Developing country governments seek toreduce pervasive informality of firms for multiple reasons:increasing the tax base, helping firms access formal marketsand grow, increasing rule of law, and as a means ofobtaining data that can be used for other governmentfunctions. The most common approach towards achieving theseaims has been to make it easier for firms to formalize, mostnotably by setting up one-stop shops where firms canregister as a legal entity and for tax purposes all at once.But past experiments have showed very few informal firmschoose to formalize even after such reforms, and that manyof those who do fail to see any benefits on financial accessor firm growth. An alternative approach, used in much ofAfrica, is to separate the process of business registrationfrom tax registration. Getting firms to register legally mayhelp governments reduce informality and achieve some of theaims above, even if it does not raise more taxes. But thequestion is then whether firms are interested in even thismore limited form of formalization, and whether they see anybenefits from using it.
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