Creating jobs and reducing poverty: why not enable the informal sector properly?

Author: Frederick Fourie

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

A new edited volume, published by HSRC Press, flags the importance of explicitly addressing the informal sector in such initiatives, given the key role it plays in providing paid employment and reducing poverty. The book is based on research done in the Research Project for Employment, Income Distribution and Inclusive Growth (REDI3x3).

This research shows unambiguously that the informal sector is an important source of employment (and of paid employment), with a growing propensity to employ. Regrettably, for many decades the sector has remained forgotten or, at best, in the margins of economic analysis and policy consciousness. Many policy makers appear to group it together with formal SMMEs. Such an approach risks missing key elements of the ‘forgotten’ world of informal enterprises – their potential, the constraints they face, their particular vulnerability, and the policy support they need to be viable and self-standing.

How many jobs are created in the informal sector?

The book provides quantitative and qualitative analysis of the nature and contribution of the informal sector. While South Africa’s informal sector is small compared with that of 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 work, work 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 multi-person enterprises (as either owner-operators or employees). Notably, almost half of the total work in the latter group, the enterprises with employees. These multi-person enterprises provide about 850 000 paid jobs – almost twice the direct employment in the formal mining sector (based on 2013 data).

The percentage of employing enterprises has been on the increase since 2001, as has their propensity to employ – implying a rising employment orientation and employment intensity.

It is estimated that 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 employment expansion by one- and multi-person enterprises alike (although 60 000 jobs were also lost due to employment cutbacks in the sector).

In addition, roughly 300 000 new informal businesses were started in 2013, creating roughly 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 about six months, reflecting early-stage vulnerability.

Poverty reduction, inclusive growth and empowerment

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 impact as losing 60 to 80 formal sector jobs. 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 get 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 for South Africa.

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 not something that is of little use or has to be tolerated. Neither is it just a mop-up sector that absorbs people not employed in the formal sector. The informal sector has a meaningful role to play in generating employment, providing livelihoods and addressing poverty – even if current earnings levels still are low.

The informal sector is very 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.

Constraints and policy imperatives

Recognising the informal sector as an integral part of the economy and of a range of economic (and other) policies 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).

Clearly 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 frequently are quite severe and earnings low.

Basic constraints include a lack of suitable and secure premises in good locations, limited or no bookkeeping 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 also of harassment and persecution by local government.

Large numbers of women in own-account positions are particularly vulnerable (while often bound by household obligations). However, own-account work have become a smaller component of women’s informal sector employment, with a growing proportion paid employees, employers or managers. This is part of an ongoing gender reconfiguration of the sector.

Several of the constraints are structural and intrinsic to the concentrated nature of the economy – and affect informal enterprises particularly badly. Formal-informal dynamics hinder informal enterprise owners in reaching beyond local markets, graduating to upper tiers of the sector or stepping-up to higher-value markets – 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 separate from the household in terms of organisation, finances and location have higher profitability and are more likely to have employees. It is important to assist informal enterprises to become self-standing institutions, starting with basic bookkeeping skills and suitable premises. A growing degree of enterprise self-reliance will benefit both own-account workers and multi-person enterprises. Prior work experience also is a valuable attribute for new enterprise owners.

A thorough macro-economic analysis of business conditions in the informal sector show that severe cyclical downturns may affect the sector differently from moderate macroeconomic downturns. In fact the informal sector suffers disproportionately in sharp downturns.

Other findings relate to township spatial issues and urban land reform. One example is the need, in a township or new urban settlement context, to modify ‘standard’ modernist city planning as well as zoning approaches to informal business.

As far as rural towns and rural land reform is concerned, there may be up to half-a-million informal farmers who sell their products in markets (i.e. they are not subsistence farmers). Their markets – often in small rural towns – are very different from supermarket-led value chains, illustrating the need for distinctive policy support to make such informal farmers more viable.

The National Informal Business Upliftment Framework (NIBUS) of 2014 was an important step, but implementation and impact has been very limited, hamstrung by factors such as limited capacity, a lack of conceptual clarity and few effective instruments – and limited buy-in by provincial and local governments. In fact, across the three government levels the current policy environment appears to be a mix of benign neglect, ambiguity and active repression of the informal sector.

The book proposes an enabling, ‘smart’ policy approach to the development of the sector, including smart formalisation. Formalisation is often narrowly conceived only in terms of tax registration and licencing combined with punitive sanctions for non-compliance – especially at local government level. A different approach would be developmental in nature and offer a menu of elements of formality to developing enterprises to properly enable them. These would relate, for example, to financial services (including credit), infrastructure and premises.

Such policies, if effectively implemented, could make a significant difference to the job opportunities, earnings and working conditions of the poor. For this to happen the informal sector must be taken seriously and addressed explicitly and properly. Otherwise it will simply remain the forgotten sector – and so will the people working in it.

REFERENCE

Fourie FCvN (ed.) The South African informal sector: Creating jobs, reducing poverty. HSRC Press 2018. ISBN: 978-0-7969-2534-3. 512 pages. Price: R290.
[The book is the outcome of an informal-sector project within REDI3x3 (the Research Project on Employment, Income Distribution and Inclusive Growth), which was based at SALDRU (UCT) from 2012 to 2017 and supported by the National Treasury. The author was convenor of the informal-sector project within REDI3x3, and is professor and research fellow at Free State University and research affiliate at UCT.]