Increasing Formality and Productivity of Bolivian Firms

A W ORLD BANK COUNTR Y STUD Y
Increasing Formality
and Productivity of
Bolivian Firms
A W O R L D B A NK C O UNTRY STUD Y
Increasing Formality
and Productivity of
Bolivian Firms





























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ISBN-13: 978-0-8213-8023-9
eISBN: 978-0-8213-8024-6
ISSN: 0253-2123 DOI: 10.1596/978-0-8213-8023-9

Library of Congress Cataloging-in-Publication Data has been requested.
Contents
Preface ...................................................................................................................................... vii
Abstract ................................................................................................................................... viii
Acknowledgments ...................................................................................................................ix
Abbreviations and Acronyms ................................................................................................. x
Executive Summary.................................................................................................................xii
Overview of Informality ..................................................................................................xii
Productivity and Profitability of Informal Firms ........................................................xiii
Policy Recommendationsxv
Introduction: Increasing Formality and Productivity of Bolivian Firms......................... 1
What Lies Behind Bolivia’s Large Informal Sector? ....................................................... 1
How Does this Study Address the Problem?.................................................................. 2
Notes..................................................................................................................................... 4
1. The Informal Sector in Bolivia Today .............................................................................. 5
How Big Is the Informal Sector in Bolivia?...................................................................... 5
Who Is in The Informal Sector?....................................................................................... 10
Why Is the Informal Sector so Big?................................................................................. 19
Why Should We Care about the Informal Sector?........................................................ 33
Conclusions ....................................................................................................................... 35
Annex 1.1. The complexity of defining informality ..................................................... 36
Annex 1.2. Sociodemographic characteristics of formal and informal workers
under the productive definition, 2005 .................................................................... 41
Annex 1.3. Sociodemographic characteristnd informal workers
under the legalistic definition, 2005 ........................................................................ 42
Notes................................................................................................................................... 42
Annex 1.4. Detailed information on labor regulation in Latin American
countries ..................................................................................................................... 43
2. The Productivity of Micro and Small Firms.................................................................. 45
Why Does Productivity Matter for Micro and Small Firms? ...................................... 45
What Is Constraining the Productivity of Micro and Small Firms?........................... 49
How Is the Operational, Regulatory, and Institutional Environment
Constraining Productivity?...................................................................................... 62
Conclusions ....................................................................................................................... 65
Notes................................................................................................................................... 66
Annex 2.1. Interest rates for microcredit institutions in Bolivia and other Latin
American countries (at end June 2005)................................................................... 68
iii iv Contents
3. Informality and Profitability in Micro and Small Firms............................................. 69
What Is the Level of Informality among the Surveyed Firms?................................... 70
Which Firms Choose to Become Formal? ...................................................................... 74
How Does Informality Affect Profitability? .................................................................. 79
What Are Some of the Channels through which Formality Increases Profits? ........ 85
Conclusions ....................................................................................................................... 88
Annex 3.1. What is the scope of the new survey?......................................................... 89
Annex 3.2. Personal, geographic, and industry characteristics of
entrepreneurs holding municipal licenses and tax numbers .............................. 91
Annex 3.3. Personal, geograristics of
entrepreneurs who hold municipal licenses and have registered with
FundEmpresa or obtained tax numbers................................................................. 92
Annex 3.4. Estimation methods ...................................................................................... 93
Annex 3.5. Impact of a tax number on log profits ........................................................ 95
Table 3.A.5.1. Impact of a tax number on access to credit and use of financial
services........................................................................................................................96
Notes................................................................................................................................... 97
4. Policy Recommendations................................................................................................... 98
What Can Be Done to Increase the Formalization of Micro and Small Firms?......... 99 ease Productivity of Micro and Small Firms?................ 104
What Is Bolivia Doing Now to Increase Formalization and Productivity?............. 108
References............................................................................................................................... 112

Tables
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)..