Background and Overview:

In countries with large informal sectors, business activities go unrecorded, taxes are not paid, opportunities for corruption are rampant, and a significant percentage of citizens are not able to participate in public policymaking.  Government-made barriers to establishing and operating a business distract these would-be entrepreneurs from gainful and productive business activities. 

In order to bridge the gap between the informal sector and the formal economy, it is important to realize that informality is a symptom of underlying institutional problems.  To harness the wealth of the informal sector and merge the two economies, governments must design programs and offer incentives that encourage entrepreneurs to join the formal economy.  One of the easiest ways to do this is by simplifying the business registration process.

CIPE and its partners have developed a number of key policy recommendations that can be applied to bring entrepreneurs into the formal economy.  One of the most important factors is private property rights.  Enforcement of property rights is extremely important because in many developing countries there is a gap between what is “on the books” and what happens in real life.  To be effective in reducing informality, governments must ensure that property rights are clearly defined, strongly enforced, and accessible to all citizens. 

Although informality remains a problem in many countries, efforts by CIPE and partners such as Hernando de Soto’s Institute for Liberty and Democracy in Peru demonstrate that this is a problem that can be successfully addressed for the benefit of entire societies.

Programs and Resources:

• "The Importance of Property Rights to Development" by John D. Sullivan, Jean Rogers, and Kim Eric Bettcher
  Originally published in The SAIS Review of International Affairs, Summer-Fall 2007, Volume XXVII, No.2, Copyright © 2007 by The Johns Hopkins University Press
• "Making the 'Extralegal' Legal" - A case study on the Institute for Liberty and Democracy (ILD) in Peru
• Learn more about ILD's impact on the informal sector in Peru
• For more information on ILD, its programs and impact, please visit ILD website
• Conference on ILD's efforts to combat informality and terrorism in Peru, featuring Hernando de Soto
• Publication: The Informal Economy in the EU Accession Countries
  The Center for the Study of Democracy, based in Bulgaria, announces the publication of a book entitled The Informal Economy in the EU Accession Countries: Size, Scope, Trends and Challenges in the Process of EU Enlargement. The book includes articles from scholars and policy analysts from different countries discussing possible impacts of the accession of 12 Central and Eastern European countries to the European Union, in particular the effects of the informal economy within those countries. The book addresses the following questions: How large is the informal economy in Central Eastern Europe? What are its sources? In what direction is it evolving? How is it different from the informal activities in EU member states? Does it represent an obstacle to further European integration or can it serve as a bridge between accession countries and member states?

• Tapping Hidden Fortunes
  A short article calling on the private sector to lower barriers to formality.
  Available in English, French, Russian, and Spanish.

• Background paper: "Barriers to Participation: The Informal Sector in Emerging Democracies"
  What is the informal sector? Why are informal sectors growing in emerging democratic, market economies? Why do informal sectors threaten democracy and economic growth? What can be done about it? Click on the above link to the background paper to find out more.
  Available in English, Russian, and Spanish.

• Reducing informality and business costs–A tool kit for entrepreneurs and policymakers
  The private sector can successfully affect public policy and improve the business climate. Click on the above link to learn how.

• Country Focus: CIPE projects designed to identify and reduce barriers to formality and business costs
  CIPE supports organizations worldwide in their efforts to identify and reduce barriers to formality and business costs. Learn more about CIPE projects and their partner organizations.

• Articles on the informal sector and the cost of doing business

• How much red tape does your country have?
  Click here for a country-by-country red tape ranking