The Effectiveness Imperative in Business Formalization

Many countries and development agencies are spending heavily on “simplifying” the procedures necessary for formalizing business firms. In some cases, these reforms may reduce the costs of initially formalizing the firm but they achieve little else. The main cause of their failure is that they disregard the fact that business formalization should reduce the future transaction costs of businesses. This requires business registers to be reliable enough to be trusted by judges when resolving disputes, by public agencies when using register information and, especially, by other firms when they contract future business transactions. It is therefore more important to raise the reliability of business registers where insufficient or maintain it in those countries where it is sufficient than to reduce the costs of initial formalization. In consequence, we should recast policy priorities in this area—speeding up formalization makes little sense when it hardly provides any useful service.