Enterprise Surveys Enterprise Note Series Informality Informal Firms in Myanmar 2016 Mohammad Amin U sing survey data on informal firms in Myanmar, a number of issues related to firm-size, productivity, business environment, gender disparity and registration costs and benefits are discussed. The findings suggest that informal firms in Myanmar are less productive than formal sector firms but compare favorably with informal firms elsewhere. The education level of the manager is positively correlated with firm productivity but firm-size is not. Access to finance is the most commonly chosen top obstacle, especially by the relatively smaller firms. Few firms find any benefits from registration and particularly so in the relatively smaller cities outside Yangon. Enterprise Note No. 33 Introduction collected by the World Bank's Enterprise Surveys Unit Informal or unregistered firms and workers exist in every (Enterprise Surveys). Due to lack of a proper sampling frame, country. According to some studies, while 17 percent of the the data are not necessarily representative of the informal work force in OECD countries is in the informal sector, in sector in the cities covered. Hence, the results presented developing countries, the corresponding figure is about 60 below should be treated with due caution as pertaining to the percent (Ihrig and Moe, 2004; Dessy and Pallage, 2003). sample of informal firms rather than the broader informal La Porta and Shliefer (2014) suggest that about 30 to 40 sector in the country. For benchmarking purposes, we use percent of economic activity occurs in the informal sector similar Informal Surveys for 16 other developing countries. in poor countries. Schneider et al. (2010) estimate the Further, we also use two other nationally representative informal economy to be about 34 percent on average for 88 surveys for non-agricultural and private sector firms in developing countries in 2005. Myanmar (Enterprise Surveys). These surveys cover the Despite the large size of the informal economy, a number microenterprise firms (less than 5 employees), small firms of issues remain unexplored. For example, low productivity (5 to 19 employees), medium firms (20 to 99 employees) of informal firms is worrisome but it is not clear if factors and large firms (100 or more employees).1 such as firm-size and manager’s education level matter for productivity as has been found for the formal sector firms. Informal firms in Myanmar compare World Bank Group Similarly, it is widely believed that informal firms face a favorably in labor productivity and turnover poor business environment. However, it is not immediately with informal firms elsewhere clear what the top constraint is – for example, limited access It is well-known that compared with the formal sector to finance or corruption? firms, informal sector firms are much less productive and This note attempts to shed light on some of the issues inefficiently small. This could be due to excessive government mentioned above for informal firms in Myanmar. Available regulations that inhibit the sector (De Soto 1989, 2000) estimates suggest that the informal economy in Myanmar or because of the sector’s limited access to finance, low is large even by developing country standards. For example, education and skills and lack of adequate motivation among according to Schneider et al. (2010), in a sample of 88 the firm owners (La Porta et al. 2014). In fact, one view is developing countries, the share of the informal economy in that productivity levels in the informal sector are so low that Myanmar is smaller than only 6 other countries. the sector can hardly be expected to contribute to overall The data we use is a pure random sample of 300 informal growth and development (La Porta et al. 2014). (unregistered) firms in the large cities of Myanmar and The Enterprise Surveys (ES) data confirm that informal firms in Myanmar are much smaller and have lower sales per worker (labor productivity) compared to formal sector Figure 2 Myanmar ranks high in turnover firms in the country (figure 1). For example, median labor and labor productivity of productivity of informal firms is about 65 percent of the informal firms level for micro firms in the country. Similarly, total monthly Sales per worker (monthly, USD median $) 4,500 600 sales (turnover) for informal firms is about 75 percent of the 4,000 Monthly sales (USD median $) 500 level for micro firms and less than 5 percent of the level for 3,500 3,000 400 medium and large firms. 2,500 300 However, informal firms in Myanmar do reasonably well 2,000 1,500 200 when compared with informal firms elsewhere (figure 2). 