In the second quarter of 2015, 2.6 million South Africans were employed in the informal sector, excluding agriculture. That accounts for 17 percent of total employment and 12.7 percent of the total labour force.
South Africa’s informal retail sector is comprised of around 750 000 informal micro-retailers operating from home (‘spaza’ shops) and street vendors, generating total revenues of $2.5 billion (R31.8bn) per year.
Over the same period, official unemployment was 25 percent, although expanded definitions that include discouraged work seekers measure unemployment at 34.9 percent. Meanwhile, unemployment among black youth in the townships is closer to 50 percent.
Providing support to the informal sector could help South Africa relieve some of its unemployment pressures. The informal sector has very low barriers to entry and exit, and is quick to identify and provide for the basic needs of the local community. While the potential for wealth generation is limited, the informal sector is better at distributing wealth than the formal sector.
For the government, the informal sector represents an opportunity cost in terms of tax revenue. Informal economic activity also makes it difficult for government’s economic management to keep effective records of operations in the economy and adjust policy accordingly.
Restrictions
But attempts to formalise or restrict the informal economy can also have unintended consequences. The informal sector provides an unofficial social security system to the economy, supporting households’ incomes where government-led programmes and the formal economy do not have the capacity to do so.
The informal economy is also an important economic support to the distribution of products and services sold by the formal economy, and formalisation comes with the risk of causing barriers to business development, economic growth and job creation, both in the formal and informal sectors.
A number of companies have recognised the benefits of working with the informal sector. Standard Bank has partnered with 9 000 spaza shops to provide basic banking services to the surrounding community. It has equipped these informal traders with point-of-sale devices and basic skills training to offer money transfer services.
The bank has been able to extend its customer base by using the existing infrastructure and networks of the informal traders, while the traders earn a commission on the transfers made at their establishments. A similar model is used by major telecoms companies, such as Vodacom, MTN and Cell C.
The informal sector has also begun to realise its own collective power. In Gauteng, informal spaza shops have started to form associations in order to take advantage of bargaining power and get preferential deals with suppliers.
Associations
The largest of these associations is the South African Spaza and Tuck Shop Association (Sasta), which has 3 000 members. Organisations such as Sasta are playing an intermediary role in bringing informal businesses into the formal economy.
Yet despite the benefits for the economy, the government provides very little support for the informal sector and the combination of strict regulation and brutal police enforcement make starting small, informal businesses a challenge.
In the early 2000s, Durban made strong progress in encouraging and controlling informal businesses. Small vendors along the beachfront were allowed to remain informal, but were provided with basic infrastructure such as stalls, storage and bathrooms. Unfortunately this was all undone in 2005 in a “clean-up effort” before the Soccer World Cup.
And that’s the unfortunate association – that informal business are unsightly, smelly, noisy and unfit for our modern society. I agree that walking along the Durban beach or in the Cape Town city centre is more comfortable without peddling, frying, shouting and incessant alarm clocks that never stop. But it’s a beautiful sight compared with 25 percent unemployment and the destitution that brings.
* Pierre Heistein is the convener of UCT’s Applied Economics for Smart Decision Making course. Follow him on Twitter @PierreHeistein
** The views expressed here do not necessarily represent those of Independent Media.
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