. Governments should therefore target firms that are young and provide them with information about the benefits of registration, and if these firms are owned by experienced and educated individuals, the likelihood for them to register would be high.Research limitations/implicationsThe study uses cross sectional data and therefore cannot capture time variant factors affecting the probability to register and also cannot correct effectively for endogeneity.Practical implicationsGovernments should therefore target firms that are young and provide them with as much information as possible about the benefits of registration, and if these firms are owned by experienced and educated individuals, the likelihood to convince them to register would be high. They should also reduce the cost of registration so as to improve net benefits in line with the rational exit view.Social implicationsFormalizing informal activities will help improve the performance of these firms, reduce vulnerable employment as well as crime, poverty and inequality. Providing decent operating and working conditions to informal players will reduce social and political unrest.Originality/valueThe African continent is home to many informal firms accounting for roughly 55% of economic activity with 90% of workers eking out a living in a sector that does not respect worker rights, provide decent working conditions and where changes in growth have done little to reduce its size. Regulatory reforms have also been implemented resulting in the number of start-up registration procedures falling from 11 in 2003 to seven in 2019. The uniqueness of Sub Saharan Africa in terms of entrepreneurial culture, political, institutional and economic conditions as well as lack of consensus in the extant empirical literature make this study pertinent.