1,000 100 That is, median labor productivity in Myanmar is higher 500 0 0 r a e so ya ali p. na ala on na na ius ar ru la de than in 12 out of 16 other countries and monthly sales g ca d ir e i as wan Ivo a Fa Ken M . R Gha tem ero swa ent urit anm Pe ng Ver R d’ kin a am ot rg Ma My A o o da em a Gu C B A b higher than in 13 other countries. Thus, the experience M C o t e B u r ng o ,D Ca Co of Myanmar could help improve productivity levels of Sales (USD, monthly, median $) Labor productivity(USD, monthly, median $) informal firms in other countries. Source: Enterprise Surveys. Do firm-size and owner’s education matter for the productivity level of informal firms? increased costs of evading government regulations. They Formalization and improving the business environment find that the latter effect dominates. are often suggested as solutions to raising informal sector For informal firms in Myanmar, there is no relationship productivity. But what about other factors such as firm- between firm-size and labor productivity (figure 3A). In size and education levels of the manager/owner which contrast, for the comparator countries, the results confirm have been found to be important for firm productivity in the findings in Amin and Islam. Thus, improvements in the formal sector? firm-size of the informal firms in Myanmar are unlikely to Amin and Islam (2015) look at the relationship between add much to labor productivity levels. firm-size and labor productivity of informal firms in a cross- The role of education in improving labor productivity section of 13 developing countries. The issue is important has been discussed in the literature, although much of this since the small size of informal firms is often viewed as a literature focuses on the formal sector (Echevin and Murtin reason for their low productivity. The authors argue that 2009, Bertrand and Schoar 2003). La Porta and Shleifer larger firm-size is likely to increase productivity due to (2014) argue that higher levels of education of managers increasing returns to scale but it may also lower it due to in the formal sector than the informal sector is what makes formal firms far more productive. However, the authors do not provide any evidence on how education affects labor Figure 1 Informal firms are smaller and productivity within the informal sector. have lower productivity than As figure 3B shows, labor productivity level is significantly firms in the formal sector higher for informal firms in Myanmar that have managers with higher education (secondary education, university $25,000 $600 degree or vocational training) vs. the rest (no education $517 or primary education). This holds even after accounting Sales per worker (monthly, USD, median) $20,000 $500 for differences in firm characteristics including firm-size Monthly sales (USD. median) $452 $21,166 $427 $400 (number of employees), age of the firm, sector of activity $15,000 $300 (manufacturing vs. services), gender of the largest owner, $289 $10,000 years of manager experience in the field, region (city) fixed $200 effects, dummy variables indicating whether or not the $5,000 $3,048 $100 firm uses machinery, uses electricity, experienced losses due $1,016 $1,355 $0 $0 to crime, and reports access to finance as a major obstacle Informal Micro Small Medium & Large for its business. In short, providing better education to Sales (USD, Labor productivity monthly, median) (USD, monthly, median) entrepreneurs in the informal sector could be a panacea for the low levels of productivity in the sector. Source: Enterprise Surveys. 2 Figure 3A Labor productivity and Figure 3B Labor productivty firm‑size are uncorrleated 400 10 Labor productivity (USD, monthly, logs) $305 8 (USD, monthly, median) 6 200 $169 4 2 0 0 Largest owner has Largest owner has secondary or higher education primary or no education 0 1 2 3 4 5 Number of workers (logs) Source: Enterprise Surveys. Source: Enterprise Surveys. Female owned/run firms have lower labor sector, labor productivity is much lower for women and the productivity but only in the manufacturing opposite holds in the services sector. As figure 4 shows, the above findings are unique to Myanmar. That is, for informal sector firms in other countries, on average, labor productivity is A number of studies have shown that firms owned or lower for female than male owned/run firms in the full run by women tend to under-perform firms owned or run sample, manufacturing sector, and especially services sector. by men in terms of firm productivity and turnover (Brush The data confirm that the results for Myanmar here are not et al. 2006; Sabarwal and Terrel 2008). Difficulties that due to differences in firm-size, age of the firm or the level of women face relative to men due to limited access to finance, education of the owner/manager. discriminatory laws and social and cultural attitudes could explain the lower performance. However, the existing literature is entirely focused on formal sector firms and it is Limited access to finance is the most not clear if the findings apply to informal firms. commonly cited top obstacle, and more so The ES data reveal