Global Workshop on Development Impact Evaluation in Finance and Private Sector Rio de Janeiro, June 6-10, 2011 Minas Gerais Formalization Program Case Study Reducing Informality among Firms in Minas Gerais, Brazil

Descomplicar “Uncomplicate” Government Initiative  Created in 2007  Mission: Promote a policy environment that is conducive to economic development, by reducing bureaucracy, providing smart and high-quality government services, and by generating public value added for Minas Gerais State  Main goal is to "uncomplicate" the relationship between  State-State  State-Firms  State-Citizens

Firm Formalization  Given high levels of informality among firms, 0ne goal of Descomplicar has been to encourage firm formalization  Conducted an informal firm survey to obtain information on the barriers to formality from the firms’ perspective  Most frequently reported barriers were  High tax burden  Too much bureaucracy  High costs of firms registration  Lack of financing  Lack of information about benefits of being formal

Firm Formalization Program - Partners  Descomplicar is working with public and private sector institutions to reduce the reported barriers to formality

Business Registration Reform  One of the first policy actions was to simplify business registration procedures  Created a one-stop-shop that conducts municipal, state, and federal registration at the same time, in the same place (“Minas Fácil”).  However, many firms remain informal – why?  Informal firms are not aware that the simplification took place  Other barriers to formalization (remaining registration fees, taxes, lack of financing, lack of information on the benefits of being formal)  Is formalization truly beneficial for firms (i.e. does it improve firm performance)? -> Try to shed light on these issues with an impact evaluation that can inform which (complementary) policy actions to take in the future

Impact Evaluation  Conduct an impact evaluation to measure which of the following interventions is most effective at encouraging firm formalization 1. Providing information on the costs and benefits of formalization, financing sources, as well as on the simplified registration process 2. Providing the information above + paying registration fees for firms 3. Stepping up tax inspections/enforcement  If firms formalize as a results of these interventions, this also allows us to measure the impact of formalization on firm performance  Intervention 3 is included in part to ensure that some firms will register

Study Design Intervention  First, conducted a listing exercise to obtain a list of informal firms located in 605 city blocks  Then, randomly assigned these 605 blocks into three groups  Within blocks, randomly assigned firms to intervention or control groups  Control firms within bocks will allow us to measure spillover effects within blocks (by comparing control firms in intervention blocks to firms in control blocks) Number of Blocks Control Firms Communication Only Communication + Free Cost Inspector Visits Communication Block Inspector Block Control Block

Listing  2564 census blocks  619 blocks rolled  7852 informal firms found  2221 firms randomly selected to baseline  522 firms randomly selected for inspection Communication only Control in Communication Block Control in Control Block Control in Inspector Block Free cost Get Inspector

Information brochures designed

Informal Firms in the Study  48% in Number of Employees Commerce ,03% Services397926,82% Industry1851,25% N/A1340,90% Total ,00% Number of Informal Firms Commerce376547,95% Services349344,49% Industry1001,27% N/A4946,29% Total ,00%

Baseline 

Future influence on policy  How will the IE results influence policy in the near future?  Taxes reduction studies  Informative campaign to all informal firms  Inspections policies

Remaining learning gaps  What remaining learning gaps will the team want to address next?  What is the impact of the simplifying the process of closing a firm on formalization levels?  What is the impact of simplifying the access to credit on formalization levels?

Obrigada! Priscila Malaguti Milla Fernandes Gustavo Andrade Alex Barbosa