Street sales: The informal economy provides livelihoods, work and income for more than 2.5-million workers and business owners, a fact seldom recognised by policy makers. One in six workers in SA is engaged in the sector, and it has the potential to create formalised employment. Picture: MARIANNE PRETORIUS
Street sales: The informal economy provides livelihoods, work and income for more than 2.5-million workers and business owners, a fact seldom recognised by policy makers. One in six workers in SA is engaged in the sector, and it has the potential to create formalised employment. Picture: MARIANNE PRETORIUS

President Cyril Ramaphosa aims to set the country on a new path of growth, employment and transformation. Action plans for employment creation are to be deliberated at a jobs summit.

It is important to address the informal sector in such initiatives, given the key role it plays in providing paid employment and reducing poverty.

In our book, our research shows unambiguously that the informal sector is an important source of employment (and of paid employment) and actually shows a growing propensity to employ.

Regrettably, for many decades the sector has been forgotten and marginalised by economic analysis and policy. Many policy makers appear to lump it with formal SMMEs (small, medium and micro-sized enterprises). However, such an approach risks missing key elements of the "forgotten" world of informal enterprises — their potential, the constraints they face, their particular vulnera-bility, and the policy support they need to be viable.

While SA’s informal sector is small compared with other developing countries, its informal enterprises provide livelihoods, work and income for more than 2.5-million workers and business owners.

One in every six South Africans who has work is working in the informal sector. The data show that in 2013 they worked in about 1.1-million one-person enterprises (as so-called own-account workers) plus about 300,000 multiperson enterprises (as either owner-operators or employees).

These enterprises provide about 850,000 paid jobs, almost twice the direct employment in the formal mining sector (based on 2013 data).

The proportion of employing enterprises has increased since 2001, as has their propensity to employ, implying a rising employment orientation and employment intensity.

In a one-year period in 2013 more than half a million jobs were created in the informal sector. About 30% or 150,000 jobs came from expansion by one-and multiperson enterprises alike (although 60,000 jobs were lost due to employment cut-backs in the sector).

In addition, about 300,000 new informal businesses were started in 2013, creating about 380,000 new jobs. Thus the annual entry of new enterprises is quite high.

However, the evidence suggests that about 40% of new start-ups may close down within six months, reflecting their vulnerability.

The poverty-reducing effect of informal sector employment is remarkable.

It is estimated that the loss of 100 informal sector jobs has about the same poverty-increasing effect as losing 60 to 80 jobs in the formal sector. Thus policy makers should not be cavalier about losing or destroying informal sector jobs.

Likewise, inclusive growth cannot be attained only by sharing the "fruits of growth" with poor people (through, for example, social grants, housing, education and health services). A proper inclusive growth strategy needs to enable the poor to actively participate, via employment, in growing economic processes, producing output and earning decent incomes.

An enabled, well-supported, more dynamic informal sector can be a potent instrument in broad-based economic empowerment, job creation and more inclusive growth.

An informal sector that generates more viable livelihoods and better-quality employment must be an important objective.

This is not to suggest that the informal sector will "solve" the problem of unemployment. But the informal sector must be an integral part of the response to the problems of unemployment, poverty and inequality.

The sector is neither something that has to be merely tolerated, nor is it just a "mop-up" sector that absorbs people not employed in the formal sector.

The informal sector is diverse and comprises all industries in addition to street traders and hawkers (who are the most visible). Most of the employing enterprises are in construction, retail trade and services, but also in manufacturing and communication. The informal construction industry holds much promise and has a high propensity to employ.

Recognising the informal sector as an integral part of the economy is a crucial first step towards instituting a "smart" policy approach, as is recognising that formal sector growth alone is unlikely to sufficiently reduce unemployment (given that the formal economy is becoming less employment intensive).

There is no shortage of initiative and desire to grow. But identifiable obstacles and constraints often lead to informal enterprise failure and a loss of jobs. Working conditions are frequently quite severe and earnings low.

Basic constraints include a lack of suitable and secure premises in good locations, limited or no book-keeping skills (to keep enterprise finances separate from those of the household) and a lack of finance, credit and insurance. Also, informal businesses are often the targets not only of crime, but of harassment by local government.

Large numbers of women in own-account positions are particularly vulnerable (while often bound by household obligations). However, own-account work has become a smaller component of women’s informal sector employment, with a growing proportion of paid employees, employers or managers. Several of the constraints are structural and intrinsic to the concentrated nature of the economy and affect informal enterprises particularly badly. Formal-informal dynamics also hinder owners of informal enterprises in reaching beyond local markets or stepping up to higher value ones, or being integrated into the value chains of formal enterprises.

Key factors associated with employment growth and more secure livelihoods have been identified. These point to policy levers that could be used to support enterprises in townships or elsewhere, thereby also helping to improve the working conditions of workers in the sector.

For example, the research shows that enterprises that function separately from the household in terms of organisation, finances and location have higher profitability and are more likely to have employees. Therefore, it is important to help informal enterprises become self-standing businesses, starting with basic book-keeping skills and suitable premises. Increased self-reliance will benefit both own-account workers and multiperson enterprises. Prior work experience is also a valuable attribute for new enterprise owners.

In rural towns there may be up to 500,000 informal farmers who sell their products in markets — they are not subsistence farmers. These markets are very different from supermarket-led value chains. Informal farmers need distinctive policy support to make them more viable.

Severe cyclical downturns may affect the sector differently. In fact the informal sector suffers disproportionately in sharp downturns, and policy makers need to take this into account.

An important issue is township spatial planning and urban land reform. In new urban settlements it may be necessary to modify "standard" modernist city planning as well as zoning approaches to cater for the needs of informal business.

In rural towns there may be up to 500,000 informal farmers who sell their products in markets — they are not subsistence farmers. These markets are very different from supermarket-led value chains. Informal farmers need distinctive policy support to make them more viable.

The National Informal Business Upliftment Framework of 2014 was an important step. However, its impact has been hamstrung by factors such as limited capacity, a lack of conceptual clarity and few effective instruments – and limited buy-in from provincial and local governments. The current policy environment appears to be a mixture of benign neglect, ambiguity and active repression of the informal sector.

An enabling, "smart" policy approach is needed for the development of the sector, including specific paths to formalisation. Formalisation is often narrowly conceived only in terms of tax registration and licensing combined with punitive sanctions for noncompliance, especially at local government level.

A different approach would be developmental in nature and offer developing enterprises a menu of elements of formality to properly enable them.

These could include financial services (including credit), infrastructure and premises. Such policies, if effectively implemented, could make a significant difference to job opportunities, earnings and working conditions of the poor.

For this to happen the informal sector must be taken seriously and addressed explicitly. Otherwise it will simply remain the forgotten sector – and so will the people working in it.

Fourie was a convener of the Research Project on Employment, Income Distribution and Inclusive Growth, based at the Southern Africa Labour and Development Research Unit at UCT. This is an edited extract of The South African Informal Sector: Creating Jobs, Reducing Poverty, published by HSRC Press.

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