Informality and Productivity in Bolivia: A Gender Differentiated Empirical Analysis

The urban labor market in Bolivia can be divided into 4 main sectors: 1) the public sector, 2) the formal private sector, 3) self-employed informals, and 4) informal workers. Although incomes are generally higher in the public sector and in the formal private sector, there is a strong preference in Bolivia for being informally self-employed. Two thirds of both men and women in urban areas respond that they would prefer to be self-employed rather than a salaried employee, and few see any advantage of becoming formal under the current institutional set-up. Currently, half of all economically active women in urban areas are informally self-employed, while this is the case for only one third of men. This implies that women are actually closer to the desired state than men, according to their own preferences. The real problem for women is not that they are informally self-employed, but rather that the profitability of their informal enterprises is low. On average, monthly profits of female micro-entrepreneurs is about 40% lower than those of male micro-entrepreneurs. This report uses quantitative information from about 600 micro and small enterprises to break down and understand this gender gap in profitability, and the results show that almost the whole gap is due to the fact that women operate their businesses on a much smaller scale (with less productive capital and fewer employees) than men. Why do female entrepreneurs operate on a smaller scale? One partial explanation is that they do not want to grow, because the business then would loose some of the features that make a micro-business particularly attractive for women (not to depend on others, to be able to care for children simultaneously, flexible working hours, and daily revenues). More important, however, is the lack of access to capital. Micro and small businesses operated by women have only a third of the operating capital of male operated businesses. There are two main reasons for this. First, women generally have fewer opportunities to accumulate capital, both because their household and reproductive work takes time away from paid work, and because they tend to earn less than men when they do work for money. Second, they do not have access to credit on reasonable terms. Access by itself is not the problem, as there is a very active micro-credit industry in Bolivia, but the terms are so unattractive that women try to avoid it if at all possible. The interest rates are high (20-40% per year); the group-lending practices increases the risk for the borrower, as they may end up paying other group members’ debt also; and they are typically required to assist at compulsory training courses twice a month, which is demanding for busy women running both a business and a household. Banks offer loans at more reasonable terms, but the requirements are difficult for micro-entrepreneurs to comply with (especially proof of a monthly pay check) and the risk is large as an entire house is often put up as collateral for even a small loan. Capital and credit is not a binding constraint in all sectors, however. On average, returns to additional capital investments are estimated to be relatively high (internal rates of return of over 20%) in the food sales sector, the textile clothing sector, and the camelid clothing sector. In contrast, they are estimated to be negative for grocery stores and the transport sector, which have experienced overinvestment to the extent that the returns to both capital and labor in these two sectors have been severely depressed. Even in the sectors where returns to capital are relatively high, a doubling of productive capital would not lead to a doubling of monthly profits. In fact, estimation results show strongly diminishing returns to scale, which means that micro-enterprises have little incentive to grow. Under the current institutional setup in Bolivia, it makes more economic sense to have several identical micro-enterprises in the family rather than one larger enterprise, and this is indeed often observed in practice. This is partly due to the characteristics of the sectors (for example, several small stores can capture a larger market due to the geographical dispersion), but it is mostly due to the tax-system, which becomes very demanding, both in terms of bureaucratic procedures and in terms of tax burden, as soon as an enterprise grows past a certain threshold. Under the current institutional set up, micro-entrepreneurs perceive no benefits from becoming formal, and indeed estimation results confirm that formality would lower the monthly profits of micro-enterprises (less than 3 workers and less than $1000 in operating capital) by 30-40%. Slightly bigger firms (3-5 workers), however, may benefit from getting a NIT and thus be able to offer facturas to the clients.