Measuring the Cost of Formalization in Brazil

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Stanley Harrell
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1 Measuring the Cost of Formalization in Brazil Adopting RCI methodology to measure start up costs of firms in the garment industry. Decio Zylbersztajn Frederico Faccioli Maristela F. P. Leme Rodrigo Silveira São Paulo - December 2, The Ronald Coase Institute

industry. Decio Zylbersztajn Frederico Faccioli Maristela F. P.

2 Supporters 8 SEBRAE 8 Associação Comercial de São Paulo 8 TINKER FOUNDATION 8 CIPE 8 FUNDAÇÃO INSTITUTO DE ADMINSTRAÇÃO 8 FEA FACULDADE DE ECONOMIA, ADMINISTRAÇÃO E CONTABILIDADE DA USP 2

3 Structure 8Motivation 8Methodology 8Results 8Implications 8Next Steps 3

4 Motivation 8Measuring transaction costs 8Business environment 8Costs of doing business Why? - Promote institutional changes - Promising institutional arrangements - Learn from international experience. 4

5 Motivation Our Focus: 8Costs to register formally 8Garment industry 8City of São Paulo 8Less than 3 years 8Less than 20 employees 5

6 Methodology 8WE CALCULATE REAL COSTS not hypothetical. 8Total Cost=Facilitator + Fees + Op.CostTime 8Sample: 100 industry and commerce / garment 8Survey instrument RCI model. 6

7 Results 8Number of procedures 8Time to register the business 8Cost to start up the business 8Contrasts 7

8 Results-Procedures 8Number of procedures WB Number of Procedures BR 9 RCI

9 Results-Time to register 8Number of days to register WB Days BR 64 RCI

10 Results-Employees 8Number of employees Industry Retail Frequency % Fonte: Dados Prim ários Number of employees 10

50 40 30 20 10 0 Fonte: Dados Prim ários

11 Results-time informal 8Time informal MONTHS: Frequency % Industry Fonte: Dados Prim ários Retail MONTHS - INFORMAL 11

12 Results-time to register 8Time to register average 74 DAYS 70 Industry Retail Frequency % Fonte: Dados Primários Days 12

13 Results-time allocated 8Time spent by entrepreneur with the facilitator: 8Average time : 7.1 hours 8Opportunity cost of time: 2.7% GDP/capita 13

14 Results-Why register? 8Why Formal? Retail Industry Make contracts Avoid fines Stay under the Law Market of suppliers Fonte: Dados Primários Freqüência 14

Stay under the Law Market of suppliers 0 10

15 Results-Costs to Register Facilitator Fees Cost of time RCI - USP Facilitator Fees Cost of time BR Facilitator + Fees Cost of time World Bank Fees % GDP per capita 15

BR - 2001 Facilitator + Fees Cost of time World

16 Some Contrasts 8Brazilian versus other nationalities - no difference 8Industry and commerce 8significant difference in costs and time 16

17 Implications 8Efforts to reduce the number of steps. 8- Seem to be working. 8Firms formalize in order to contract. 873% operated informally initially. 832% up to 30 days 868% up to 60 days 17

18 Implications 8Possibility to bribe is reported. 8Impact of SIMPLES should be measured. 8Case Study+ Survey+ IO analysis are complementary. 18

19 Policy Implications 8Opportunity cost of time matters therefore 8Facilitators are widely used. 8SEBRAE is important source of information. 19

20 Next Steps 8Our next research: 8Focus on the business environment in Brazilian agribusiness and agriculture. 8Costs to access credit. 8Costs to contract. 8Nature of the farm and farmers organization. 20

UNIVERSIDADE DE SÃO PAULO

UNIVERSIDADE DE SÃO PAULO FACULDADE DE ECONOMIA, ADMINISTRAÇÃO E CONTABILIDADE DEPARTAMENTO DE ADMINISTRAÇÃO SÉRIE DE WORKING PAPERS WORKING PAPER Nº 03/027 ECONOMICS OF NETWORKS AND PATTERNS OF COMPETITION