Chapter 10: Conclusion and Recommendations
5.3 SIZE OF INFORMAL SECTOR IN SOUTH AFRICA AND ITS CONTRIBUTION TO GDP CONTRIBUTION TO GDP
5.3 SIZE OF INFORMAL SECTOR IN SOUTH AFRICA AND ITS
The size and nature of the informal sector as evidenced in South Africa can be attributed to the apartheid regime. The apartheid policy prohibited blacks from being private sector entrepreneurs or business owners outside homelands. Black people were restricted from participating in the formal economy. One way of limiting black participation in the formal economy was, for example, through business licensing. In 1982, the law provided for one business licence per 650 people in black urban townships as opposed to one business license per 60 people in Cape Town. (Van der Berg in Nomvete, 1993: 31; Lund & Skinner, 2003: 3 and Valodia, Lebani & Skinner, 2005: 13). This stimulated informal economic activity among blacks. When the deregulation took place in the 1980s, coupled with an explosion of the rural-urban migration, the informal sector increased drastically (Van der Berg in Nomvete, 1993:
26). By 1990, the informal sector had grown (from a very small amount in the early 1970s) to about 8 percent of the enumerated GDP. To note is that of the 8 percent, at least 7, 5 percent was generated by black informal operators. This expansion can be linked to the deregulation, rapid urbanisation as well as lack of jobs in the formal sector (Van der Berg in Nomvete, 1993: 27). According to Preston-Whyte &
Rogerson, (in Preston-Whyte & Rogerson, 1991: 306) the main objective of deregulating the business environment was to relax measures that restricted development of the formal and informal business sector. Deregulation reduced regulations, thereby allowing black owned businesses to grow, as per the provisions of the White Paper on a Strategy for the Creation of Employment Opportunities in the Republic of South Africa.
It is estimated that the informal sector‟s contribution to the GDP ranged from 12, 6 percent in 1991 to 9, 2 percent in 1993, to approximately 7 percent in 1999 (Saunders
& Loots, 2005: 92-93). One observation is that the sector‟s contribution to the GDP decreased during this period. This is surprising given that according to the 2003 Quantec5 report (cited in Saunders & Loots, 2005: 92), the number of participants increased significantly from 1992 to 2002. However, although the number of participants increased, the informal sector‟s contribution to the economy did not increase. This could be linked to the type of informal activities that the participants engaged in, whether the activities were survivalist or productive. Valodia (2006: 4)
5 Quantec Research (Pty) Ltd is a company that specializes in marketing, distribution and support of economic and financial data.
maintains that the informal sector contributes some 7 percent of the GDP. This means that the sector‟s contribution is part of the national accounts. Despite this contribution, statistics indicate that employment in the informal sector is largely of a survivalist nature (Valodia, 2006: 3). According to Valodia et al (2007: 18), a significant number of participants join the informal economy for survival as opposed to entrepreneurial reasons. What is clear if one looks at the GDP contribution, is that the informal sector‟s contribution to the national account is small. The implication is that the formal sector will remain the backbone of the economy. As a result, when trying to accommodate the informal sector, care should be taken not to “destroy” or negatively affect the formal sector. There is a need for an approach that balances and enables both sectors to flourish.
Van der Berg (in Nomvete, 1993: 31) maintains that the informal economy‟s contribution to the GDP is normally lower than its contribution to employment. This implies that although more jobs are created, less value is added to the economy due to low incomes generated in the informal sector. In essence, they are underemployed, and the sector is more a survival (fall back) strategy than a productive one (Van der Berg in Nomvete, 1993: 31). This fact is supported by various authors such as Chen, Vanek & Carr (2004: xiv); Valodia (2006:5) and Valodia et al (2007: 11), when they maintain that workers in the informal economy are on average faced with the challenges of lower incomes and low standards of human development.
It is maintained that during 2005, 69 percent of participants in the informal sector earned R1000 a month or less (Valodia, 2006: 4). This further shows the correlation between being poor and working informally. The majority of informal workers are poor and earn below the minimum wage. A study conducted by NALEDI in South Africa in 2003 found out that 75 percent of the workers in the informal sector earned less than R1000 per month (Bivens & Gammage in Avirgan, Bivens & Gammage, 2005: 16). This study showed that wages and incomes in South Africa‟s informal economy are consistently lower than those in the formal economy. These findings pose a serious challenge to the idea of looking to the sector as a means for poverty alleviation and wealth creation. This fact is further supported by Saunders and Loots (2005: 100) who maintain that the informal economy has some limited income earning opportunity. This implies that the ability of the informal economy in
addressing inequality and poverty alleviation will depend largely on how the sector is managed. It is on this basis that Braude (cited by Bivens & Gammage in Avirgan, Bivens & Gammage, 2005: 16) sees the informal economy as a means of survival in an economy where there are no good jobs.
Generally, participation in the informal sector has been increasing in South Africa.
According to a report by Quantec (cited in Saunders & Loots, 2005: 92), informal economy participants increased from 1.9 million in 1992 to 3,5 million in 2002. This is an increase of approximately 84 percent. Interestingly, though, this increase happened while the labour absorption rate in the formal economy declined by 82.1 percent in 1981 to 38, 2 percent in 2002. This shows that in some instances people join the informal economy due to lack of job opportunities in the formal economy (Saunders & Loots, 2005: 92).
