Managing the interface between the formal & informal sectors

Informal traders SBIncreasing the number of micro and informal businesses (in particular survivalists, street vendors, hawkers and spaza shops) is a yard stick by which the progress of the Department of Small Business Development is measured. That is clear from the 2016 report of the Parliamentary Committee on Small Business Development (See https://pmg.org.za/committee-meeting/22352/ ). Whilst supporting the poor is laudable, any strategy that wants to regenerate economic growth has to seriously reconsider this approach.

In three country wide assessments in neighbouring countries (conducted by Enterprise Surveys of the World Bank), the practices of informal sector businesses are considered as key constraints on economic growth and a growth oriented business environment.

In the case of Zimbabwe the practices of informal businesses (unregulated competition, trading on and clogging the doorsteps of rate-paying firms, undercutting by non-compliance to health and labour regulations, etc. was considered as the greatest obstacle facing firms. Almost one out of four formal enterprises (24%) ranked it as the most serious problem, followed by access to finance (21%) and political instability (19%).
Top ten business constraints 2016 Zimbabwe
In Lesotho the Practices of the Informal Sector (17%) was in the third place of factors hampering the business environment, pipped to the post by Political instability (35%) and Tax rates (20%).
Top ten business constraints 2016 Lesotho
In Swaziland one in eight firms (12%) views the Practices of the Informal Sector as the greatest constraint on a growth oriented business environment. It is a mere 6% behind Corruption that leads the list (18%). Tax Rates (14%), Electricity constraints (13%) and Crime (13%) just pushed the Informal Sector’s practices into fifth position.

Top ten business constraints 2016 Swaziland
The unregulated and unfair competition of Informal Businesses is therefore viewed as a key constraint on a growth oriented business environment by:

  • One out of four businesses in Zimbabwe
  • One out of six businesses in Lesotho, and
  • One of of eight businesses in Swaziland.

If South Africa wants to achieve growth, it is high time to reconsider enterprise policies and strategies. That requires a rethink about all enterprise policies and the Parliamentary Committees should rather get a proper focus than on measuring progress by criteria that will in fact undermine growth. We have over the past decade wasted billions of rand on efforts in pursuit of cooperatives with very very little to show for that. The one positive in that is that the damage is less than what it would have been were the promotion of cooperatives successful.

The question is not about getting it now right with informal or micro business promotion. Russell Ackoff made a pertinent observation:


quote-openingWhen you make a mistake in doing the right thing and you correct it, things become better. When you make a mistake doing the wrong thing and you correct it, things become even wronger. The more efficient you are at doing the wrong thing, the wronger things become …

It is time to stop trying to correct the wrong things… It is time to start doing the right things that will ensure growth. And that includes managing the interface between the formal and informal sector.
Johannes Wessels

For more information on the World Bank’s Enterprise Surveys, click: EnterpriseSurveys, The World Bank Group.

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