Thriving informal sector can get jobs plan off the ground
While the sector does not directly add to the tax base it could be a major generator of new jobs
Ask anyone who has lived in Johannesburg for at least a decade and is adventurous enough to venture into the CBD and they will tell you just how much the commercial activity landscape in the city has changed.
Gone are the big department chains and hire-purchase furniture stores. In their place are small supermarkets, “ethnic” restaurants, blanket and linen wholesalers, stores selling cheap fashion brands and microlending outlets.
There are the persistent hair ladies opposite the high court on Pritchard Street who stand with painted boards to entice pedestrians to try out the latest braiding styles. There are the matrons stacking up heaps of secondhand clothes for sale along the sidewalks opposite Library Gardens. There are the food caravans of Braamfontein, and there is the legendary shisa nyama at kwaMai Mai that are so busy you have to queue for 30 minutes on a good day.
Some would argue the exodus of “established” retailers points to inner city decline. Another view would be that this new commerce is a microcosm of a thriving informal sector. An informal sector that is providing goods and services, and also livelihoods to hundreds of thousands who for a variety of reasons have slipped through the employment net. As a World Bank paper notes, the informal sector in many countries has filled a gap left by the formal wage sector as a principal source of job creation.
The dominant discourse that holds the formal private sector to be the primary source of job creation is wholly out of step with our realities.
The income from informal sector business activity, meagre though it may be, is a lifeline for the urban and rural poor. The results of the latest quarterly labour force survey pointing to a growth in the number of jobs in the informal sector is a ray of good news amid otherwise gloomy and depressing figures. Although the increase has been modest — a jump of 114,000 — it is not insignificant given that it recorded the largest employment gains per sector. Compared to the second quarter of 2018 employment in the informal sector increased in trade, transport, manufacturing and construction.
This is a positive development that should be read with the necessary nuance. It indicates that more people are either starting their own informal businesses or finding jobs in existing ones. It is also worth considering the gender dimension: there has been a year-on-year increase in the number of women gaining employment in the informal sector, though this is still below that of men and overall, women are still more likely to be unemployed than men.
The International Labour Organisation estimates that the informal sector — represented by small and household businesses in the nonagricultural sector — accounts for more than 66% of total employment in Sub-Saharan Africa. Although it is difficult to accurately gauge its output (most businesses fall below the tax threshold) by some estimates the SA informal sector serves a consumer market worth more than R100bn.
Factors such as poor worker protection and noncontribution towards the fiscus through taxes are the consequence of lack of regulation, but the potential of the informal sector as a source of job creation and poverty reduction, especially in a developing country, warrants far greater attention than it currently does.
The dominant discourse that holds the formal private sector to be the primary source of job creation is wholly out of step with our realities — namely the sheer size of the total unemployed population and the limitations for its total absorption into formal paid work. Not just work, but critical professions needed to grow our economy.
By equal measure, the state is already groaning under a huge public sector wage bill that it has acknowledged to be unsustainable. The national development plan (NDP) projects that the informal sector could generate almost 2-million new jobs by 2030, not just in our cities and townships but importantly in rural areas.
In his recent state of the nation address President Cyril Ramaphosa announced that the priority of the sixth administration was to drive decentralised and district-based planning that brings economic development to localities. The government has announced a renewed focus on ensuring small businesses benefit from spatial interventions like industrial parks, business centres and special economic zones.
At a more micro level, establishing something as simple as a traders market enables people to sell their products more easily, and for consumers to have access to multiple products and services in one place. Such markets are common across the continent, where one can find a combination of small merchandisers, tailors, jewellery sellers, furniture makers, motorcycle repairs and traditional healers. The untapped entrepreneurial potential of the informal sector is vast, if unleashed.
A successful example of state support to catalyse informal sector activity is the fashion district in downtown Johannesburg. As part of its city improvement district plans, the Johannesburg Development Agency upgraded the infrastructure in the area and set out to attract small, micro and medium enterprises (SMMEs) in clothing wholesale, retail and manufacturing. Today the area is renowned for the place you can buy or get tailored modern and ethnic fashion and is a stop for most inner-city tour groups.
The news of the latest “jobs bloodbath” is of concern to us all. It is even more reason why this sector should get a renewed focus. It has the capacity to absorb many of our unemployed citizens, especially young people who are able to use income received and saved as a stepping stone to self-employment. If one considers that there is a low skills threshold in the sector, driving innovative training solutions can make a difference.
In the 1990s, for example, Kenya sold (at a low fee) training vouchers to people in the informal sector through the Jua Kali programme. It targeted small enterprises that wanted to run their businesses more profitably, balancing management and basic book-keeping training with technical training in fields such as woodwork, car mechanics and food processing.
The challenge for local policymakers is how best to respond to and provide a supportive framework for informal sector activities in a manner that goes beyond punitive compliance. Granted, what has served as a disincentive to scaling up state support for informal business activity in other jurisdictions has been the fact that they do not add to the tax base. By equal measure, informal “extra-legal” businesses could be prone to resisting greater regulation for the very same reason.
This quandary aside, the provision of technical assistance, training, credit and even basic infrastructure can play a vital part in growing the sector and boosting its productivity. Speaking at the launch of the SA SME Fund earlier in 2019, Ramaphosa said large industries can no longer be solely relied on to create jobs on a massive scale and that small enterprises presented the greatest potential.
The government has stated its intention over the next medium-term strategic framework period to focus on improving the enabling environment to grow small businesses. One such measure is the Competition Amendment Act. Once it comes into operation it will increase access to the economy for small, medium, and black-owned businesses.
The private sector also has a role to play, in procuring goods and services from small businesses, thus enabling more people to be employed. Many, if not most, informal sector traders already make use of products such as mobile money payments in their businesses. Financial institutions with their great capacity for innovation can look at ways to provide microfinancing such as small start-up loans, and the extension of credit lines to businesses that cannot provide the necessary collateral.
Addressing the unemployment crisis requires of us all to think beyond seeing the state as either the root cause or the panacea for the problem. It requires innovation and creative thinking. As the sector that has consistently seen growth in terms of the number of people it employs, growing the informal economy is, if not the solution, at least part of it.
• Magardie is a senior speechwriter in the presidency.