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Analyzing Panama's informal businesses

 

Despite their often temporary appearance, informal businesses tend to be long-term, run by people with some education who believe they make more money than if they try to enter the formal sector—officially defined as paying all taxes, fair wages and social security. These findings are from a survey of more than 1,000 small enterprises mapped under the Economic Inclusion of the Informal Sector in Panama (PASI) project—funded by the Interamerican Development Bank and managed by CARANA—which identifies bottlenecks micro-, small and medium enterprises face in becoming formal enterprises and works with stakeholders on policies to make formality more affordable.

Fruit sellers in Panama CityFruit sellers in Panama City

PASI’s consultants under the National Competitiveness Center (CNC) in Panama developed a tool to measure degrees of informality. Only 5.7% of surveyed businesses were considered formal; 60.6% were partially formalized, indicating some tax and social security payments; and 33.7% were completely informal. Of these, only around 40% of the businesses were aware of the requirements to become formal enterprises. Despite the general sentiment that the required documentation was not difficult to attain, smaller businesses faced more prohibitive costs and smaller returns.

More than just labeling businesses informal or not, mapping characterizes them based on previous employment, access to finance, education level, gender and income. Homemakers and those involved in agriculture had the highest degree of informality; recent students had the lowest. Almost 40% of informal business owners had previously owned an informal business, demonstrating a systemic and long-term trend. Forty percent of surveyed enterprises were unable to gain financing due to lack of collateral and are highly indebted to informal forms of finance.

Dishing out a meal in Panama CityDishing out a meal in Panama City

The study also found that a majority of most informal business owners, 27%, have started secondary school, 23.5% have finished it, 19.8% have finished primary school, and 15% had no education. There’s a strong gender bias in the sector: 57.3% of informal businesses are owned by women, 32.3% are owned by men, and 10.4% are owned jointly. Most business owners felt they made more money under the informal sector—particularly important as their enterprises represent 75-100% of their household income.

PASI is currently assembling policy recommendations that would ease businesses’ integration into the formal sector.

Published July 2011