that on average, labor productivity by the smaller firms level does not vary significantly between women vs. men From a list of 8 obstacles (access to finance, access to land, owned/run2 informal firms in Myanmar. If anything, corruption, crime, electricity supply, water supply, access to women perform better than men (figure 4). However, technology, and lack of skilled workers), access to finance the firm’s sector of activity matters. In the manufacturing was the most commonly chosen top obstacle (by 36 percent of the firms) followed by access to land (20 percent). On the absolute level, about a quarter of the informal Figure 4 Female owned/run firms lag firms in Myanmar report limited access to finance as a severe behind male owned/run firms obstacle for their business. in terms of labor productivity As in the broader literature, firm-size matters here with in the manufacturing sector in the smaller firms (employment and sales wise) much more Myanmar likely to report access to finance as the top obstacle and a 500 severe obstacle than the larger firms (figure 5). Thus, policy $416 measures aimed at relaxing financial constraints in the Labor productivity (monthly, 400 $322 $307 informal sector are likely to be more effective if targeted $305 $298 USD, median) 300 $265 $274 towards the relatively smaller firms. 200 $178 $164 $145 19 $114 $124 Smaller informal firms are more likely to be 100 credit-constrained than larger informal firms 0 Full sample Manufacturing Services Full sample Manufacturing Services Less than 5 percent of the informal firms in Myanmar have Myanmar Other countries a bank account for business purposes, much lower than in ■ Female owned firms ■ Male owned firms Guatemala (21 percent), Argentina (31 percent), Peru (33 percent) and Rwanda (78 percent) for which information is available. Micro firms with a bank account in Myanmar are also few (10 percent). However, informal firms in Myanmar Source: Enterprise Surveys. 3 are less likely to be credit-constrained than informal firms Figure 5 As perceived by the firms, elsewhere. Firms that did not apply for a loan during the limited access to finance last year because of complex application procedures, high affects smaller firms more than interest rates, high collateral requirement, insufficient loan larger firms amount or maturity, and because the firm did not think it 60 would be approved are classified as credit-constrained firms; 52 firms that did not apply for the loan because of no need for 45 a loan are credit-unconstrained firms; the remaining firms Percentage of firms 39 37 32 31 are the ones that applied for the loan but it is not clear if 30 21 23 19 they got what they wanted. Classifying these remaining 15 firms as credit-constrained gives an upper limit for credit- constrained firms and a lower limit by assuming that these 0 Lowest sales 2nd sales 3rd sales Highest sales firms are credit-unconstrained. quartile quartile quartile quartile Between 42 and 49 percent of the informal firms in ■ Access to finance is the top obstacle ■ Access to finance is a severe obstacle Myanmar are credit-constrained. This is only somewhat higher than the same for micro firms in the country (42 to 43 percent are credit- constrained) but lower than for Source: Enterprise Surveys. informal firms on average in other countries (49 to 62 percent). As above, firm-size matters with small informal Figure 6 Small informal firms in firms in Myanmar much more likely to be credit-constrained Myanmar are much more likely than the larger informal firms (figure 6). to be credit-constrained than the larger informal firms Use of own funds by informal firms is almost universal in Myanmar, and more common 80 than elsewhere About 98 percent of the informal firms in Myanmar Percentage of rms that are 56 60 use their own funds to finance working capital. As figure credit-constrained 47 40 40 36 7 shows, the figure is roughly same for the formal sector firms in the country but noticeably higher than for 20 informal firms on average in other countries. Use of bank 0 finance is almost non-existent among informal firms in Below median monthly sales Above median monthly sales Myanmar as is the case for informal firms elsewhere. In ■ Lower limit ■ Upper limit contrast, use of credit/advances from suppliers/customers is more common among informal compared with micro firms in Myanmar. Source: Enterprise Surveys. Few firms have a favorable opinion of the Figure 7 Use of own funds is almost benefits from formalization, especially in the universal among informal firms smaller cities in Myanmar Policies encouraging formalization require an 98 99 99 understanding of the potential benefits to firms from 100 90 registering and the reasons for not registering. The ES 80 asked firms about various reasons for not registering and potential benefits as perceived by them from registering. Percentage of rms 60 Findings from these questions are provided in figure 8. 