Interventions to incentivize business formalization over the past decades have shown mixed results (Bruhn and McKenzie, 2013
Bruhn and McKenzie, 2018
Floridi et al., 2019) and brought limited knowledge on how to address informality in a systematic way. Adding to the challenge is determining whether informality should be a direct target, or is rather something indirectly impacted through development, improved governance, better regulation and improved public services (Loayza 2016
Loayza, 2007
Perry et al., 2007
World Bank, 2009). The informal sector includes businesses, workers, and activities operating outside the legal and regulatory systems (Loayza 2016). The scale of the informal sector in emerging and developing economies, which accounts for 25 to 40 percent of GDP and often more than 60 percent of employment (World Bank 2020), merits rethinking approaches to formalization. To support greater rates of formalization, this note proposes four specific areas for further research and pilot interventions: 1) supporting informal clusters, 2) providing support to informal businesses without a target of formalization, 3) simplified, intermediate and temporary legal statuses of informal businesses to better align with business needs and government goals, and 4) understanding behavioral insights that influence businesses' decisions to inform policymaking.