Addressing Informality: Transitioning to the Formal Economy

This Policy Brief identifies the root causes of informality and discusses what is required at the policy level to address informality and promote a proper transition to a formal economy. Informality has long been a problem globally, with different nuances among economies. Bureaucratic barriers, deficiencies in developing human capital and weak institutions are among some of the major factors explaining the presence of informality, which has many negative associations to low productivity, socioeconomic vulnerability, poverty, unfair competition, tax evasion and lack of compliance to rules, among others.

Given the multidimensional nature of informality, a mix of policies should be considered. They include the need to create a suitable regulatory atmosphere that facilitates businesses; measures to improve governance, institutional quality and rule enforcement; incentives for compliance; and enhancing human capital through education and training.