Multi-Dimensional Informality and Dynamism of Microenterprises in Africa

The informal economy in Africa has been considered both the cause and result of underdevelopment, and that dichotomous understanding of the formal-informal divide, simply based on a single criterion such as whether an enterprise is registered or not, is not satisfactory. In this paper, we propose Composite Informality Index (CII) as a continuous measure of informality enclosing multiple indicators of individual enterprise. We applied multiple correspondence analysis to quantify CII. We examined whether CII has explanatory power for firm size, sales and growth, and the degree of resiliency seen in shocks received from COVID-19 and recovery from them. We found that informality is associated with a smaller size of employment and sales, consistent with stylized facts of informality. However, CII is not directly related to sales growth, rejecting the general perception of linking informality to slower business growth. A business owner-operator mindset, rather than being more or less informal, determines business growth. The informality is associated with smaller revenue loss from COVID-19 shock, suggesting informal enterprises' higher absorptive capacity. We also found that business perspectives that appreciate the full control of their own business and the flexibility to innovate, which are also linked to higher sales growth, are associated with lower informality. Our method would be particularly useful for devising policies to boost owner-operators' motivation that would help African countries to enhance the dynamism of the microenterprise sector.