ILO launches an innovative approach to facilitate enterprise formalization in Cabo Verde

With 8 out of 10 economic units operating in the informal economy globally, what can countries do to promote the transition to formality and improve the livelihoods of billions? Which enterprises are most likely to formalize?

Article | 03 January 2023
Cabo Verde has a few lessons to share. Its government has been spearheading innovative strategies to bring enterprises and their workers into the formal economy, to foster economic growth and decent work. With the support of the ILO, the government created the Special Legal Regime for Micro and Small Enterprises (REMPE), which includes a simplified legal status for micro and small enterprises. Entrepreneurs who qualify to register can benefit from simplified and reduced taxes. They can also contribute to the national health and social security system and receive benefits for themselves and their employees. Businesses that are registered under the REMPE can also access a government credit line with reduced interest rates and benefit from a credit guarantee scheme.

In 2020, the ILO and the ProEmpresa SME Development Agency launched a pilot project in the Sucupira market in Praia, which is the largest informal market in the country. The objective was to assist women entrepreneurs to formalize their businesses by giving them the tools needed to do so. This included providing them with information on why and how to formalize, giving them access to business and financial management trainings so that they could successfully manage their businesses and loans they received, and educating them on the importance of tax compliance and the benefits they could receive if they contributed to the national social security system. As a result, around 2,000 entrepreneurs were sensitized on the benefits of formalizing their businesses and 900 enterprises registered and formalized their operations within a period of 6 months.

The integrated approach of the government to promote the transition to formality has been working, notably with respect to social security, in which there was a large increase in the registration of enterprises through REMPE, from 3,745 enterprises in 2016 to 15,781 in 2020, despite the COVID-19 crisis. However more work needs to be done.
The Government of Cabo Verde realized that the key to promoting the transition to formality for businesses is to develop the right mix of incentives and support to assist them to do so.

An innovative approach

Against this background, the ILO has supported the Government to conduct a feasibility study for the development of an integrated package of incentives to support formalization, targeted at different categories of enterprises. This was done through the ILO Enterprise Innovation Facility (eif), a special fund of the ILO’s ENTERPRISES department that aims to support innovative solutions to address challenges by enterprises and enhance their sustainability. Through the feasibility study, the ILO piloted a new tool to map formalization incentives which informed a report on incentives and support services that are in place in Cabo Verde for various categories of micro and small enterprises. The study also identified which sectors and types of enterprises would be the most likely to formalize if they get access to the right incentives. The latter was done through a combination of quantitative and qualitative analyses based on data from an informal sector survey, a conceptual framework on (theoretic) formalization pathways and an overview of (current and potential) enterprise formalization incentives.

In September 2022, the study was validated by tripartite constituents, including the Government Representative for the Enterprise Development sector, Director General of Labour, Inspector General of Labour, representatives from the National Social Security Institute, National Directorate of State Revenue, the SME Development Agency, microfinance institutions, the Labour Market Observatory, Municipalities, employers’ and workers’ organizations and representatives of the informal sector. The study generated great interest on the part of all and was highly appreciated not only for the information and analysis provided on the country’s situation with respect to informality, but also for the recommendations made to make the transition more accessible and to accelerate the process. Stakeholders made very relevant suggestions to improve the document.

This innovative initiative enables the ILO and its constituents to already identify some concrete opportunities and benefits that are available to different types of registered enterprises, including financial, market access and social security services. For example, with respect to access to finance in the private sector, two organisations were identified that provide finance to registered businesses run by women and youth. In addition, in terms of access to social security, different types of insurance or savings products were identified from institutions that were targeted at registered enterprises operating in a particular sector or owned by particular groups (e.g. women entrepreneurs). This innovative approach to map formalization incentives and identify categories of enterprises that are more likely to formalize is essential as a first step for the government to develop an integrated and targeted approach to facilitate formalization. It shows what is feasible in terms of incentivizing enterprises to formalize, but also what is possible and needed in terms of creating strong partnerships with other institutions or companies to give businesses the support they need to become formal and strengthen their contribution to economic growth and decent work.

Next steps

The study recommends a seven-step operational model for the path to formality, the most appropriate models for governance model and business registration. The integration of these pathways to formality into the national strategy will be the next step. In addition, the ILO will provide expertise and appropriate tools to complement the government's actions over the next three years.

Dinastela Curado, National Coordinator of the SIIFF-CV project, ILO, Adilson Pinto, representing the Secretary of State for Enterprise Development, Monica Furtado, Consultant and coordinator of the study, speak at the validation workshop of the feasibility study