Topic: Informal Economy
The last ten years have seen a big shift in conceptualising the informal economy from a “traditional economy that will wither away and die with modern, industrial growth” to an integrated part of the economy, which is “expanding with modern, industrial growth” and here to stay.
Scholars as well as practitioners in the developing world have begun to acknowledge the significant role of the informal economy in employment provision and generation and its function as buffer between employment and unemployment. Moreover the informal economy has particular relevance for the creation of livelihood opportunities and alleviating poverty as part of individual survival strategies of the poor.
In South Africa, the informal economy forms a key component of strategies to address unemployment and poverty and to support the creation of sustainable livelihoods. However, municipalities face various challenges in developing and implementing policies that create an enabling environment for the sector. In fact, the majority of South African municipalities, for various reasons, fail in providing LED-friendly and more developmental and inclusive informal economy policies and by-laws.
According to the Quarterly Labour Force Survey, in the first quarter of 2012 there were 2.1 million people in South Africa active in the informal economy (excluding the agricultural sector), compared to 9.5 million in the non-agricultural formal sector. Of the 2.1 million, 1.2 million were men and just over 857,000 were women. A provincial breakdown shows that Limpopo province has the largest relative informal economy – around 34% of total economic activity takes place in this sector. Informal employment is also of considerable importance in Mpumalanga, the Eastern Cape, the Free State and KwaZulu-Natal, making up more than 20% of non-agricultural employment in each of these provinces. The relative share of the informal economy by province indicates some correlation with the overall unemployment rate, supporting the idea that for many people the informal economy is the alternative to unemployment. It is argued that without the informal economy, the unemployment rate would rise from currently 25% to around 47.5%. This implies that its significance in pro-poor economic development policy is more important than even its relative size suggests.
There is a wide range of economic activities included in the informal economy such as street vendors, taxi drivers, rubbish collectors and home-based care workers, making it almost as diverse as the formal economy. Retail activity dominates South Africa’s informal economy with trade of goods and services being the most important sub-sector. Just over 1 million people are engaged in this activity, and another 300 000 in community and social services. Together, these sub-sectors constitute around 60% of all employment in the informal economy. The dominance of trade is a characteristic which makes the South African informal economy different to other African countries. This is due to the fact that the structure of the economy is not typical for a developing country: the key difference is that South Africa has a sizeable manufacturing sector contributing 14% to the Gross Domestic Product (GDP), with the majority coming from formal businesses (ca. 97%) of medium and large size. As a result, the scope for small-scale manufacturing and agro-processing – formal and informal – targeting local consumers in poor communities is very limited. In addition, due to the absence of small-scale informal manufacturing activity there is also an absence of informal business-service firms.
By its very nature, informal economic activity goes unrecorded and is therefore difficult to measure, but some estimates value the informal economy at around 28% of South Africa’s GDP. Therefore the size of the informal economy (i.e. including informal traders, waste collectors, home-based care workers, taxi drivers etc.) can be estimated at around R160 billion which would make its value 2.5 times as large as the contribution of the entire agricultural sector, or 70% of the contribution of the mining sector to GDP.
The term “informal sector” was first coined by Keith Hart in his study of the economic activities of the urban economy of Accra, Ghana, in 1973. Hart used the term to refer to the low income activities of the urban poor who could not find wage employment. The term was subsequently adopted and popularised by the ILO in form of “informal economy”. While there are disagreements on the definition of the informal economy, most definitions nevertheless emphasise the following characteristics:
- small scale, low level of organisation and low productivity;
- happens outside of state licensing and regulation framework; and
- (some authors include) “legal and economically sound” activities ( differentiating the informal economy from hidden or underground economy).
In 2003 the International Conference of Labour Statisticians (ICLS) released a definition of the informal economy based on the wish to capture the informal economy’s size and significance in a holistic way. Whereas previous definitions only embraced informal employment of informal businesses (‘informal sector employment’), this expanded definition also captures the large number of employees working within formal enterprises on an informal basis. The definition focuses on “the nature of employment in addition to the characteristics of enterprises and includes all types of informal employment both inside and outside informal enterprises. [...] [It] extends the focus from enterprises that are not legally regulated to include employment relationships that are not legally regulated or socially protected”. Employment in the informal economy can thus be defined as “the sum of employment in the informal sector and informal employment found outside the informal sector”.
The ILO 2003 Expanded Statistical Definition distinguishes informal self employment and informal wage employment:
Informal self-employment includes:
- employers in informal enterprises
- own account workers in informal enterprises
- contributing family workers (in informal and formal enterprises)
- members of informal producers’ cooperatives (where these exist)
Informal wage employment:
Employees hired without social protection contributions by formal or informal enterprises or as paid domestic workers by households. Certain types of wage work are more likely than others to be informal. These include:
- employees of informal enterprises
- casual or day labourers
- temporary or part-time workers
- paid domestic workers
- contract workers
- unregistered or undeclared workers
- industrial outworkers (also called homeworkers)
The informal economy and local government
Local government in Africa has tended and still tends to deal with informal economy participants largely on the basis of by-law formulation, particularly in respect of street traders. This approach is based on an inherently restrictive view of the ‘problem’ of the informal economy.
Pejorative perceptions of the informal economy – both within municipalities and some formal businesses – have contributed to the marginalisation of the informal economy within official economic development policy. This marginalisation is clearly illustrated in the almost complete absence of reference to the informal economy in official planning and economic strategy documents. The informal economy is most often considered by municipal planners as a spatial problem (i.e. where to locate informal trading zones) rather than as an integral part of the local economy, and a key factor preventing even higher levels of unemployment.