40 Two results stand out. First, the proportion of firms that 20 20 20 believe there are benefits from registering is low: it ranges 7 7 0.7 0.3 4.7 4.5 between 11 percent (better access to raw materials and 0 Own funds Credit/advance from Banks public services) to 23 percent (less bribes to pay). Thus, suppliers/customers it is not surprising that 62 percent of the firms report no ■ Informal ■ Micro ■ Regular ES ■ Other informal benefit as a reason for not registering. In short, greater effort is required in making formalization more beneficial to the firms. Second, firms are much more likely to report Source: Enterprise Surveys. 4 Notes Figure 8 Perceived benefits from 1. Detailed information on these surveys is available at www. registering seem to be less enterprisesurveys.org. 2. There is hardly any distinction between the largest owner and the common in the smaller cities manager of the firms in the sample used. 80 Reasons for not registering Potential benefits from registering 71 62 62 References 58 60 55 Amin, Mohammed and Asif Islam (2015), “Are Large Informal Firms Percentage of firms 51 51 49 46 More Productive than the Small Informal Firms? Evidence from 40 34 36 Firm-level Surveys in Africa,” World Development 74(October): 20 25 24 23 20 25 374-385. 20 15 15 15 17 16 16 16 11 7 13 Bertrand, Marianne, and Antoinette Schoar (2003), “Managing with Style: The Effect of Managers on Firm Policies,” Quarterly Journal of 0 Time, fees, and paper Taxes that Inspections Bribes need to be and meetings registered No benefit from Better access Better access Less bribes Being able to to finance to raw to pay issue receipts Economics 118(4): 1169–1208. work paid if with businesses registering materials and required to registered government need to pay govt. services Brush, C., N. Carter, E.J. Gatewood, P. Greene and M. Hart, (2006), complete officials that registration follow registration Growth Oriented Women Entrepreneurs and Their Businesses (New ■ Full sample ■ Large city ■ Small city Horizons in Entrepreneurship). Cheltenham, UK and Northampton, MA: Edward Elgar. De Soto, Hernando (1989), The Other Path: The Invisible Revolution in Source: Enterprise Surveys. the Third World, New York: Harper and Row. De Soto, Hernando (2000), The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, New York: Basic benefits from registering in the large city of Yangon than Books. elsewhere in Myanmar (see figure 8 for details). One Dessy, Sylvain, and Stephane Pallage (2003), “Taxes, Inequality, and reason for this could be that typically large cities have the Size of the Informal Sector,” Journal of Development Economics better public services, physical and financial infrastructure 70(2003): 225-233 implying greater benefits from registering. What this Echevin, Damien and Fabrice Murtin (2009), “What Determines suggests is that formalization efforts are likely to be more Productivity in Senegal? Sectoral Disparities and the Dual Labour Market,” Journal of Development Studies 45(10): 1707-1730. beneficial and successful where the availability of public Ihrig, Jane and Karine S. Moe (2004), “Lurking in the Shadows: the services and infrastructure is good such as in the relatively Informal Sector and Government Policy,” Journal of Development larger cities of Myanmar. Economics 73: 541-557. As is the case in many other developing countries, La Porta, Rafael and Andrei Shleifer (2014), “Informality and the informal sector in Myanmar is large and likely to Development,” Journal of Economic Perspectives 28(3): 109-126. Sabarwal, Shwetlana and Katherine Terrell (2008), “Does Gender Matter persist. Understanding the sector is important both for for Firm Performance? Evidence from Eastern Europe and Central raising incomes of those working in the sector, as well as Asia,” World Bank Working Paper Series No. 4705, World Bank, to maximize the sector’s contribution to overall growth USA. and dynamism of the economy. Using firm-level survey Schneider, Friedrich, Andreas Buehn and Claudio E. Montenegro data, this note highlights a number of issues concerning (2010), “Shadow Economies All over the World: New Estimates for informal firms in Myanmar covering firm productivity, 162 Countries from 1999 to 2007”, Working Paper 5356, World Bank, USA. gender disparity, business environment and costs and benefits of registration. While the findings are preliminary in nature, it is hoped that they will help encourage more rigorous empirical work in the future. The Enterprise Note Series presents short research reports to encourage the exchange of ideas on business environment issues. The notes present evidence on the relationship between government policies and the ability of businesses to create wealth. The notes carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this note are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. 5