B2.1.1 Most Informal Enterprises Operate in Retail Services

BOX 2.1 Informality in the Services Sector

Many LMICs have a substantial informal sector—which (as chapter 1 highlighted) has accounted for much of the expansion of services in those economies. In line with the nature of informality, precise data on informal firms remain scarce in many countries. However, the available data suggest that low-skill service sectors, such as retail and personal services, form most of the informal sector. Recent World Bank Enterprise Surveys of unregistered firms in four countries show that more than 70 percent of these firms are in services, employing more than two-thirds of the informal workforce (figure B2.1.1).

Even though in manufacturing, informality is prevalent, especially when the share of unregistered firms (which, for example, in Brazil and Mexico is higher than for retail firms; Perry and Maloney 2007) is examined, a large part of employment and value added is still found in the formal sector. This is different for many services sectors, in which informality dominates employment and value added. For example, economic census data from Ghana show that even though the share of unregistered manufacturing firms is higher than in many services sectors, when employment and value added are examined, the share of unregistered businesses is higher than in manufacturing for several services subsectors, especially in retail, hospitality, and other services, the latter including social, community, and personal services (figure B2.1.2). The importance of informality in services sector employment is in line with the household survey data presented in chapter 1.

La Porta and Shleifer (2014) and Ulyssea (2020) discuss three commonly held views about informality and its potential for development:

FIGURE B2.1.1 Most Informal Enterprises Operate in Retail Services

Sectoral distribution of informal enterprises in four selected LMICs, 2018–19

Share (%) 100 90 80 70 60 50 40 30 20 10 0 71

73 80

89 68 67 80 84

29 22 18 8 31 30

19

13 Somalia Lao PDR Mozambique Zambia Somalia Lao PDR Mozambique Zambia Number of firms Employment Manufacturing Retail Transportation Vehicles trade

Source: World Bank Enterprise Surveys, 2018–19. Note: Low- and middle-income countries (LMICs), by World Bank income group classifications, had 1994 gross national income of less than US$8,955.

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