“Unwilling” Entrepreneurs

The common perception of the informal sector is that unregistered businesses are not as efficient as registered or formal businesses. One proposed reason for this is that, by not being registered, informal businesses face severe hardships in accessing finance, markets, public services and government programs. Hence, the usual policy response to informality is simple: try and encourage informal businesses to register.

However, another problem in regards to informal firms may be the underlying motivation for starting the business in the first place. There are many informal businesses that are started not because the owner sees a good business opportunity, but because he or she cannot find a satisfactory job (“unwilling” entrepreneurs). A survey of informal firms conducted by Enterprise Surveys shows that 46 percent of informal firms in Ivory Coast, 39 percent in Madagascar and 31 percent in Mauritius were started because the (largest) owner could not find alternative employment opportunities.

My sense is that becoming an entrepreneur just because one cannot find a satisfactory job is a far cry from the dynamic Schumpeterian entrepreneur, and is likely to impose additional efficiency costs on the economy. While this issue requires a detailed empirical analysis, the figure below suggests that it may be true. Labor productivity, or output per worker, is indeed lower for firms with unwilling entrepreneurs. Efficiency costs resulting from the underlying motivation of entrepreneurs do not necessarily go away by getting the informal firms to register. What the economy needs is more wage-earning jobs.