The Competitiveness Challenge of the Formal Sector in Francophone Africa: Understanding the Role of the Informal Sector and the Business Environment

In francophone Africa, a clear stagnation of the size of the modern sector is observed over time, contrasting with a huge expansion of the informal sector. While some authors point to competition from the informal sector as the main explanation for this contrast, a growing body of literature emphasizes the role of the business environment. This study uses a unique set of data to show that a poor business environment is affecting both formal and informal enterprises, although not to the same extent. While it is true that in areas where formal and informal firms are in competition, the latter have been able to substantially outpace the former, products offered by both categories of firms are often strongly differentiated. Our results do not show any negative correlation between exposure to informal competition and formal firms’ productivity level, which, by contrast, is found to be strongly correlated with the business environment.