July 20, 2009
Aid donors often pursue policies designed to encourage small, informal firms to enter the formal economy, believing that formal firms not only pay taxes but also have greater productivity. True? CGD senior fellow Vijaya Ramachandran and co-authors find that labor productivity of informal and formal firms is about the same in East Africa. But in South Africa, productivity is much higher in formal firms. They explain why this matters for firms, governments, and donors.