"Formalization raises productivity, tax revenue, and worker protection, so policy should push it hard"

"the informal economy. Labor market rigidities contribute about 28 percent, on average (Figure 2).3 A comparison of drivers across countries indicates that the tax burden appears particularly important in Morocco and Tunisia (Figure 2). Both these countries have a high corporate tax rate, at about 30 percent, signifi cantly above the average for developing countries of about 20 percent.4 In Morocco, surveys of small fi rms reveal that a high tax burden is the most signifi cant obstacle to formalization—over 50 percent of surveyed fi rms identify the level of taxes as the major reason for not registering their business. Notable among other drivers, rigid labor market regulations appear to be particularly relevant in Egypt, Lebanon, Morocco, and Syria. And indeed, data from enterprise surveys indicate that worldwide, the percentage of fi rms identifying labor regulation as a major constraint on their business operations is, on average, greatest in these countries.5 In Egypt, for example, termination regulations are overly stringent—severance payments for established employees (including the cost of advance notice requirements) amount to up to 132 weeks’ worth of their fi nal salaries. In Syria and Morocco, these payments are equivalent to 80 weeks and 85 weeks, respectively6—much higher than the average 39 weeks in the East Asia and Pacifi c region and 26 weeks in the developed 3 To compute the contribution of each causal variable (driver) to the size of the informal economy, we multiply the estimated coefficient of the causal variable from the MIMIC model by its value, and then divide by the estimated size of the informal economy. See also note 1. 4 Roberta Gatti, Diego Angel-Urdinola, Joana Silva, and Andras Bodor, 2011, Striving for Better Jobs: The Challenge of Informality in the Middle East and North Africa (Washington: World Bank). 5 See IMF, October 2010 Regional Economic Outlook: Middle East and Central Asia. 6 World Bank, 2008, Doing Business 2009 (Washington). Figure 2 Contribution of Determinants to the Size of the Informal Economy (Percent) Sources: Authors’ estimates. See also notes 1 and 3 in the text. Tax burden Institutional quality Regulatory burden in labor markets Regulatory burden in product markets 0 10 20 30 40 50 60 70 80 90 100 Egypt Jordan Lebanon Morocco Syria Tunisia 2. MENAP OIL IMPORTERS: MEETING SOCIAL NEEDS, RESTORING ECONOMIC CONFIDENCE 47 world.7 Such high fi ring costs impede the expansion of formal employment and either force formal fi rms completely into the informal economy or drive them to hire workers informally so that these costs can be avoided. What Can Policymakers Do? The barriers to business and labor formality are also barriers to inclusive growth. To remove them, policymakers should Improve the business climate and create a level playing fi eld for everyone. Policy should focus on improving the regulatory framework for businesses—by, among other measures, simplifying entry regulations and reducing compliance costs—while at the same time creating an environment that fosters a fairer enforcement of regulation. Such an approach not only is conducive to investment and growth, but also is inclusive as it allows all fi rms and workers to compete fairly. Reform labor market institutions. Overly"