Learning about informality in Ecuador
The study found that the level of informality remains high in Ecuador: informal enterprises employed 37% of the employed population in 2011, as compared with 42% in 2000. Moreover, Ecuador ranks fourth among the countries with the largest population without social security coverage in Latin America (62% of workers).
According to study authors Denis Medvedev and Ana María Oviedo, “many micro and small firms in Ecuador have limited growth potential due to a variety of factors, including the lack of access to and poor quality of credit.” Many of these entrepreneurs are women who value their own business not only for the income they generate but for the flexibility to care for their children in the workplace and to establish a schedule that accommodates family responsibilities.
This issue has become a priority for the Ecuadorean government. In early 2012, the Law of the Popular and Support Economy and its accompanying regulations introduced several benefits for family businesses and small firms, part of the group prioritized in this new law. These include increased access to credit, education and training, as well as tax benefits.
A key conclusion of the study, which was conducted directly with entrepreneurs and workers in the manufacturing, retail, tourism, transport and construction sectors, is that firms that are in greater compliance with laws and regulations tend to generate more benefits in the medium and long term.
According to the report, “While Ecuadorian companies show higher survival rates than in more advanced economies, other indicators of firm performance suggest that most of them are unlikely to grow and become more productive.”
Among other recommendations, the report encourages better dissemination of information on support programs for small firms, streamlining administrative procedures to promote formalization and the establishment of simplified tax regimes that combine several taxes, including social security, into a single payment.
Key findings of the Faces of Informality Study
- Micro and small enterprises in Ecuador have limited growth potential.
- Owners of larger firms are better educated.
- Most credit is used to finance operating expenses instead of investment.
- Most firms comply mainly to “follow the rules,” and those who do not comply argue that they are too small to do so and that the costs of formalizing them are too high.
- Formalization facilitates increased profitability through increased access to formal sources of finance and the ability to generate more sales and grow the customer base by issuing tax receipts.
- The vast majority of micro and small enterprises comply with some but not all regulations and over 80% operate somewhere on the “formality continuum.”
- Although the vast majority of entrepreneurs believe that tax evasion is unacceptable, around 40% know of a firm that does evade taxes.
- Inspections significantly increase the likelihood of compliance, yet the compliance rate remains substantially below 100%, even in firms where inspections are made.