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points (Fernández and Villar 2016). A reduction and simplification of business taxes in Brazil in 1996 was associated with a significant increase in the incidence of formal firms, and the newly formal firms achieved higher revenue and profits than those operating informally (Fajnzylber, Maloney, and Montes-Rojas 2011). The impact of Brazil’s reform on informality varied across economic sectors, however, because of differences in incentives to become formal (Monteiro and Assuncão 2012). Labor market regulations. Tighter enforcement of labor regulations has been effective in reducing informality in the region, through various mechanisms. In Brazil, tighter enforcement of regulations raised wages and output by improving the allocation of workers between the formal and informal sectors (Meghir, Narita, and Robin 2015). More frequent inspections in Brazil also induced some informal workers to become formal (Almeida and Carneiro 2012). Moreover, inspections have been found to be more effective than incentives in convincing firms in Brazil to operate in the formal sector (de Andrade, Bruhn, and McKenzie 2013). Other regulations. Policy reforms to ease barriers to entering the formal sector have had mixed results. A reform that simplified the process of opening a business in Mexico was successful in increasing the number of registered businesses, but had no impact on informality: the owners of the new businesses were former employees of formal firms, not informal workers (Bruhn 2011; Kaplan, Piedra, and Seira 2011). Financial deepening contributed to a reduction in informality in Uruguay, particularly for women and older workers (Gandelman and Rasteletti 2016). COVID-19 response. The provision of income support to informal workers during the COVID-19 pandemic has been challenging. In some cases, existing programs have been successfully scaled up, particularly for the lowest-income informal workers. But even where informal workers have been reached, there have been challenges related to coverage (Busso et al. 2020). One lesson is that the provision of social safety nets needs to be more agile, with low barriers to enrollment and provisions for rapid rollout (Arnold, Garda, and Gonzalez-Pandiella 2020).
Middle East and North Africa On average, MNA has the lowest output and employment informality among all EMDE regions. There is particularly wide divergence within the region, however, consistent with the wide range of per capita incomes across MNA economies (figure 5.10). Output informality in oil importers and in oil exporters that are not members of the Gulf Cooperation Council (GCC) is well above that in GCC countries, reflecting a sizable presence of agriculture sectors in some countries, as well as histories in some cases of prolonged armed conflict with associated migration, and high reliance on public sector employment. Informal activity in these economies absorbs a large proportion of the region’s high numbers of unemployed youth. By contrast, employment informality in GCC countries is very low, averaging 3 percent of total employment in 2010-18. This is broadly in line with the high per capita incomes of GCC countries.
