Conclusion

Access to finance

Less access to finance in more informal economies. Firms in the informal sector have less access to credit from the banking sector and capital markets, which restricts their ability to invest, including in productivity-enhancing technologies (Capasso and Jappelli 2013; D’Erasmo 2016; Ferreira-Tiryaki 2008; box 6.1; figure 6.12). In EMDEs with above-median informality, about one-third of firms identified access to finance as a major constraint—8 percentage points higher than in EMDEs with below-median informality. Households in EMDEs with below-median informality have access to significantly more commercial bank branches, ATMs, and credit than those in other EMDEs. About half of the population in EMDEs with below-median informality owns an account at a financial institution or used a mobile money service recently—about 17 percentage points higher than in EMDEs with below-median informality. Over time, expanded access to finance. EMDEs, especially in EAP, Middle East and North Africa (MNA), South Asia (SAR), and, more recently, SSA, have implemented a series of reforms to improve access to finance. Such reforms mainly aim to strengthen credit reporting systems and improve the effectiveness of collateral and bankruptcy laws (World Bank 2020a). Overall, financial development improved in about 90 out of 142 of EMDEs over the period 2010-18 (figure 6.12). The number of ATMs per 100,000 adults rose by 50 percent between 2010 and 2018, and the share of population with an account at a financial institution increased from 33 percent to 51 percent. Domestic credit to the private sector increased by about 4 percentage points of GDP over the same period. Access to credit has been facilitated for firms in the informal sector by introducing credit information bureaus and better use of information and communication technology (Capasso, Monferrà, and Sampagnaro 2018). Personal property registration has also made loans more accessible for firms operating in the informal economy (for example, in the Czech Republic; World Bank 2012). Digital payment systems have provided an entry point into the formal financial system and encouraged a shift away from informal finance (for example, in Kenya; World Bank 2017).

Lower informality after expanded access to finance. Lower financing costs and easier access to credit can entice informal firms with promising investment projects that require external finance to enter the formal economy (box 6.1). Empirically, adding 10 more bank branches per 100,000 adults was followed by a decline of 0.1 to 0.3 percentage point in the share of informal output in the following one to five years. A 10percentage-point-of-GDP increase in domestic credit to the private sector was associated with a significant contraction in output informality, by 0.1 percentage point of GDP over the subsequent one to five years.

The COVID-19 (coronavirus) pandemic plunged the global economy into an unprecedented contraction in 2020, and it is likely to leave lasting scars on long-term