drives many firms with a strong potential to grow to remain in refuge in the informal sector, reducing the productivity gap between the formal and informal sectors in those countries.

# **B. West Africa**

Two significant points have become prominent in research on West Africa: The difficulty of providing a single definition of informality due to the strong heterogeneity among informal firms and the consequent approach of classifying firms according to a continuum of characteristics. Results from Benjamin and Mbaye (2012) confirm the importance of distinguishing the large from the small informal firms in describing behavior and identifying obstacles in the investment climate. While the vast majority of informal firms are very small, the large informal firms play a major role in some sectors, notably commerce.

As noted above, Benjamin and Mbaye (2012) investigate productivity differentials between large and small informal firms in West Africa. The results indicate that large informal firms also have lower productivity than formal firms but the differential is minor, whereas the productivity gap between large and small informal firms is much greater. This result confirms the thesis of Gelb et al. (2009) in which the weakness of regulations drives many firms with a strong potential to grow to remain in refuge in the informal sector, reducing the productivity gap between the formal and informal sectors.

They also examine total factor productivity (TFP) in addition to labor productivity. TFP controls for capital intensity, yet they find the same positive correlation between TFP and formality as for labor productivity. This shows that capital intensity alone cannot explain differences in labor productivity.

They find that large informal firms, in particular, can have fragile structures. They manage large volumes of value added and temporary workers, but they are run like a family firm with a small number of permanent employees, no specialized departments, and seldom survive the death of the owner, or a rupture with political protectors.

The informal sector relies on practices that hinder productivity growth. Their lower productivity may be influenced by the fragility noted above, lack of transparency of their own accounts, long-established traditions based on well-entrenched control of territory and rents, and sub-optimal allocation of productive factors (including reliance on family sources for credit). Informality also prevents companies from acquiring modern management skills and worker training, limiting growth potential and access to the world market. Thus the informal sector contributes to an inimical investment climate for formal firms, particularly foreign investors. Further, the informal sector in general and large informal firms in particular are responsible for a substantial loss of fiscal revenues and narrowing of the tax base.

The informal sector is in part a symptom of institutional deficiencies and the large informal sector, in particular, is a symptom of government failure to enforce regulations that should apply to these firms, as well as the burdensome nature of regulations and taxation that inhibits compliance. For the large informal firms with a genuine choice, policy should be oriented toward a more systematically enforced and enforceable regulatory regime.

Business and government should collaborate on an effort to improve both the business environment and tax compliance, in recognition that each side can take actions that will improve the circumstances of the other. Government can and should move independently to improve public expenditure management and 26