Development and entrepreneurship: Business formal (The Economist)
The article highlights several reasons to presume that high rates of informal economic activity do not power growth but rather are the result of factors that limit growth.
We learn that “rich countries have on average about 42 registered firms per 1,000 people whereas the corresponding number is merely three in poor countries”, that “the average formal firm employs 126 people whereas the typical informal firm employs only four” and that “informal firms have extremely low productivity, in large part because they are usually run by poorly educated entrepreneurs.”
Thus, “while it is true that tax avoidance and regulations encourage firms to remain informal,” what matters is that “many informal firms are simply too unproductive to survive in formal economy.” What are the implications for policy? That “reducing registration costs would neither generate a large shift into the formal economy or prop up growth.”
Support for this argument comes from several additional observations: that “government red tape does not appear to be much of an issue for many businesses in the developing world,” that “typically, nine out of ten registered firms started out as registered” and that “the informal sector usually shrinks following spells of strong economic growth.”