Enforcement, Evasion and Informality: Theory and Practice An International Conference in Honor of Katherine Terrell Organized by International Policy Center (Gerald R. Ford School of Public Policy, University of Michigan) And Cornell University Ann Arbor, June 4-6, 2010 Informality, productivity, and enforcement in West Africa: A firm level analysis By Nancy C. Benjamin (The World Bank) And Ahmadou Aly MBAYE (University Cheikh Anta DIOP of Dakar) Introduction Significance of the informal sector in Africa and very little consideration given to big informal actors Sample designs shaped by a narrow and misleading definition of informality as small scale individual or household, ignoring the large informal sector. In this study, we use firm-level data collected on 900 formal and informal businesses in the capital cities of Benin, Burkina Faso and Senegal, complemented by more qualitative information gathered from semi- structured interviews of major stakeholders in the three cities as well as secondary data compiled from the national income accounts. A second phase of more in-depth interviews with selected major stakeholders focusing on the large informal sector was carried out in The predominance of the informal sector in Africa, and the existence of large informal firms in particular, highlight some major issues inhibiting African development. Our study also found that informal businesses are less productive than formal ones and that the productivity gap is much smaller for large informal firms than for small informal firms, again suggesting that large informal firms have the requisites to formalize but choose not to do so. The informal sector in West African economies: scope and major characteristics Informality as a Continuum The size of activity criterion The registration criteria The access to bank credit criterionThe mobility of the workplace criteria The existence of honest financial statements criterion Figure 1: informality as a continuum : the six different levels of formality Figure 2 : Share of firms failing to meet various criteria of formality Large informal businesses in West Africa Their major characteristics An accounting system based on fake Very odd organizational structure High mortality rate of firms Short longetivity Their dynamics of transition Where do they come from? Do they tend to formalize? TAUX DE SURVIE DES ENTREPRISES A OUAGA EntreprisesRetrouves (%)Non retrouves (%) Formelles7624 Informelles5446 Figure 3: Evidences of their existence Evidences from our survey data It should be clarified that the transition program for informal enterprises is not meant to apply to those large-scale enterprises, particularly in the importing sector, that evade taxes. These enterprises have no need for any special benefits. They exist only with the tacit agreement of powerful supporters in the government, and their existence should be considered a costly form of corruption rather than a special case for a developing economy. To remedy this problem, the government needs to launch a program to enforce the tax and the other laws against these enterprises. Scott Jacobs Evidences gathered from official (tax authority and customs) sources Figure 4: proportion of firms under reporting sales to the tax authority by industry Some very famous cases Khadim BOUSSO Cheikh Tall Dioum and NBA Moustapha Tall Bocar Samba Dieye The NANA Benz in Togo The big wholesalers and retailers in the Dantokpa Market (Benin) The Informal Sector and the Institutional Environment Connection between big informal actors and the Mouride brotherhood High perception of poor use of tax revenue Minimizing risk of being exposed to fiscal harassment High perception of poor enforcement capabilities High perception of the level of costs associated with a reliable accounting system High perception of the level of taxation Difficulties linked to tax collection Figure 5:Do you think the government is using tax revenue rightly ? Fiugre 6: Level of confidence in the good use of public resources Figure 7: Do you think tax payment expose you to fiscal harassment ? Level of enforcement Figure 8: Rules governing social protection Figure 9: Honest tax filing Level of enforcement Figure 10: Sincerity of accounts Figure 11:Managing the accounting system Cotonoudakar Ouaga Figure 12: Perception of the costs of accounting Figure 13: Perception of the level of taxation Figure 14: Percpetion of tax payment modalities Figure 15: Assessment of the quality of the tax collection service Figure 16: Easiness of filing tax Figure 17:Length of queues for tax payment Productivity Differences Between Formal and Informal Firms PRODUCTIVITE DES SECTEURS INFORMEL ET FORMEL Dakar Ouagadougou Figure 18 Variable dpendante: le log de la productivit du travail CART Cotonou