Saul Estrin He is Professor Emeritus of Business Economics and Strategy at the London School of Economics and Political Science. Maribel Guerrero He is an associate professor of public policy and management at Arizona State University’s School of Public Policy and the Center for Global Technology Transfer. Tomasz Mickiewicz Professor of Economics at Aston University. New research on informal entrepreneurial opportunities in emerging economies.
Santiago de Chile. Chile has become a noteworthy emerging market in recent years.
Giannina Osorio is one of hundreds of thousands of people supporting informal entrepreneurs in emerging economies around the world.
She is a real estate broker in Chile, and her company provides free financial advice to informal entrepreneurs and others in desperate need of help.
Companies like Giannina’s play a key role. Informal entrepreneurial businesses operate under government oversight.
In some regions of the world, such as sub-Saharan Africa, Latin America and South Asia, women workers make up between 60 percent and 90 percent of non-agricultural employment.
Informal entrepreneurs are often motivated by business opportunities, but many are also motivated to start a business by a lack of attractive employment prospects.
Three guidelines for supporting informal entrepreneurs
As our research shows, policymakers can do more to support informal entrepreneurs in emerging economies.
Registration
Policymakers should make existing informal sector start-ups, which are seen as a temporary phase of entrepreneurship, legitimate and attractive rather than simply allowing them. This can be achieved by removing the initial requirements associated with formal registration, which could be imposed gradually above certain revenue thresholds.
Local communities would also benefit from playing a greater role in registering and taxing new and small businesses – for example, giving minority groups in certain areas the tools they need to register, so the revenue generated stays within their communities.
Eliminating excessive regulation and bureaucratic requirements also helps: if government is perceived as distant, regulations are less likely to be followed. Policymakers should take into account the extent to which people have trust in government administration at different levels (local, central). Trust has a major impact on people’s motivation to formalize their activities, especially since local communities are often more trusted than the central government.
Improved tax system
Authorities should consider unintended consequences that may encourage individuals and businesses to remain in the informal sector. Simple tax codes with low rates and low payroll taxes would help. It is also important to establish supportive social protection systems, including progressive taxation and protection for the most vulnerable, to address distributional issues, while creating incentives to encourage entrepreneurial self-sufficiency and ensuring that entitlements are not lost at low levels of start-up income and are gradually reduced as income increases.
Allowing tax benefits for some time after registration would also help, but limits should be set per individual or household to mitigate opportunism such as duplicate registration.But we are focused on the role of the informal sector. innovation: The latter could be supported through experimentation, if an initial informal phase is permitted..
Informal entrepreneurs are often motivated by business opportunities, but many … [+]
Promoting equality and inclusiveness in structural policies
Supporting sustainable development requires a range of structural policies, including investments in education equity, financial inclusion, labour markets and technology policies to increase returns and incentives and reduce costs. These include:
- Improving Educational Outcomes Through reforms that prioritize equal access and encourage citizens to complete at least technical and vocational training.
- Improving financial inclusion Reforms that enhance ethnic minorities’ access to formal financial services can reduce informal financial services and increase the growth prospects of businesses and entrepreneurs.
- Improving labour market entry Through Reforms that simplify and facilitate the entry of informal workers into the formal employment sector, creating a more flexible and inclusive workforce.
- Making technology more inclusive Use Digital platforms and open innovation, including government-to-person mobile remittances, can advance economic empowerment for minorities, help new businesses grow, and create synergies with financial inclusion.
- Improving crisis management policy design. As the experience of the COVID-19 pandemic has demonstrated, a rapid and well-designed response to a crisis is critical for businesses and to create incentives to maintain a formal response.
Change through practice
Governments are not the only agents of change. Socially minded entrepreneurs like Giannina Osorio have a key role to play in providing important information to informal entrepreneurs. Efforts like Giannina’s increase informal entrepreneurs’ chances of survival and their ability to grow and formalize.
Making start-ups more formal or less informal will contribute to sustainable, dynamic and competitive growth at both the start-up and national levels. This change will also promote inclusiveness and equality.
