Informal sector must be on the menu for inclusive growth

Inclusive Economy23 Oct 2018Frederick Fourie

An enabled, well-supported and dynamic informal sector can be a potent instrument for generating more inclusive growth. New results from South African research highlights the important role of informal enterprises in providing paid employment and reducing poverty. But in order to strengthen this role substantially and sustainably, effective and enabling policies are required, including ‘smart’ formalization. If not, the sector will simply remain forgotten – and so will the people working in it.

INCLUDE platform

This expert opinion is based on an article originally published at INCLUDE platform, the knowledge platform on inclusive development policies.

The informal sector has remained largely forgotten in South Africa’s economic analysis and policy consciousness for many decades. A major reason for this is that many researchers and commentators view informal sector participants as being without aspirations or entrepreneurial skills, or ‘merely survivalist’, with no meaningful role to play in generating employment or reducing poverty. This is often related to a narrow view of the sector as comprising mostly street traders and waste pickers.

Consequently, policymakers overlook the potential of informal enterprises in the battle against unemployment – as well as the constraints that informal enterprises face, their particular vulnerability and the policy support that could make them more viable and self-standing. For example, the analysis and policy proposals for small business and employment in the South African National Development Plan, the strategic framework for guiding South Africa towards eliminating poverty and reducing inequality by 2030, fails to mention the informal sector, even though the Plan projects the sector to deliver almost 2 million additional jobs by 2030.

Our research shows unambiguously that the informal sector is an important source of employment – and of paid employment – with a growing propensity to employ. In South Africa, one in every six workers is employed in the informal sector. In other developing countries, the number is even higher, often much higher. 1.4 million South African informal enterprises provide livelihoods, work and income for more than 2.5 million workers and owner-operators.

The informal sector is diverse, comprises all industries, and is not static. The sector is not limited to trade only; most of the multi-person, employing enterprises are in construction, retail trade and services, manufacturing and communication; the informal construction industry in particular has a high propensity to employ. In the informal sector as a whole more than half a million new jobs were created in a one-year period in 2013, for example. However, informal enterprises are vulnerable and many jobs are lost again.

The poverty-reducing effect of informal-sector employment is remarkable. 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.It is known that inclusive growth cannot be attained only by sharing the ‘fruits of growth’ with poor people (through, for example, social grants and 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 a decent income. The above figures show that the informal sector must form an integral part of the pursuit of such a strategy.

The main obstacles and constraints that lead to the failure of informal enterprises and loss of jobs are clearly identifiable. These include a lack of suitable and secure premises in good locations, limited or no bookkeeping skills, a lack of finance, credit and insurance, and being the target of crime – as well as harassment by local government. Several constraints are structural and intrinsic to the concentrated nature of the economy. These hinder informal enterprise owners in reaching beyond local markets, graduating to upper tiers of the sector, or stepping up to higher-value markets and formal sector value chains.

So, what is the way forward for South African policymakers? The informal sector needs to be supported by a development-oriented policy approach in which enterprises are enabled to become self-standing institutions that are organisationally and financially separate from the household. A good place to start is by teaching enterprise owner-operators basic bookkeeping skills and providing them with suitable premises for their businesses – these are factors associated with employment growth. Such policies – instead of enforced formalization, which is often limited to tax registration and business licensing – could make a significant difference to the job opportunities, earnings and working conditions of the poor. ‘Smart formalization’ should be development oriented and offer a menu of elements of formality, which enterprises can access as required, in a step-wise fashion, as they become more mature and eventually part of the formal sector.