How Should the Government Bring Small Firms into the Formal System? Experimental Evidence from Malawi
Developing country governments seek to reduce the pervasive informality of firms for multiple reasons: increasing the tax base, helping firms access formal markets and grow, increasing the rule of law, and as a means to obtain data that can be used...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2018
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/880711538673183990/How-Should-the-Government-Bring-Small-Firms-into-the-Formal-System-Experimental-Evidence-from-Malawi http://hdl.handle.net/10986/30510 |
| Summary: | Developing country governments seek to
reduce the pervasive informality of firms for multiple
reasons: increasing the tax base, helping firms access
formal markets and grow, increasing the rule of law, and as
a means to obtain data that can be used for other government
functions. However, there is debate as to the best approach
for achieving these goals. This study conducted a randomized
experiment in Malawi to test three alternatives: (a)
assisting firms to obtain a business registration
certificate that offers access to formal markets but imposes
no tax obligations; (b) assisting firms to obtain business
registration and tax registration; and (c) supplementing the
assistance to obtain business registration with a bank
information session intended to help firms utilize one of
the key potential benefits of formalizing. The study finds
incredibly high demand for obtaining a formal status that is
separate from tax obligations, and very low take-up of tax
registration. Business registration alone has no impact on
access to formal markets or firm performance. However,
coupling registration assistance with the bank information
session increases the use of formal financial services, and
results in increases in firm sales by 20 percent and profits
by 15 percent. The results highlight the advantages of
separating business and tax registration, but also the need
to assist firms in benefiting from their new formal status. |
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