Ishengoma (2006); OECD (2006); Muwonge (2007); Dzhekova and Williams (2014) and USAID (2005) have similar opinions on barriers to formalisation. They concur that from an informal entrepreneur’s perspective, formalisation barriers can be unpacked into regulatory, administrative, fees and financial requirements, corruption, socio-cultural attitudes, lack of key business services and fear of criminality. USAID (2005) goes on to establish a link between barriers to business growth and barriers to formalisation.
2.5.1 Regulatory Barriers
The formalisation of enterprises in many developing economies is cumbersome mainly due to heavy regulations which act as hurdles through delays and higher costs of public services. Burdensome and costly government regulations have been singled out as significant determinants of informality prompting many operators to remain informal in order to avoid them (USAID, 2005). Governments are said not to appreciate the need to keep regulatory burdens to a necessary minimum in order to enable formalisation. Heavy handed regulations requiring approval of very minor activities and inflexible centralised authority have worsened the situation. Study has confirmed that the costs and barriers imposed by regulation in developing economies are higher in some cases than in the advanced countries thereby presenting a daunting regulatory hurdle to the would be formal entrepreneur (OECD, 2006; USAID, 2005).
2.5.2 Administrative Barriers
Administrative barriers such as excessive paperwork, civil service inefficiency, low level skills, general bureaucratic obstruction and corruption are regarded by USAID (2005) as a hustle that dissuades informal entrepreneurs from wanting to interact with authorities.
They attribute most of these administrative barriers to emanate from the desire to create opportunities for rent-seeking.
2.5.3 Business Fees and Financial (Costs) Barriers
In the same vein Ishengoma (2006) cites business fees and financial requirements as regressive and punitive as they are set at levels that discourage formalisation of businesses. Regressive business registration and licensing fees are often set at levels that penalise informal players and act as a disincentive to business formalisation. While to start-up a business in Niger totals US$1000, Uganda does not control the fees and
licences charged by local governments on business resulting in businesses being pushed into informality (USAID, 2005).
Studies by OECD show that Informal businesses are reluctant to join the tax regime because of high level taxes, and fear of exposing themselves to tax officials a view Gelb, (2009) shares. Since registration is often the means of entry into the tax system, taxation as a barrier to formalisation is closely linked to business registration. They claim registration is what separates the informal entrepreneur from the formal one; yet, the bureaucracy involved in registering a business is a key barrier adding that seeking approval in the form of a licence to engage in some regulated business is yet another hurdle (OECD, 2006). Schneider and Williams (2013) reinforces the argument by adding that the burden of taxes and social security contribution is a key driver that influences and motivates informality, followed by quality of state institutions and the morale behind taxation.
2.5.4 Other Barriers
Problems of corruption, criminality, and lack of key business services have also been singled out by Gelb (2009) as barriers to formalisation. Businesses are said to stay off registries and tax rolls in order to minimise contact with corrupt officials who impose an additional cost to doing business while others are reluctant to provide information about their wealth for fear of being exposed to criminals (OECD, 2006; USAID, 2005). Labour laws are usually avoided by going informal thereby lowering social costs for the business.
In a survey conducted in South Africa by SALED, 63% of the survey respondents confirmed that high labour costs prevented them from taking more employees.
Spiegel (2012) has a different view on the barriers to formalisation in the informal gold mining sector. He mentions the tradition of miners to operate individually without seeking permits as rife. He also identifies illiteracy, access to mineral rich concessions, rare visits and inspections by authorities, and little or no incentives for being registered, as some of the barriers for not formalising. He however agrees with the former that cost and difficult procedures to gain and maintain legal status, fear of being taxed fully after registration, and fear to lose their lucrative illegal markets are some of the barriers to formalisation.
Table 2.2 summarises the benefits of, and barriers to formalisation of enterprises as reviewed in related literature
Table 2.2: Benefits and Barriers of Formalisation
BENEFITS OF FORMALISATION BARRIERS TO FORMALISATION Higher quality, better paid and more sustainable jobs for
employees.
Burdensome and costly government regulations.
Building investor confidence. Heavy handed regulations requiring approval for very minor activities.
Boosting public revenue through a broad tax base. Inflexible centralised authority.
Poverty reduction through increased welfare. Excessive paperwork during registration.
Identifiable and permanent workplace with shorter working hours.
Inefficient low level skilled civil servants.
Safe and healthy working conditions are guaranteed. General bureaucratic obstruction.
Improved level of skills and access to information. Punitive and regressive registration and financial requirements.
Access to better markets. The burden of having to pay taxes.
Protection of workers under labour laws. Cumbersome registration processes.
Social security protection. Lack of transparency in what taxes are used for.
Enjoyment of secure property rights. Fear of exposure to criminals after registration.
Improved access to capital and credit. Fear of exposure to labour laws which are not business friendly.
Improved access to legal and judicial services for enforcement of contracts.
Lack of formalisation incentives.
Increased gross profits and investment hence longer term business stability.
Lack of knowledge on the benefits and procedures of registration.
Unlimited access to public service. Fear of losing the lucrative illegal markets.
Profitable business expansion through economies of scale.
Difficult and costly procedures of gaining and maintaining legal status.
Freedom of public advertisement leading to expansion of customer base.
Source: Own Compilation