Essay On Formalization

1199 Words3 Pages

Formal and Informal sector intersect when the subject relates opportunity costs enforcing the cost-benefit approach. Legalist perspective suggests that formalization is the mechanism to protect business and property rights, creating capital, raise productivity and attract investments. De Soto (2000) argues that the real estate value is worth of USD 9.3 trillion in the Third World countries that exceeds any kind of donation and loans from the developed world. We witness the unique “entrepreneurial ingenuity” that the poor created in the developing world. Although, it is a dead capital which cannot be used for economic development, unless treated properly. De Soto claims that the higher formalization, the more potential exists to accumulate wealth and decrease the poverty rate. The concept that he considers crucial generating capital flow is the “surplus value” created by the formalization and property rights. Assets’ economic potential must be fixed in order to initiate additional production. Assets must be integrated into one formal representational system; that is how the West succeeded in capitalist realm. In 1849, California, the Congress gradually integrated the informal property created by immigrants and miners . Thus, benefits from the company perspective of operating formally are as follows: limited liability not risking the whole property of the business/owner; enforceable commercial contracts, enabling business entities insure rights and obligations to be met; access to finance and market information, legalised and registered entities benefit from the trust of financial institutions; access to government incentives, including procurement tenders and export promotion policies; access to public infrastructure and services; ...

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...loping countries. Its costs originate from penalties after they are detected by the government authorities. Those fines are very stiff and usually covered by the modest output or the physical capital stock of the informal entities. On the other hand, MSMEs being informal often prevent themselves achieving economies of scale, enjoy legal and judicial benefits and social services, lacking bargaining power and ability to enforce contracts through the courts. Thus, it reduces the chances of investments from internal and capital markets.
We have positioned advantages and disadvantages of being formal/informal to better understand the challenges in both circumstances. However, it is necessary to closely analyse the precedence of successful formalization as well as successful informal institutions in order to challenge modern economic paradigms in development economics.

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