Step By Step to Formalization

Judith Van Doorn
Specialist,
Enabling Environment
and Enterprise Formalization

I have travelled to many parts of the world where I’ve seen different faces of informality.  Whether they are street vendors, small shop owners or other informal sector workers, one of the things that they have in common is that they work long hours to make ends meet.  They sometimes work under harsh conditions with limited social protection, competing for the same clients. Yet at the same time they contribute a vast amount to the economies of their home countries, especially in the developing world.

Four out of five enterprises in the world are informal. That means they are not covered or insufficiently covered by any laws or other formal arrangements.

Many governments are now looking at how to help businesses move from the informal to the formal economy I was recently invited to a Global South-South Knowledge Sharing Event on Enterprise Formalization in Manila, whereby speakers from Latin America and India engaged with Filipino participants to exchange ideas.  The event was part of the ILO’s South-South Initiative which aims at fostering development through peer-to-peer learning.

One of the main lessons that came out of this was that enterprises do not formalize overnight. Instead, they gradually move up a step at a time on the formalization ladder, provided that certain conditions are met. How can we assist and encourage entrepreneurs to transition to formality? As a specialist in enterprise formalization I’ve seen that four key principles should be kept in mind when businesses want to go formal:

1. Enterprise formalization needs persistence:
   It is a complex issue, touching on many policy domains. Ranging from business registration to taxation, support services, access to finance and social protection. Policymakers should make a start, introduce some initiatives and continue to elaborate, improve and adapt while making sure that the policies ‘speak to each other’.  Some countries have been working for more than 20 years to find the right policy mix. This requires perseverance, high political will and extensive coordination.
   
   
2. Make it easy and simple: Business registration procedures vary tremendously, depending on where one lives. In some countries, it may take up to three months to register a business, whereas in others it can be done in less than one day. Many governments have streamlined business registration procedures and sometimes even brought the relevant registration desks under one roof.  This is a good step forward.  Yet in many countries, a lot remains to be done to simplify registration and make it more client-friendly.
   
   
3. Sell the benefits to business: Entrepreneurs will assess how they can benefit from formalizing their businesses and what costs or risks it will bring. Simplified registration procedures alone will not encourage them to formalize. There needs to be more. Several governments in Latin America have designed a package of measures to reduce tax payments, facilitate access to finance, create procurement opportunities and ensure increased access to social security for entrepreneurs who move into the formal economy.

4. Give small business a voice: It is important to listen to business-owners so that their views can be taken on board when policies are being discussed and designed.

The challenge is huge and with the formalization of enterprises very high up on the agenda in many developing and developed countries it is essential to further deepen our knowledge and strengthen our efforts to help governments pave the way.