Increasing Formality and Productivity of Bolivian Firms

Bolivia's informal sector is the largest in Latin America, by many definitions and measures. Bolivia's high informality rate has been blamed on many factors including the burden of regulation, the weakness of public institutions, and the lack of perceived benefits to being formal. The high level of informality has a number of negative implications related to for low productivity, low growth, and low quality of jobs.

This book presents fresh ualitative and quantitative analyses to better understand the reasons why firms are informal and the impact of normalization on their profitability, in order to inform policy actions appropriate to the reality of Bolivia.

The crucial finding of the analysis is that the impact of tax registration on profitability depends on firm size and the ability to issue tax receipts. The smallest and the largest firms in the sample have lower profits as a result of tax registration because their cost of formalizing exceeds benefits. Firms in the middle range benefit from tax registration in large part due to increasing the customer base by issuing tax receipts.

It presents a set of prioritized policy implications for policy makers. In the short term, the priority should be to increase the benefits of formalization through training, access to credit and markets, and business support. The second is to increase information on how to formalize and its benefits. In the medium term, the priority is to simplify formalization, regulatory and taxation procedures and reduce their costs. Increasing even-handed enforcement of taxation and regulation is also important but not a priority for micro and small firms. Measures to boost the productivity of micro and small firms in general will both help overall economic growth, employment, and, formalization.