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Citation Information

Type Working Paper
Title Informal sector formalization in Tanzania: An alternative approach
Publication (Day/Month/Year) 2006
URL http://dare.uva.nl/cgi/arno/show.cgi?fid=54402
Not all entrepreneurs fit Schumpeter’s description of creative genius. In the
informal sectors of developing countries, there is considerable evidence that
most do not. If the informal entrepreneur and informal employee aim for
short-run subsistence rather than long-run profits, is a policy of skills
development optimal for encouraging formalization of enterprises, or would
another policy focus be more appropriate? This paper adapts an approach
from Akos Rona-Tas (2001), which classifies entrepreneurial activity into
two types: pro-cyclical profit-driven entrepreneurship, and countercyclical
consumption-driven entrepreneurship. The latter forms the basis for a model
of the sector-work decision in the Tanzanian labour market. In this model
we assume that wage variance is highest in the informal sector, second
highest in the formal private sector, and lowest in the public sector. We
make assumptions of a similar style with regards to wage levels and
expected job security. The result is a model which shows theoretically that
for most workers, informal employment is at best a second-best option. The
implication is that formalization policy in Tanzania could be more effective
if its focus were shifted to expansion of formal private enterprise instead of
direct formalization of informal enterprises. We argue that such a change
might produce more favourable results in the effort toward formalization
than the previous strategy of formalization-inducing skills development.

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