Chapter 10: Conclusion and Recommendations
4.3 DEFINING THE CONCEPTS: INFORMAL SECTOR AND INFORMAL ECONOMY INFORMAL ECONOMY
Bhowmik (2003: 2) makes a very interesting observation of the link between the urban poor and the informal sector participants, particularly the street vendors. In this relationship, low income groups get cheap and affordable goods from street vendors.
Bhowmik maintains that in the absence of street vendors, urban poor would have to buy from expensive shops and in the process often are worse off. He goes further to say that actually the street vendors subsidise the poor.
Contrary to beliefs that the informal sector is made only of survivalist enterprises, some authors argue that in certain instances earnings for workers who moved from formal sector employment to the informal economy increased (Valodia, 2006: 3). This view is supported by Kucera & Roncolato (2008: 322), when they maintain that in some circumstances people in the informal economy get better income that some people doing formal jobs. In such cases informal workers are better off economically than even formal workers. Barta (2009) also provides a case study of a woman in Bangkok who is earning more in the informal sector than what she earned in the formal sector before she was laid off by a clothing company.
Referred to as the twilight economy, marginal economy or the underground economy, the term informal sector is defined in many ways by different people. Depending on the reason for analysing the sector, informality is often perceived through the lens of licensing, regulation, tax and criminal law (ILO, 2002a: 23 and Barta, 2009).
4.3 DEFINING THE CONCEPTS: INFORMAL SECTOR AND
380). The Development Bank of Southern Africa (cited by Bradley in Reddy, 1995:
115) defines the informal sector as being all people who are active in unregistered enterprises.
What we commonly know as the informal sector used to be known as the traditional sector. The term informal sector was first coined by the British economist, Keith Hart in 1971 when studying economic activities in urban Ghana (Chen, Vanek & Carr, 2004: 23; Valodia, 2006: 1 and ILO, 2002b: 10). This term was later used by the International Labour Organisation (ILO) to refer to small scale farmers and unregistered economic activities. The ILO used the term to describe the activities of the working poor which were not recognised, recorded, protected or regulated by the public authorities (ILO, 2002a: 1). According to Valodia (2006: 1), the term informal sector was used to describe a range of subsistence activities of the urban poor. In terms of the definitions, the key words that describe the sector can be summarised as lack of recognition, lack of protection, activities and outputs not recorded and not governed by any law. Valodia, Lebani & Skinner (2005: 15) provide the following criteria for informal sector enterprises as adopted by the 15th International Conference for Labour Statisticians (ICLS):
Enterprise not registered in terms of national legislation.
Employees in the enterprise not registered as per the requirements of the labour legislation.
Enterprise employing a small number of employees.
Considering these criteria, one can conclude that an informal business enterprise is an enterprise where both the enterprise and the employees are not registered in terms of applicable legislation. With regard to the number of employees, there could be reservations. For example, if a business is registered and has only three employees registered as per labour legislation, could such an enterprise be classified as informal?
The other challenge is with regard to the registration of employees. Following the ushering of democracy in South Africa, the majority of previously disadvantaged people have registered businesses, particularly close corporations, as per the applicable legislations. Although these businesses are registered in terms of the national legislation, their employees are in most instances temporary workers and not
registered. Considering the ICLS definition, would such a business then be classified as informal, given the number of employees and their registration status? What is clear is that it is not easy to define an informal business enterprise based on the three ICLS criteria. One can argue that the informality of the enterprise should then be limited to the registration of the business enterprise itself. Issues relating to the status of the employees as well as number of employees should perhaps only be used for classification of business as per the provisions of the 1995 White Paper on the Promotion of Small Business in South Africa.
Overall, informal business enterprises activities are defined as a way of doing things characterised by (ILO, 2002a: 23; Gugler in Gilbert & Gugler, 1992: 96 and Valodia, 2006: 1):
Ease of entry.
Family ownership of the enterprise.
Small scale of operations.
Labour-intensive and adapted technology.
Skills acquired outside the formal school system.
Unregulated and competitive markets.
