**Policy Research Pubic e tr Mnagement and Private Sector Development**

## **WPS 1047**

- Mhis paper a product of the Public Sector Management and Private Sector Development Division, - Country Economics Department reflects an early application of a methodology for private sector assessment developed by the Divisic ' to identify constraints on, and priorities for, the development of a country's private sector. Copies of + paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Priscilla Infante, room N9-059, extension 37642 (November 1992, 48 pages).

Private sector assessments provide information and analysis essential to formulating strategies for alleviating constraints on private sector development. They are meant to contribute both to the Bank's policy dialogue with borrowing govenmments and to the formulation of country assistance strategies.

Rueda-Sabater and Stone examine the constraints on growth faced by private enterprises and how these relate to the policy and institutional environment in C6te d'Ivoire. They employ new data sources as well as surveys of, and in-depth interviews with, private entrepreneurs. They focus on:

**o** The effects of taxes and labor regulation on private firms.

The impact of public spending on private sector development.

**o** The role of informality in enterprise activity.

# Among their findings:

Tax policy and enforcement impose a heavy financial burden on a shrinking base of formal enterprises, whose regulatory burden has also grown. Taxes are increasingly independent of a firm's profits. This substantial fixed cost may lead some businesses to exit prematurely and may discourage others from formal entry. The overall tax burden on small and medium-size enterprises has risen disproportionately, to levels that discourage formal participation in the economy. Informal firms pay some taxes, but there is considerable leakage in collection.

Unnecessary rigidities in labor policies weigh less heavily than expected on firms, because they avoid their full costs through such means as subcontracting and apprenticeships. The restrictions nonetheless limit firms' flexibility of operation and ability to reward merit.

In the 1980s, public spending increasingly channeled limited financial resources and human capital toward nondevelopment purposes, including poorly performing enterprises and elite-oriented services, precluding their use in the private sector. The methods of financing public spending (such as withholding taxes and accumulating arrears) have sharply curtailed the capital available to private enterprises. The public sector's dramatic accumulation of arrears and growing reputation as a bad customer are undermining the competitive private supply of goods and services to the government.

Government employment policies attract many of the most qualified potential entrepreneurs and business professionals to government employment.

Rather than a sharp divide, there is a continuum between small informal and large formal firms. Some medium-size and large formal firms engage in informal behavior, and large firms sometimes lower their costs through links with informal firms - including purchases of inputs that have escaped regulation and taxes.

**The Policy ResearchWorking PaperSeriesdisseminates thefindings of work under way in theBank. Anobjectiveof the** series **is to get these findings out quickly, even if presentations are** less **than fully polished. The findings,** interpretations, **and conclusions** in **these papers** do not **necessarily represent official Bank policy.**

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