trainers were often unwilling to enter the areas in which potential trainees lived and worked (Lund and Skinner, 2005, 14). The one success story has been the baked goods sector, where the private suppliers of fixed capital equipment – i.e. ovens - provided both management training and credit together and had a strong financial incentive to ensure that their clients had adequate book-keeping and managerial skills.<sup>7</sup> Nonetheless, it is worth thinking creatively about how to connect the costs and benefits of compliance – otherwise the incentive to regularize will disappear. There are various ways of doing it. In one case the government worked with commercial banks to persuade them to lower their cost of lending to enterprises that had committed to formalization. In another, a revenue authority allowed newly registered firms to charge higher VAT rates on their products than those they paid to their suppliers – effectively giving them a tax break. One approach might be to use pooled data on registered enterprises to make it easier for individuals to get access to, for example, health insurance or other services. And another possible intervention concerns physical infrastructure. The South African city of Johannesburg sought to formalize a cluster of enterprises in the garment sector into the formal economy by providing them with storage and office space in a specially designated ‘fashion district.’ It also gave them training and advice on marketing and business development. A controlled comparison later found that these interventions led not only to higher levels of output and employment, but also to product diversification and competitive upgrading (Rogerson, 2004, 422).

# _Working through intermediaries_

The second lesson to emerge from our experience is that it is almost impossible to formalize unorganized informal sector enterprises. The best approach is to work through existing informal organizations. Ideally, governments should to identify ‘amphibians’ – those individuals or associations with one foot in the informal and the other in the formal sector. The advantage of working through intermediaries is that they are generally more credible than governments, have closer knowledge of conditions on the ground and may be better placed to enforce bargains – providing selective benefits to those who choose to formalize. They are also well qualified to set common industry standards and identify and punish individuals who fail to meet them – a very important consideration in export clusters where even a single breach can undermine an industry’s reputation. Finally informal sector organizations are also in a position to package information about their members and provide it to commercial banks or other service providers at a lower cost than if these outsiders did it for themselves.

The usual candidates for this intermediating function are business associations. Formal private sector associations can persuade entrepreneurs to formalize by making the benefits of membership contingent on regulatory compliance. The usefulness of business associations as instruments for economic development varies widely. In some cases, they have contributed to innovation and upgrading and, at times, to the formalization of

> 7 Interview with Vandana Chandra, Senior Economist, Economic Policy and Debt Unit, Poverty Reduction Economic Management Network, World Bank.

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