The definition of the informal sector during the early days referred only to the activities undertaken by enterprises. As time progressed, the informal sector was expanded to include both the enterprises and the inhumane informal working conditions (informal employment relations) of the workers in this sector (ILO, 2002a:
2). The definition of informal sector was then expanded to include both enterprises and the employment informal relations as well. This expansion led to the adoption of a new concept, the informal economy (Chen et al, 2005: 38 and ILO, 2002a: 2). In terms of this expansion, the informal economy looks at the nature of employment relations, in addition to the characteristics of the enterprises. The informal economy is therefore that part of the economy that comprises informal employment, that is, employment where the workers do not have secure employment contracts, benefits or any social protection (ILO, 2002b: 12 and Valodia, Lebani & Skinner, 2005: 15).
Valodia, Lebani & Skinner (2005: 15) argue that using the term informal economy as opposed to informal sector assists in addressing arguments regarding the linkages between the formal and informal economies. The use of the concept informal
economy indicates that the sector is part of the overall economy, although it does not conform and comply with certain prescribed norms and standards.
In the past, there was the belief that the informal sector was not permanent, that it would disappear. It was believed that if countries introduced right economic policies and resources, the informal sector participants would ultimately “graduate” and become formal enterprises (Chen, 2004: 4 and ILO, 2002b: 9). It was felt that the informal sector would disappear once a country achieves sufficient levels of economic growth (Chen, Vanek & Carr, 2004: 23, Chen, 2005: 5 and ILO 2002b: 10).
Despite these earlier beliefs that the informal sector was temporary, studies conducted in Kenya and Ghana found out that the informal sector was efficient, creative and resilient. The studies indicated that contrary to the belief that the informal sector would disappear, it actually expanded overtime (Chen, 2004: 5 and ILO 2002b: 10).
Although this was the case, there were arguments that the informal sector is marginal or peripheral and not linked to the formal sector in any way. It is, however, interesting to note the new pattern of the modern (capitalist) economy, which made the informal economy a permanent, although subordinate and dependent feature of formal sector (Chen, 2004: 7 and ILO, 2002b: 10). This has been through, for example, big companies subcontracting production of goods and services to small scale informal units (Chen, Vanek & Carr, 2004: 24).
Despite earlier beliefs that the informal sector was a temporary phenomenon, it is greatly acknowledged today that it is a permanent feature of economies. In fact, as noted, the sector has continued to grow in new forms (Chen, Vanek & Carr, 2004:
25). An expanded definition of informal economy has also been developed. This definition encompasses all forms of “informal employment”. This has moved the focus from unregulated enterprises to include employment relationships that are not regulated, recognised or protected (Chen, Vanek & Carr, 2004: 26 and ILO, 2002a:
2).
These developments have led to a new thinking, which should ultimately inform the approach to the management of the informal economy. The table below indicates the
shift in thinking on how the informal economy was viewed in the past and the current thinking:
Table 4-1: Old and new views about the informal economy
The Old View about the informal economy The New View about the informal economy
The informal sector will disappear with industrial growth.
The informal sector is “here to stay” and is expanding. It is a permanent feature of economies, whether developed or undeveloped.
The informal sector is only marginally active. The sector contributes significantly to GDP and is the main provider of employment, goods and services for low-income families.
The informal economy exists separately from the formal economy (dualist school of thought).
The two economies are linked in several ways, for example, through production, trading and distribution channels.
It provides a pool of labour for the formal economy.
The increase in informal employment is due to the inability of the formal economy to absorb employment seekers. It is also as a result of informalisation of employment relationships by big companies.
The economy comprises of street traders and very small producers.
The sector comprises a wide range of activities, from old traditional forms to new sophisticated ones like high tech home-based industries (as evidenced in developed countries).
Most participants choose to operate in the sector in order to avoid regulation and tax (legalistic school of thought).
Goods and services produced in the sector are legal although their production is not regulated. Should the barriers to registrations and other related costs be reduced, most entrepreneurs could consider registering.
Work in the sector is mainly survivalist and not affected by economic policies.
Although survivalist activities are prevalent, the sector comprises also productive businesses, whose success or failure depends on the economic policies. Further, it is the
The Old View about the informal economy The New View about the informal