Informality and Productivity · Informality and Productivity BO G O TÁ, NO VEMBER 2017 W ILLIAM F....
35
Informality and Productivity BOGOTÁ, NOVEMBER 2017 WILLIAM F. MALONEY CHIEF ECONOMIST, EFI, WORLD BANK WWW.WORLDBANK.ORG/WMALONEY WWW.WORLDBANK/.ORG/PRODUCTIVITY 1
Transcript of Informality and Productivity · Informality and Productivity BO G O TÁ, NO VEMBER 2017 W ILLIAM F....
Informality and Productivity
B O G O T Á , N O V E M B E R 2 0 1 7
W I L L I A M F . M A L O N E Y
C H I E F E C O N O M I S T , E F I , W O R L D B A N K
W W W . W O R L D B A N K . O R G / W M A L O N E YW W W . W O R L D B A N K / . O R G / P R O D U C T I V I T Y
1
INFORMALITY: WHY DO WE CARE?
2
Why do we care about informality?1. Unprotected workers: issue of welfare, equity and
efficiency
2. Low and distorted tax collections and poor provision of public services
3. Weak rule of law and governance: A problem in our social contract?
4. Productivity: firms too small? Barriers to growth? Misallocation of workers? Indicator of distortions?
3
Improved allocation of factors across firms and
sectors
25%
Improved within firm performance (innovation)
50%
Improved quality of entering firms
(Selection)
25%
Sources of Productivity Growth
Total Factor Productivity Growth(TFP)
Cusolito and Maloney 2018
Informality is closely related to level of development (Productivity). But causality?
5
Latest Available Year - Sedlac Data (max 2015)
THE THREE MARGINS OF INFORMALITY/FORMALITY
6
3 margins between informality and formality
1. Within firm (Porteño): Informal workers in large firms (World Bank, too!)
2. Transforming firm (De Soto 1986): Micro firms becoming formal.
3. Between firm (labor Harris-Todaro 1970): Informal workers becoming employed in formal firms.
Each may, or may not, imply productivity losses
The 3 informal/formal margins
Tamaño de Empresa
0
5
10
15
20
25
30
35S
ha
re o
f la
bo
r fo
rce
Firm Size - workers (q)
Margins of Informality
Formal Informal
Transforming Firm Margin (DeSoto)
Modern FirmsMicro Firms
Intersectoral Margin (labor)
Between Firm Margin (labor)
Within Firm Margin
1. Porteño margin is not critical
Table 2: MEXICO- Distribution of Informal Workers by Firm Size (2001)
Share of Firm Workers Distribution of
Firm Size that are Informal Informal Workers
1 97 35
2 to 5 90 42
6 to 10 50 7
11-15 39 3
16-50 26 6
51-100 14 2
101-250 12% 1
+250 7% 6
Total All Sizes 100%
Source: Bosch and Maloney (2011) National Urban Employment Survey (ENEU)
Informal workers are both self employed and salaried who are not covered by labor
benefits.
This is true everywhere, even Argentina
Efficiency losses are not obvious◦ May be a way of circumventing
excessively rigid legislation.
77%
2. The de Soto Margin (firms) Two views
1. De Soto- firms with growth potential that are excluded from state services from growing
◦ Misallocation of factors of production leads to big productivity losses
2. Inefficient firms with little potential to grow◦ Size determined by cost (management?) structure (Lucas 1978)◦ Mass of firms that are nowhere near close to the margin. ◦ See no point in interacting with the state-don’t need state services◦ Allocation could be optimal given opportunities in the modern sector.
Query: How many firms are close to formalization?
10
2. The de Soto Margin?Table 3: The Change in Firm Size Associated with the Transition to Formalization
Source: Bosch and Maloney (2011). Based on the ENEU panel
Destination Firm Size
Initial Firm
Size 1 2 to 5 6 to 10 11 to 15 16 to 50 50+
1 2.1 11.6 7.9 8.4 15.8 54.2
2 to 5 0.2 20.7 14.2 5.4 16.2 43.2
84%
65%
Overall, few firms transition to the formal sector Sri Lanka: de Mel, McKenzie and Woodruff (2013) Vietnam: McCaig and Pavcnic (2014) General: La Porta and Shleifer (2014)
The original conception of informalityNot related to state, but organization of activity.
