Formalization vs. preserving livelihoods

Our debate on enterprise formalization continues.

Jan Loprick has dispatched himself to Liberia where he has been pondering whether this agenda makes sense when almost the entire economy is informal and the most pressing need is to preserve livelihoods and find employment for recently demobilized soliders. His answer is a tentative yes, provided policy-makers concentrate on linking formalization to tangible benefits (e.g. access to markets, practical security of land tenure) and ease up on enforcement. From Jan:

Sure, capacities are very limited in Liberia but sometimes small carrots might be sufficient. For small scale miners a reliable claim to their mining parcel might be reason enough to get a mining license and comply with tax requirements.

As usual, regulatory simplification is a good idea and may even be easier to achieve when politics are fluid than in more stable environments. The main thing is to avoid antagonizing former combatants through heavy-handed policing - which requires a close understanding of the political affiliations between business owners, politicians and former warlords.

Meanwhile Edoardo Totol points out that many informal 'enterprises' are in fact self-employed or owner-operators who have no interest in becoming larger or more efficient. 'Formalization' should aim at giving these people a voice, not at coralling them into legal frameworks that have little to do with the reality of their business. From Edoardo:

What is really needed is a representative body of informal operators capable to negotiate with governments the ways in which formalization will occur, considering especially the countless amount of informal institutions that are not going to disappear with formalization procedures.

I agree - up to a point. Participation in formal institutions  and markets may well be a 'normal good', that is irrelevant for many micro-enterprises. But it's also true, at least in Latin America, that even quite large firms engage in tax and other forms of regulatory evasion - with adverse consequences both for revenue collection and private sector development. The more I become involved in these issues, the more the notion of 'informality' seems more a barrier than an aid to understanding - because it conflates a whole range of behaviors, some of which we should be concerned about and others not.