With support, the informal economy could help ease SA’s crises

The informal economy has often been overlooked in SA’s economic policy analyses owing to a scarcity of data.

According to a 2018 article by Cecilia Poggi, Anda David and Claire Zanuso debunking myths about the informal economy, informality has historically been perceived negatively as it is often associated with income inequality and low wages, limited government regulation and low tax revenues. This negative perception obscures the potential benefits of the informal economy, particularly in creating employment.

Considering the economic atmosphere in SA, the scourge of unemployment continues to rise. For instance, the unemployment rate was estimated to be 34,5% in the first quarter of 2022, according to Stats SA’s Quarterly Labour Force Survey. Unemployment has adverse effects on economic growth and indiscriminately affects both migrants and South Africans, including the most vulnerable populations such as the youth and women.

If harnessed properly, the informal economy has the potential to mitigate unemployment. However, there are several challenges. First, there is little or no attention paid to the sector at policy level, and when attention is paid it is more often than not punitive. According to a 2018 report produced by the Socio-Economic Rights Institute of SA in collaboration with the SA Local Government Association, today’s policy and municipality bylaws fall short because they outlaw informal economy activities rather than supporting traders.

According to a 2019 article by Michael Rogen and Caroline Skinner, “a key driver in punitive approaches is an attempt to regulate the activities of foreign migrants”. Also, it is perceived as a “problem sector” that creates tension between migrants and South Africans. This tension, which often play out as protests, xenophobia and Afrophobia, stem from migrants and SA traders in the informal economy sharing limited economic opportunities. And, there is little useful data on the size and scale of informal economic activities.

Despite these challenges the informal economy could mitigate chronic unemployment in SA. From the literature it is apparent that there is a strong correlation between informal economic activities and employment creation. According to Investec, the informal economy, also called the township economy, accounts for about 17% of SA’s total employment and contributes about 6% of SA’s GDP.

The government’s economic policies must regard the informal economy clearly as a key part of the SA economy while being cognisant of the diversity of economic activities in the sector. The sector includes prominent activities such as spaza shops and informal retail trading, street trading and hawkers, taverns, fast-food outlets, hairdressing and domestic work. This is significant as the National Development Plan 2030 targets “public employment programmes” achieving 2-million opportunities a year from 2020 onwards. Public employment programmes are akin to informal economy activities as they are characterised as “low productivity, nonmarket services such as expanded public works projects in government construction, care, self-help projects and survivalist activities”.

Second, according to the International Labour Organisation the informal sector is an important sphere because it is an alternative source of employment opportunities and income generation for low-skilled people. Stats SA estimated that in the fourth quarter of 2020 about 2.5-million workers (excluding agriculture) earned income, employment opportunities and livelihoods from informal businesses.

The challenge of rising unemployment in SA is twofold: on the one hand the formal sector is not producing enough opportunities. On the other there is a mismatch between the availability of employment and the shortage of critical skills to fill these opportunities. According to the Critical Skills Survey of 2020/2021 produced by Work Permit & Expatriate Solutions, 77% of organisations were struggling to recruit critical skills in SA.

To encourage inclusive growth government efforts must therefore be focused on encouraging vulnerable populations to engage in economic entrepreneurial activities at the informal and township economy level, thereby creating employment and reducing poverty. Such employment creation is significant in that employees are drawn directly from the community in which the informal activity is set up, promoting inclusive growth.

Third, informal economy activities have a great potential for fostering social cohesion between migrants and South Africans, a process often overlooked. Research by the Southern Africa Labour & Development Research Unit exploring South Africans’ understanding of issues such as social cohesion, skills and economic activities, including trade and looking for jobs together were identified as activities that bring people together. Societies benefit from the activities in the informal economy and in most cases depend upon these trade interactions to function and be cohesive.

Economic activities such as hairdressing enable people to interact and build trust through social interaction. Buying small goods from spaza shops on credit creates a sense of trust among community members. By participating in stokvels or rotating credit schemes, local hosts and migrants learn to depend on and develop each other socially and financially, resulting in the creation of partnerships and networks of participation. The significance of these activities has far-reaching positive effects on a cohesive society and the economy overall.

Unemployment is a scourge with adverse economic consequences that indiscriminately affect migrants and South Africans alike. Government must make strides to formulate policies that create an inclusive enabling environment for informal economic activities as they have the potential to mitigate unemployment and contribute to growth.

The informal economy presents a worthwhile opportunity to address the issue of chronic unemployment affecting marginalised South Africans, migrants, women and the youth. The potential outcomes from mitigating unemployment, like social cohesion, economic growth  waning xenophobia are worth considering.

• Matema is a programme manager assigned to the Migration Project at the Konrad Adenauer Stiftung. Dr Kariuki is executive director of the Democracy Development Programme. They write in their personal capacities.