Hart (1973) Gave the name “informality” : Without form – not bureaucratically organized and hence hard to enumerate.
Geertz (1963): Transition to modernityThe central problems…are organizational….It is the ability and originality to organize a range of diverse economic activities in a unified institution—store or small factory—that most distinguishes a Modjokuto (Indonesia) entrepreneur from his non-innovative bazaar-trade fellow, not wealth, not education or even drive. (p 74).
Empirics and surveys suggest little potential/desire for growth?◦ MX: Fajnzylber et al (2006): little “dynamism” in small firms; Woodruff
12
2. De Soto: Does reducing costs increase formalization?
Mexico:◦ Survey: Why not registered? 75% “business is too small”; ~10%- cost of registration,
compliance too high(Woodruff and McKenzie 2006) ◦ Lowering of registration/compliance costs leads to small and temporary change in
registration- .2% of stock of informal. (Kaplan et. al 2006)
Brazil: Small reaction to SIMPLES program (Fajnzylber et al 2007)
Benin: additional information has no effect, some effect of a bank account and training but not a lot. (Benhassine 2018)
Bolivia: McKenzie and Sakho (2007) Profits don’t go up if register.
Summary of literature: “Easing entry regulations and providing information on the formalization process has had only a very limited impact on the formalization of existing informal firms, especially with regards to tax registration” (Bruhn and McKenzie 2014).
So, probably de Soto margin is less critical than originally thought.
13
The three margins of informality
Tamaño de Empresa
0
5
10
15
20
25
30
35S
ha
re o
f la
bo
r fo
rce
Firm Size - workers (q)
Margins of Informality
Formal Informal
Transforming Firm Margin (DeSoto)
Modern FirmsMicro Firms
Intersectoral Margin (labor)
Between Firm Margin (labor)
Within Firm Margin
3. Between firm (worker) margin: Competing theories
15
Who are the informal: Role changes across the life cycle.
Informal Salaried ◦ port of entry for youth
◦ accumulate experience for Formal Salaried or independent work
◦ Most in micro firms
Self Employment◦ prevalent among prime or
older
◦ have capital and skills to open a business
16
0
5
10
15
20
25
30
35
40
45
50
15
19
23
27
31
35
39
43
47
51
55
59
63
67
Self-Employed Form Informal
Employment as share of age cohort
Que dicen los trajabadores?
Trabajadores independientes: La mayoría(~2/3) son voluntario◦ Mexico/Brazil: Valoran la flexibilidad, en especial las madres jóvenes
◦ No están esperando por trabajos formales
◦ Eligen no tener protección social formal
◦ Son trabajos de bienestar comparable
◦ Colombia: excepción importante
Ghana (Falco 2015): Independientes con empleados son los mas felices en el mercado laboral
Que dicen los trajabadores?Asalariados informales: la mayoría son involuntarios ◦ Preferirían ser formales o
independientes
◦ Jóvenes: dificultad para entrar a la fuerza laboral
◦ Excepciones: República Dominicana, México
Ghana (Falco 2015) Menos felices pero.. no muchos
0
0,2
0,4
0,6
0,8
1
1,2
1,4
1,6
od
ds
rati
o
Independent Informal
Salaried
Argentina Dominican RepublicR. Dominicana
Pro
bab
ilid
ad r
elat
iva
Independiente Informal
Autoevaluación de pobreza relativa a trabajadores formales
Worker flows often suggest voluntary entry intoinformality.
.08
.1.1
2.1
4.1
6.1
8
Se
lf-E
mplo
ye
d to
Form
al
.03
.04
.05
.06
.07
Form
al to
Se
lf-E
mplo
ym
ent
1987q1 1991q1 1995q1 1999q1 2003q1
Formal to Self-Employment Self-Employed to Formal
Independiente a
formal
Formal a
independiente
Fuente Bosch, Maloney (2007)
Formal a independiente Independiente a formal
NAFTAGATT
Mexico
Este patrón simétrico se rompe después de 1990 en Brasil.
