involved in informal trade. While some are highly visible, such as transporters carrying the goods across the border, street vendors, and ad hoc traders, others are less so, such as wholesalers, currency changers, and officials in the relevant administrations who are willing to turn a blind eye to the practice. Interviews underlined the pivotal role played by wholesalers, who control the supply chain and distribution network and are best informed about possible commercial opportunities that may arise as a result of changes in customs duties or tax rates. This kind of trade also keeps many goods within budget for Tunisian consumers.

# **C. Investment climate: What encourages informal firms to formalize?**

Over the past few years, a large part of the literature on the impact of improved business regulations has focuses on the links between easing business entry and increased entrepreneurship. A common finding is that substantial improvements in the ease of start-up are linked with more firms registering: making business registration and operations simple, cheap and fast can encourage formalization.<sup>8</sup> However, this assumption cannot be entirely verified.

An early literature review on business entry reforms found that the introduction of significant business entry reforms is directly associated with an increase in the number of firms, and that a significant reduction in business registration costs affects new firm creation more in industries with low barriers to entry than in those with high barriers.<sup>9</sup> Smaller reforms – such as Lima’s (Peru) simplification of just the process to obtain a license to start a business – seem to have had no significant effect on firm performance.<sup>10</sup> Interestingly, the existing literature on the effect of entry regulation on formalization, and the effect of formalization on performance, focuses on studies conducted in Latin America and Southeast Asia.

In Mexico, Bruhn (2011) analyzed the impact of a reform that, in 2002, reduced the number of days taken to start a business from 30.1 to 1.4. The reform was implemented sequentially in different counties in Mexico, and allowed for a quasi-natural experiment using data on individuals’ employment status from the Mexican Labor Market Survey (ENE). The analysis found that the reform increased the number of registered firms by 5 percent.<sup>11</sup> Branstetter and Taylor (2010) found that, in Portugal, the introduction of a one-stop shop, which decreased the number of days to register a business by 91%, led to an increase of new firms created by over 17%.<sup>12</sup> However, recent studies have found that information campaigns following simplification of registration requirements result in very few informal firms registering.<sup>13</sup> In addition to easier business entry procedures, informal business could in principle benefit from a more secured and predictable taxation system, in particular for SMEs, which would minimize the risk of risks of harassment from tax inspectors.<sup>14</sup> To date, there is no empirical evidence of the effect of tax protection that would directly benefit micro or small businesses.

> 8 Klapper, Leora and Inessa Love, 2010.

> 9 Motta, Marialisa, Ana Maria Oviedo, and Massimiliano Santini, 2010.

> 10 Lorena Alcázar, Miguel Jaramillo, Mimeo, Grade, June 2011.

> 11 Bruhn, M., 2011.

> 12 Branstetter, Lima, Taylor, Venancio, October 2010.

> 13 See Andrade, G. H., Bruhn, M., McKenzie, D. (2013.

> 14 See, for example, De Mel, S., McKenzie, D., Woodruff , C., 2013.

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