Indeed, the unproductive informal sector often achieves the very opposite: it “crowds out” the way more productive formal small and medium enterprise (SME) sector. It does this by using the cost advantages usually derived from informality-paying less tax, lower wages, and worse working circumstances-to unfairly take native demand (even when simply temporarily) away from the more productive formal SME sector. With unstable demand and decrease prices, formal SMEs discover it much more durable to make the mandatory investments that might increase productivity, develop their operations, train their workers, and sustainably develop. In its regular “Enterprise Surveys,” the World Bank’s IFC arm sometimes finds that managers and homeowners in the formal SME sector consider the practices of the informal sector as by far the largest impediment blocking their higher efficiency and progress; for example, in Kenya.
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