Findings of the Labour Force Surveys (LFS) conducted by Statistics South Africa (Stats SA) indicate that the number of people employed in informal firms has been growing substantially since the mid 1990s. According to Valodia et al (2007: 7), about 1 614 000 jobs were created between 1997 and 2005 in the South African economy. Of this total, the informal economy grew by about 417 000 jobs, excluding subsistence agriculture. The majority of the jobs were created by informal firms that contributed at least 19, 4 percent of the jobs (Valodia et al, 2007: 8). There are, however, disparities in the amounts provided by various reports. According to a report by ILO, employment in the informal economy was estimated at 34 percent in the year 2000 (ILO, 2002b: 40). This figure is higher than the estimates provided by other authors like (Valodia et al, 2007: 8), who maintain that the employment in the informal sector was 18, 5 percent in 2001. Despite these differences, the important principle to note is the role that the informal economy plays in employment creation, as well as its contribution to the GDP. This is a critical principle for municipalities to note when they plan economic and urban development policies and strategies. The policies and strategies should support the informal sector if the battle against poverty and unemployment is to be won. The table below summarises the state of the informal
sector as per the findings of the various Labour Force Surveys6 conducted during the years 2005, 2007 and 2010.
Table 5-1: Analysis of the employment levels in the formal and informal sectors September 2005 March 2007 June 2010
Formal Sector
7 987 000 64,9% 8 423 000 66,6% 8 845 000
69,4%
Informal Sector
2 462 000 20,0% 2 131 000 16,9% 2 124 000
16,6%
(Source: Table developed by author, information sourced from Statistics South Africa Labour Force Surveys of September 2005, March 2007 and June 2010).
An analysis of the table reveals the following implications for the management of the informal sector:
The formal sector is the major creator of jobs, not the informal sector, employing more than 60 percent of the labour force. This implies that even when developing a policy or adopting a strategy for promoting the informal sector, care should be taken not to negatively affect the growth of the formal sector. The formal sector remains the engine of the national economy.
The formal sector has been consistently growing, while employment in the informal sector continues to decline. The question is whether those who left the employ of the informal sector were absorbed by the formal sector, or whether due to low income levels in the informal sector, some people decided to leave the sector. Alternatively, it could be that due to the economic climate, business owners in the informal sector have laid off people. Having discussed the importance of the informal sector as being able to absorb the unskilled, uneducated and those retrenched in the formal sector, this is a worrying factor.
Any policy to manage informal businesses should among other things aim to turn survivalist enterprises into productive and sustainable ones.
As indicated earlier, there is a link between the formal and informal business sectors.
An analysis of the contribution of various economic sectors (by percentage) indicates the following:
Table 5-2: Comparison of employment by various economic sectors.
September 2005 March 2007 June 2010 Industry Formal
Sector
Informal Sector
Formal Sector
Informal Sector
Formal Sector
Informal Sector Wholesale and
retail trade
22,6 48,9 23,5 44,8 20,8 46,6
Services 24,7 17,2 24,3 11,9 26,9 13,1
Construction 7,3 14,1 7,5 14,5 8 13,9
Manufacturing 18,1 10,3 17,8 12,0 16.2 10,1
(Source: Table developed by author, from the Statistics South Africa Labour Force Surveys of September 2005, March 2007 and June 2010).
From the table above, the following deductions can be made:
There are definitely linkages between the formal and the informal sectors. The higher the industrial contribution by the formal sector, the higher the participants in the informal sector. In the formal economy, wholesale and retail is the highest contributor, followed by community and personal services and manufacturing. The same goes for the informal sector with respect to trade and services. The only difference is in manufacturing. In terms of manufacturing, there are very few participants in the informal sector, while in the formal sector the employment contribution is high. This supports the view that most of the informal sector participants do not participate in value-adding activities. They are instead concentrated in the trade sector. Due to the insignificant value-adding, the contribution of the informal sector to the GDP will be very little. In the trade sector, it is interesting to note that the number of people employed by the informal enterprises is far higher than the number in the formal enterprises. The majority of the participants in the informal sector
would be street traders as it is easier to “buy and sell” than to manufacture. It is therefore critical that government policies consider this sectoral distribution.
The percentage of the informal enterprises engaged in wholesale and retail trade is consistently above forty percent. This could be due to ease of entry, as well as the fact that to trade does not require special skills or infrastructure.
Since trading does not involve value-adding, the incomes are likely to be low.
This means that the majority of the enterprises might be survivalist in nature.
It raises challenges in terms of the ability of the sector to contribute towards poverty alleviation, economic growth and improvement in the quality of life of participants. It further means that over and above focussing on the enterprises, government policies must also focus on the social programmes (welfare assistance).
Another glaring difference is in the construction industry, were the employment rate for the informal sector is higher than in the formal sector by more than fifty percent. This is very interesting. One can assume that the reason for this scenario is because most construction work is temporary or for a specific period. As a result, formal businesses might be using “informal labourers” instead of appointing permanent labourers. The main policy issue in this regard is how such workers can be helped in terms of the decent work paradigm.