Chapter 10: Conclusion and Recommendations
4.9 FACTORS AFFECTING THE INFORMAL ECONOMY
The informal economy is heterogeneous. Its size and composition is dependent and influenced by various factors. Its existence can therefore not be attributed to a single cause (ILO, 2002a: 27 and Valodia, Lebani & Skinner, 2005: 14). It is therefore important for each municipality to analyse and consider various factors when developing a policy for managing the informal economy. This section highlights some of the factors that shape the informal economy:
4.9.1 Legal and Institutional Frameworks
Informality is often described in terms of lack of registration and activities operating outside the law. This could be linked to the legalistic school of thought that ascribes the reason for informality to unwillingness on the side of entrepreneurs to conform and thereby avoid related costs (Chen, Vanek & Carr, 2004 and Valodia, 2006: 3).
According to a report by ILO (2002a: 27), three types of legislation affect the informal economy: (i) business regulations that govern the establishment and operations of enterprises; (ii) laws regarding property rights, and (iii) labour legislation that governs employment relationships and worker protection. How these legislations and institutions are structured and operate will surely contribute to the size and composition of the informal sector. For example, in an environment that is conducive to business and investment, formal activities are likely to grow. In an environment where it is costly or too bureaucratic to register a business, most entrepreneurs might decide to operate informally.
In developing a policy for managing the sector, the municipality should do a thorough assessment of the regulatory environment. This should be at both the local, national or provincial levels as these will surely be manifested at local level (ILO, 2002a: 28).
The broader local economic development strategy must be seen as the backdrop, since the informal sector also contributes towards economic growth.
4.9.2 Economic Growth
The informal economy contributes to economic growth. According to ILO (2002a:
30), in Sub-Saharan Africa, the informal economy contributed between 7 and 38 percent of the total GDP. In India, the contribution is as high as 62 percent of GDP. It is estimated that in South Africa, the contribution could be as high as 12 percent (Valodia, 2006: 4).
One of the factors that contribute to an expansion of the informal sector is when the formal economy does not create enough jobs for those seeking employment. In this instance, people might start their own businesses in the informal economy. In some countries, growth in high-technology sectors relegates people without high skills. The people are absorbed by the informal economy. To harness this potential for job creation and contribution to economic growth, government policies to manage the sector should lead to the creation of productive employment (Bhowmik, 2003 and ILO, 2002a: 29).
4.9.3 Economic Policies and Economic Climate
According to the report by ILO (2002a: 30), one of the factors contributing to an increase in the spread of the informal economy is as a result of high poverty, unemployment and underemployment. This situation can arise due to the emergence of certain economic policies, like the Structural Adjustment Policies introduced in the 1980s and 1990s.
In the Asian countries, for example, the informal economy grew during the economic crisis in the 1990s. As more and more companies closed or retrenched workers, more people joined the informal sector. In Thailand, when there was an economic boom,
most people were involved in productive activities (although informally) like furniture manufacturing. With the recession, there was an increase in marginal economic activities (Chen, 2004: 7 and ILO, 2002a: 30).
In developing a policy for managing the informal sector, provision should be made to provide support that responds to the economic situation. For example, during an economic boom, more advanced support could be required to assist productive activities. In contrast, during periods of economic recession, survival activities are more likely to increase, requiring a different management approach. What this implies is that municipalities must adopt flexible policies so that they can respond effectively.
4.9.4 Poverty
When you are poor, you cannot afford to be unemployed. As a result, you will accept any job to stay employed, even if the job is informal (ILO, 2002a: 31). Thus, when poverty increases, even the informal economy increases. This however does not mean that all those employed in the informal sector are poor, or that all those employed in the formal economy are doing well. As Kucera & Roncolato (2008: 322) maintain, there are poor workers within the formal economy. This fact is further supported by ILO (2002a: 31), which maintains that there are self-employed people who get better salaries than formally employed unskilled and low-skilled workers. It is, however, a fact that poverty makes people to accept unattractive jobs in the informal economy.
Since jobs are linked to meagre income, the cycle of poverty continues.
Any policy to manage the informal sector should therefore take into account the following (ILO, 2002a: 31):
The majority of the participants are poor (so might need welfare assistance as well),
The incomes are on average low. Any taxes levied upon the participants could kill the businesses/initiatives.
Policy that aims to address informal economy while reducing poverty in the rural
Women are more affected by poverty than men, and are concentrated in lower- income segments.
In developing the policy, care should be taken to ensure that the policy addresses problems faced by the informal sector and provides decent work. This would assist to eradicate poverty. Furthermore, the policies should enable the participants to move to more productive, protected and decent work (ILO, 2002a: 32).
4.9.5 Demographic Factors
Various demographic factors like size of labour-force, level of education and the skills of those searching for employment, migration from the rural to the urban areas and rate of urbanisation, affect the growth of the informal economy (Chen, 2004: 7 and ILO, 2002a: 32). For example, when entering the informal sector, most females are found at the lower end with less income. This can be attributed to factors like inadequate education and training as well as lack of access to productive resources (ILO, 2002a: 32). In most instances, people migrate to urban areas in search of better job opportunities. When the expectations are not met, they end up in the informal economy (Bhowmik, 2003). To develop an effective policy for managing this sector, the municipality should do a thorough assessment of (ILO, 2002a: 32):
The education and skills levels of its residents. The lower the education level, the more chances of getting into the informal economy.
The rural-urban migration.
The growth of the labour force.
The rate of urbanisation. This implies that to decrease the migration, conditions in the rural areas should be improved.