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BARRIERS TO ENTRY AND RETURNS TO CAPITAL IN INFORMAL ACTIVITIES: EVIDENCE FROM SUB-SAHARAN AFRICA

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  • Note: The authors gratefully acknowledge funding from the Austrian, German, Norwegian, and Korean Governments through the World Bank's Multi Donor Trust Fund (MDTF) “Labour Markets, Job Creation, and Economic Growth, Scaling up Research, Capacity Building, and Action on the Ground” for the project on “Unlocking Potential: Tackling Economic, Institutional, and Social Constraints of Informal Entrepreneurship in Sub-Saharan Africa.” Special thanks are due to AFRISTAT and DIAL, in particular to Constance Torelli and François Roubaud, for providing and preparing the datasets used in this paper. Comments by the participants of the IARIW Special Conference on Measuring the Informal Economy in Developing Countries, Kathmandu, in particular by Panos Tsakloglou, two anonymous referees, and the editors of this special issue have been very helpful.

Jann Lay, University of Göttingen and GIGA German Institute of Global and Area Studies, Institute of Latin American Studies (ILAS), Neuer Jungfernstieg 21, 20354 Hamburg, Germany (lay@giga-hamburg.de).

Abstract

This paper investigates the patterns of capital entry barriers and capital returns in informal micro and small enterprises (MSEs) using a unique micro dataset for seven West African countries. Our findings support the view of a heterogeneous informal sector that is not primarily host to subsistence activities. While an assessment of initial investment identifies some informal activities with negligible entry barriers, a notable cost of entry is associated with most activities. We find very heterogeneous patterns of capital returns in informal MSEs. At very low levels of capital, marginal returns are extremely high—often exceeding 70 percent per month. Above a capital stock of 150 International Dollars, marginal returns are found to be relatively low at around 4–7 percent monthly. We provide some evidence that the high returns at low capital stocks reflect high risks. At the same time, most MSEs appear to be severely capital constrained.

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