Legal Empowerment Fact Sheet
Fourth Pillar: Business Rights
"Legal empowerment is about opportunity: the poor can and do generate income, and are incredibly resourceful and ingenious in scratching out a living. In cities and villages around the developing world, they sell goods and services in the streets and organize markets that governments refuse to recognize."Kumi Naidoo
The poor are entitled to rights not only when working for others, but in developing their own businesses. Access to basic financial services is indispensable for potential or emerging entrepreneurs. Just as important is access to protections and opportunities such as the ability to contract to make deals, to raise investment capital through shares, bonds, or other means, to contain personal financial risk through asset shielding and limited liability, and to pass ownership from one generation to another.
When the laws regulating small businesses are unfairly drafted, implemented or enforced, or simply too weak and inefficient, they leave the poor little option but to trade in the informal economy. Obtaining a license, the first step to registering a business, is often prohibitively expensive and difficult. Costly and cumbersome regulations prevent poor people from bettering themselves through enterprise and stifle the economy's development. Expanding access to legal rights gives many more local businesses the opportunity to benefit from trade both locally and internationally.
Some examples:- India's municipal laws prohibit street trading without a license, yet Delhi, with a population of over 15 million people, has issued fewer than 4,000. Around 99% of the country's 10 million street vendors are forced to work illegally. Instead of being protected by the law, they are excluded from it.
- A recent study of 12 Latin American countries found that only 8% of all enterprises are legally registered, and that nearly 23 million businesses operate informally. The owners of these businesses cannot get formal bank loans1, nor can they enforce contracts or expand beyond a personal network of familiar customers and partners.
- An estimated 2 billion people are without access to basic financial services
- In Kenya, over 1,000 licenses govern entrepreneurial entry; over 130 separate laws regulate agriculture alone.
- In Mexico, only 7% of businesses have the legal status and documents needed to trade with the United States and Canada under NAFTA. For Peru, only 2 percent are able to trade internationally
- Utility connections (water, electricity and telephone) require a legally recognized property title or lease as a form of security. Thus, informal traders are often deprived of these services.
Limited liability companies are among the most productivity enhancing legal institutions. They enable a business to legally separate entrepreneurs' personal finances from those of their businesses. If the business fails, an entrepreneur's family will not lose everything; if the entrepreneur falls on hard times, the business can still survive or be sold. Most informal businesses have to operate with no more than a limited amount of family capital. They can sometimes borrow small sums from informal creditors, but only for short periods and at punitively high interest rates. These credit constraints prevent informal businesses from expanding and expose them to greater financial and operational risks.
Formal companies can also better commit to contracts and hold others to them. They do not need to dedicate as much time and resources to monitoring their agents and find it cheaper and easier to trade with strangers, even distant ones. They do not need to rely on relatives, close friends and local contacts. New markets open up for them.
Informal businesses have clear hierarchies and specialized roles. Hiring workers is costly and contracts are impossible to enforce, so tasks tend to be concentrated in the hands of family or close friends. Because legal companies can enforce contracts, they can hire strangers, they can access a much bigger talent pool.
Business - Reform optionsThe success or failure of the informal economic sector will often spell the difference between economic progress versus stagnation, increased employment versus widespread joblessness, and creation of a broader society of stakeholders versus deeper inequality leading to a weakened social contract. Legal Empowerment measures in this domain must:
- Strengthen appropriate legal and regulatory frameworks, including enforceable commercial contracts, private property rights and use of public space.
- Promote fair commercial transactions between informal enterprises and formal firms. Including financial, business development, and marketing services for informal enterprises.
- Promote inclusive financial services so that micro entrepreneurs in the developing world can benefit from what many of their counterparts elsewhere take for granted: savings, incentives, tax rebates, credit, insurance, pensions, subsidies and other tools for risk management
- Support social protection for informal entrepreneurs.
