The Unofficial Economy in Africa
We examine the productivity of informal firms (those that are not registered with the government) in 24 African countries using field work and World Bank firm level data. We find that productivity jumps sharply if we compare small formal firms to informal firms, and rises rapidly with the size of formal firms. Critically, informal firms appear to be qualitatively different than formal firms: they are smaller in size, produce to order, are run by managers with low human capital, do not have access to external finance, do not advertise their products, and sell to largely informal clients for cash. Informal firms thus occupy a very different market niche than formal firms do, and rarely become formal because there is very little demand for their products from the formal sector.
We are grateful to Nicholas Coleman, Sonia Jaffe, and Francisco Queiro for excellent research assistance. This research was supported by the NBER Africa Project. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.