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Economic Growth and Poverty: Does Formalisation of Informal Enterprises Matter?


  • Esther K. Ishengoma

    () (Faculty of Commerce and Management, University of Dar es Salaam and GIGA German Institute of Global and Area Studies)

  • Robert Kappel

    () (GIGA German Institute of Global and Area Studies)


The informal sector (IS) plays a significant role in developing countries viz. the provision of employment, income and supplying ignored markets. However, working and employment conditions within the sector are still poor. Its expansion and changing structures have thus drawn the attention of scholars and international policy makers to the factors hindering its formalisation. Among the factors addressed are the high costs of formalisation and the lack of incentives for operating in the formal sector. A variety of approaches have been adopted by different stakeholders to overcome these factors. This paper assesses these approaches along with the factors related to informality-formality trade-off and the issue of formalisation as a solution for firms’ growth. By focussing on the problems faced by informal enterprises and the literature which addresses the options for accelerating the formalisation of informal enterprises, the paper will briefly summarise the weaknesses of these approaches.

Suggested Citation

  • Esther K. Ishengoma & Robert Kappel, 2006. "Economic Growth and Poverty: Does Formalisation of Informal Enterprises Matter?," GIGA Working Paper Series 20, GIGA German Institute of Global and Area Studies.
  • Handle: RePEc:gig:wpaper:20

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    References listed on IDEAS

    1. Klein, Michael, 2003. "Ways out of poverty : diffusing best practices and creating capabilities - perspectives on policies for poverty reduction," Policy Research Working Paper Series 2990, The World Bank.
    2. Jackle, Annette E & Li, Carmen A, 2006. "Firm Dynamics and Institutional Participation: A Case Study on Informality of Micro Enterprises in Peru," Economic Development and Cultural Change, University of Chicago Press, vol. 54(3), pages 557-578, April.
    3. Kappel, Robert & Lay, Jann & Steiner, Susan, 2004. "The Missing Links - Uganda's Economic Reforms and Pro-Poor Growth," Open Access Publications from Kiel Institute for the World Economy 3840, Kiel Institute for the World Economy (IfW).
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    9. Ranis, Gustav & Stewart, Frances, 1999. "V-Goods and the Role of the Urban Informal Sector in Development," Economic Development and Cultural Change, University of Chicago Press, vol. 47(2), pages 259-288, January.
    10. Howell, Jude. & Singh, Andrea., 2002. "Good practice study in Shanghai on employment services for the informal economy," ILO Working Papers 993551913402676, International Labour Organization.
    11. Levenson, Alec R. & Maloney, William F., 1998. "The informal sector, firm dynamics, and institutional participation," Policy Research Working Paper Series 1988, The World Bank.
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    13. Abigail Barr, 1998. "Enterprise performance and the functional diversity of social capital," CSAE Working Paper Series 1998-01, Centre for the Study of African Economies, University of Oxford.
    14. Loayza, Norman V., 1996. "The economics of the informal sector: a simple model and some empirical evidence from Latin America," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 129-162, December.
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    Cited by:

    1. Rachel Lock & Helen Lawton Smith, 2015. "The impact of female entrepreneurship on economic growth in Kenya," Working Papers 26, Birkbeck Centre for Innovation Management Research, revised Nov 2015.
    2. Kanothi, R.N., 2009. "The dynamics of entrepreneurship in ICT: case of mobile phones downstream services in Kenya," ISS Working Papers - General Series 18727, International Institute of Social Studies of Erasmus University Rotterdam (ISS), The Hague.
    3. Fara Azmat & Ramanie Samaratunge, 2009. "Responsible Entrepreneurship in Developing Countries: Understanding the Realities and Complexities," Journal of Business Ethics, Springer, vol. 90(3), pages 437-452, December.
    4. Ahmadou Aly Mbaye & Nancy Benjamin & Stephen Golub & Jean-Jacques Ekomie, 2014. "The Urban Informal Sector in Francophone Africa: Large Versus Small Enterprises in Benin, Burkina Faso and Senegal," Working Papers 201405, University of Cape Town, Development Policy Research Unit.
    5. Beegle,Kathleen G. & Benjamin,Nancy Claire & Recanatini,Francesca & Santini,Massimiliano, 2014. "Informal economy and the World Bank," Policy Research Working Paper Series 6888, The World Bank.
    6. Woldeyohanes, H. T., 2014. "Dimensions and Determinants of Growth in Micro and Small Enterprises: Empirical Evidence from Mekelle City, Ethiopia," AGRIS on-line Papers in Economics and Informatics, Czech University of Life Sciences Prague, Faculty of Economics and Management, vol. 6(3), September.
    7. Tarek, Syed Ali, 2011. "Study of Sustainable Growth Factors of SIE/ Micro-financed Business," MPRA Paper 40752, University Library of Munich, Germany.
    8. Kareem Elhennawi, 2016. "Factors Affecting Business Informality Among Egyptian Opportunity Entrepreneurs: An Exploratory Study," Journal of Developmental Entrepreneurship (JDE), World Scientific Publishing Co. Pte. Ltd., vol. 21(04), pages 1-18, December.
    9. William Ruzek, 2014. "The Informal Economy as a Catalyst for Sustainability," Sustainability, MDPI, Open Access Journal, vol. 7(1), pages 1-12, December.
    10. Janet Ceglowski & Stephen Golub & Aly Mbaye & Varun Prasad, 2015. "Can Africa Compete with China in Manufacturing? The Role of Relative Unit Labor Costs," Working Papers 201504, University of Cape Town, Development Policy Research Unit.

    More about this item


    Informal sector; small enterprises; formal and informal institution; cost of formalisation; informality; formality; poverty; economic growth;

    JEL classification:

    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • D2 - Microeconomics - - Production and Organizations
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty

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