23
45
Self-E
mplo
ym
ent
to F
orm
al
.81
1.2
1.4
1.6
1.8
Form
al to
Self-E
mplo
ym
ent
1983m1 1988m1 1993m1 1998m1 2003m1time...
Formal to Self-Employment Self-Employment to Formal
Brasil
Independiente a Formal
Formal a Independiente
Reforma constitucional y comercial
Bosch, Goñi, Maloney (2012)
65
70
75
80
85
90
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
Actual No trade No Constitution
Brasil: la caída del empleo formal tiene raíces en la legislación laboral
Empleo Formal
Sin Reforma
Comercial
Sin Reformas
Constitucionales
Bosch, Goñi, Maloney (2012)
Formal and Informal workers
Mexico, 1999:1lwage
4 6 8 10 12
0
.5
1
1.5
formal and informal workers
Colombia, 1998logwage
9 11 13 15
0
1.65927
Distribución de salarios informales/formales
ENEU, Santamaria (2005)
Brazilian case- doesn’t necessarily introduce segmentation, but does reduce the supply of “modern” jobs.
Colombia: ◦ very likely to be segmentation- Villar may be right
◦ General bad designed legislation hurts formalization
◦ Still- Colombia is not very off the trend line for a country of it’s level of development.
23
Causality?
24
Latest Available Year - Sedlac Data (max 2015)
So, why are there so many informal self employed?
1. Could be that distortions get worse in developing countries.
2. This is a normal process of development◦ Most salaried workers in US, UK, Germany report that they’d like to be self employed (Oswald,
Blanchflower)
◦ Developing country workers can afford to be since opportunity cost of being self employed is low. Blau (US), Krebs and Maloney 1998; Gollin 2007 (Japan).
Little evidence of correlation of informal sector size with growth.
25
INFORMALITY AND PRODUCTIVITY
26
Policies to Reduce Informality and improve productivity1. Remove segmenting distortions in labor markets where
applicable
2. Tilt the benefit/cost ratio of firms and workers to opt for formality:
◦ removing distortionary incentives in Social Protection Systems,
◦ reducing cost of doing business for all firms. (Levy)
◦ improving services associated with formality especially for SME’s,
3. Raise productivity in “informal” sector
4. Reduce opportunity cost of informality: raise productivity in the formal sector
◦ Improved playing field
◦ Improve firm capabilities and innovation system
◦ Improve quality of entrants
27
Can we raise the performance of micro firms? Yes
Japan
40% of production done in home factories where 1 room converted to workshop.
Quality was problematic.
Nihon Noritsu Kyokai (Japanese Management Association) worked to raise quality.
Mitsubishi “Zero”
Improving productivity at the micro-firm level (Random Control Trials)
Mexico: Micros- productivity doubles after one year of local consulting services. Bruhn, Karlan Schoar(2016)
Kenya: Management training on innovation makes rural female entrepreners more likely to introduce new products.
South Africa: marketing and finance training increase profits 40-60%. Anderson- Macdonal (2107)
Kenya: Mentorship raised profits of female micro entrepreneurs
Uganda: ◦ Grants for skills training, tools and materials.◦ After four years half practice a skilled trade. ◦ Raises business assets by 57%, work hours by 17%, and earnings by 38%. Blattman et al (2016)
Togo: Personal Initiative Training raise profits 30% (Campos et al 2017)
29
Similar elements needed to increase formal productivity
30
Management Quality
Quality issues in Colombian SMEs
31
Origins of Japanese Productivity Movement
Japan Management
Association
(efficiency)
Japan
Productivity
Center
Union of Japanese
Scientists and
Engineers (Quality)
Wartime
Production
Singapore:
SPRING and
Productivity
Movement
Colombia:
Centro
Nacional de
Productividad
Japanese Productivity Movement (1945)
The Innovation ParadoxDeveloping-Country Capabilities and the Unrealized Promise of Technological Catch-Up
XAVI ER C I R ER A
WI LL I AM F. M A LON EY
The Productivity Project:www.worldbank.org/productivity
In sumLarge policy agenda on eliminating distortions that may be causing informality and low growth
However, link from informality to low productivity is not so clear.
Quite possible that the best recipe for reducing informality is boosting productivity in the formal sector.
35
GRACIAS
36