Local Government and the informal economy: a strained relation-ship
From a government perspective, there have been various factors that have made it difficult to put together appropriate policies towards the informal economy; some of these are:
- Instability and vulnerability of informal worker’s representation and associations;
- Proliferation of organisations representing informal workers in each city or town, where organisations are fighting for recognition, support and power;
- (related to above) multiple structures within municipalities, (which usually do not plan and operate jointly) are mandated to facilitate, manage, implement and monitor informal activities;
- Complex co-ordination processes within municipalities, each using its own strategies; and
- Low literacy levels: as such, informal workers are unable to exercise their constitutional rights and duties; a feature which continuously frustrates municipal officials.
From the perspective of agents operating within the informal economy:
- Relationships with police are always strained, especially law enforcement agents who are viewed as antagonistic to informal trading per se;
- Relationship with local government is often tense, especially where informal traders’ goods are constantly being confiscated and impounded but also due to site allocations and the function of processing permits by municipalities. A general lack of common ethics, values and policy guidelines from local government authorities often creates a breeding ground for tensions and frustrations for informal traders;
- Increased inter-organizational rivalries and intra-organizational conflicts between and among informal/street traders’ associations - most of whichhese organizations are institutionally and financially weak and therefore are not able to represent and manage their members properly;
Is formalisation the answer?
A good deal of the debate over government policies for the informal economy is the question of whether and how to formalise the informal economy, i.e. the idea that all informal business activities can and should become ‘proper’ small businesses. Although there are obviously some candidates for this path within the informal economy, this approach fails to fully recognise either the very diverse nature of the informal economy, or the fact that many survivalist endeavours will never be more than that, but should nonetheless be respected for the role that they play in reducing the vulnerability of the poor.
In a publication by UN-Habitat dedicated to innovative policies for the urban informal economy, it is pointed out that the “policy analysis should move beyond the conventional debate [of formalisation] and focus on appropriate regulation, that is, the simplification and streamlining of national regulations and municipal by-laws that are required to (a) promote the development and gradual regularisation of the urban informal economy, (b) improve its operational efficiency and (c) strengthen its income-enhancing effects on the urban poor”. In addition, a second set of related innovative policies a la de Soto should be based on the formalisation of property rights with the objective of releasing the “entrepreneurial and property potential” of the poor.
Simple and affordable intervention
Drawing on experience from Durban, South Africa, Lund et al (2006) argue that there is “ample opportunity for simple and affordable interventions that make for securer working environments for those in the informal economy”. We have listed seven possible areas where local goverment can get active.
1. Understand the needs of the informal economy and acknowledge its different facets
The reality is that the informal economy contains a ‘continuum’ of economic activities, and this complexity requires that policymakers take a differentiated view of the informal economy and develop strategies tailored to different local needs accordingly.
2. Work together with the informal economy
Formal business interests are represented in municipal governance through associations such as chambers of commerce. Informal workers and their enterprises should be entitled to the same opportunities of having forums for the expression of their interests. However, few cities provide opportunities for continual interaction over decisions about, for example, the sites of new markets, priorities for development, participation in trade fairs, or dispute mechanisms. Local government can play a central role in facilitating the organisation of representative bodies and include these in its participatory processes.
3. Create a favourable policy environment
Include the informal economy in local economic development strategies and integrated development planning documents through direct consultation with all stakeholders. A move towards developing comprehensive policies that recognise the contribution of the informal economy to economic activity and takes cognizance of the particular vulnerabilities of informal economy participants represents a significant step forward in achieving the goal of ‘developmental government’ at a local level.
4. Create a favourable regulatory environment
Municipal regulations significantly shape the environment within which informal workers and enterprises operate. Street trading by-laws can be punitive, for example through confiscation of goods with no warning or the imposition of fines for trading in specific areas. In this process, precarious livelihoods are instantly destroyed. Alternatively, local governments can put street trading by-laws into place which can create an enabling environment for traders, through a regulatory regime in which the roles and responsibilities of all parties are outlined.
5. Flexible taxes and rates
Street traders in many cities pay monthly fees for trading space, in the same way that formal businesses must pay rates or rentals. The tendency is that informal workers pay blanket levies which are too high for the very poor, and too low for the better off. A system of differentiated rentals [can present a solution], so that formal and informal businesses alike are charged different rents and rates for different levels of service. Rentals can be linked to site size, desirability of location, and the level of services provided. For street traders, a basic site rental can be set, and then differentiated rentals for different levels of service provision. Components of a package of services are basic shelter, solid waste removal, water, toilets, lighting, and storage facilities.
6. Access to infrastructure and basic services
Local government services can be designed to address the infrastructural needs of both formal and informal enterprise, which are essentially similar. They both need secure space, with transparent contracts for access to it and which comes with a known and reliably delivered set of services such as lighting, water, toilets, garbage removal, security and storage.
7. Access to markets
Local government can play a crucial role in helping informal enterprises to access markets, e.g. through building markets, training, organisation of enterprises operating in the same markets and by facilitating the foundation of cooperatives.
Critical Success Factors
Depending on the existing level of engagement with the informal economy, we have identified seven areas where local governments should get active in order to ensure a holistic and succesful approach to LED:
- Acknowledging the importance and presence of the informal economy (as a key stakeholder or sector in development and local economies) and facilitating changes in attitude towards the informal sector;
- Dealing with the complexity and diversity within the informal economy or having the right skills, capacity and structures within the local government sector to engage with the informal economy;
- Bridging the relationship and communication gap between local government and the informal economy;
- Including informal sector issues into local government policies, regulations and planning processes;
- Developing local economic development (LED) friendly policies and by-law guidelines for the informal economy;
- Actively engaging the informal economy in LED; and
- Involving national departments in supporting the efforts of local government to develop and implement a more developmental approach towards the informal economy.
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