The voluntary formalization of enterprises in a developing economy-the case of Tanzania

The informal sector of the Tanzanian economy is a changing, heterogeneous mixture of enterprises operating wholly or partially outside of the government system of regulation. It flourishes partly because informality offers opportunities of economic necessity to the poor, most of who will never be able to assimilate the costs of formalization, and partly because it offers others a low cost arena for experimentation that can lead to business growth. Some enterprises do formalise voluntarily, the stimulus for which can be represented as an economic function determined by the values that operators assign to institutional incentives, opportunity costs and formalization costs, and the process can be represented as an exchange transaction with government. Government tolerates the informal sector because it reduces unemployment and contributes to poverty alleviation, but it is not officially recognized and government is under some pressure to formalize it. A policy based on formalization seen as a voluntary transaction between operators and government could focus on mutual benefits and reduce the risk of damaging fragile enterprises and livelihoods for little benefit. Copyright © 2005 John Wiley & Sons, Ltd.