Formalization and its Discontents: Conceptual Fallacies and Ways Forward

Abstract

The concept of formalization has long underpinned policy interventions and measures intended to connect informal entities with state institutions or formal economic structures. However, despite the policy enthusiasm, the outcomes of formalization policies have frequently been disappointing. This article argues that this disconnect lies in the concept of formalization itself and that common approaches to formalization are often rooted in three conceptual fallacies: a binary distinction between formal and informal economic actors, a lack of appreciation for the diversity of informal economic actors and the idea that ‘becoming’ formal necessarily spurs positive externalities. These conceptual confusions pay insufficient attention to contextual complexity and the political and social dynamics that shape informality in a given context and they are frequently rooted in the practicalities and power structures that shape knowledge creation in this area. This article demonstrates this through case studies of tax registration and property titling. Thus, it argues for a new research agenda on formalization that challenges both its conventional conceptual foundations and the practices of research that engage with it.

Catch Them If You Can: the Politics and Practice of a Taxpayer Registration Exercise

“…As Moore (2020Moore ( , 2022 and others point out, tax registration exercises have become increasingly popular in recent years in low-and middle-income countries, and particularly in sub-Saharan Africa. These fit with a wider trend in development in the past two decades that focuses on formalisation interventions (Gallien and van den Boogaard 2023). For tax registrations in particular, two sets of arguments have been associated with their recent popularity.…”

“…We focus here on challenges to the particular practice of tax registration exercises, rather than of expanding the tax net or formalisation more widely. For a more systematic discussion of these debates, see Gallien and van den Boogaard (2023).…”

“…The appeal of these interventions is intuitivethey promise increased revenue for states, a shrinking of large informal sectors, and potential benefits for newly registered enterprises (Gallien and van den Boogaard 2023;Joshi et al 2014). In contexts where pre-existing tax registers are small, they also represent a symbolic expansion of the state's reach into society, and an increase in society's legibility to the state (Sánchez-Talanquer 2020; Scott 1998).…”

“…In contexts where pre-existing tax registers are small, they also represent a symbolic expansion of the state's reach into society, and an increase in society's legibility to the state (Sánchez-Talanquer 2020; Scott 1998). With states seeking to broaden their revenue base in the aftermath of the Covid-19 pandemic, the popularity of tax registration drives is likely to expand further (Gallien et al 2021). Yet, as recent scholarship has pointed out (Gallien and van den Boogaard 2023; Moore 2022), the results of these exercises have often been disappointing.…”

“…government agencies. One critique of common conceptions of formalisation processes has been that they are too often imagined as 'light-switch-like' processes depending on a single act of registration, while in fact formalisation often depends on a range of relationships with different institutions (Gallien and van den Boogaard 2023). The registration exercise in Sierra Leone presents an excellent example of this dynamic, as effective registration depends not just on an interaction between the taxpayers and the NRA's enumerators, but also on their registration with the Office of the Administrator and Registrar General (OARG) and/or the Corporate Affairs Commission (CAC), and have to have an NCRA number, a driver's licence (or a passport for non-Sierra Leoneans), in a context with relatively limited reach of national identification.…”