Increasing Formality and Productivity of Bolivian Firms

Abstract

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 study presents fresh
 qualitative and quantitative analyses to better understand
 the reasons why firms are informal and the impact of
 formalization 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 (two to five employees)
 benefit from tax registration in large part due to
 increasing the customer base by issuing tax receipts. The
 study 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 priority 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 to 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 help overall economic growth, employment,
 and formalization.