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Informal business trading a chance for SA to have inclusive economic growth

Sector requires more than clever regulatory tricks to thrive

Tessa Dooms Columnist
Rather than finding ways to truly value and nurture the informal economy, efforts and resources have been directed towards formal sector small business development says the writer.
Rather than finding ways to truly value and nurture the informal economy, efforts and resources have been directed towards formal sector small business development says the writer.
Image: ANTONIO MUCHAVE

In the early 2000s, former president Thabo Mbeki introduced into the public imagination the notion that SA has a dual economy. The first is characterised by formality and development while the second, the informal economy in which the urban poor and marginalised communities participate, is characterised by underdevelopment.

Given SA’s persistently high rates of inequality, a dual and unequal economy is unsurprising. Interestingly, this dual economy, as opposed to flagging the problem of inequality, focuses on calls and efforts to rid SA of the informal economy through regulation and formalisation.

Rather than finding ways to truly value and nurture the informal economy, efforts and resources have been directed towards formal sector small business development. These efforts, particularly for young black South Africans, have not arrested the trend of youth unemployment and economic exclusion.

In the face of an ailing economy and increased contestation of economic participation in the informal sector, it is perhaps an opportune moment to revisit the question of what to do with the continued existence of two economies, almost a decade after Mbeki first proposed the idea.

According to studies by the Human Sciences Research Council in 2018, an estimated 2.5m people worked in the informal sector, with more than half operating as informal traders, employing upward of 800,000 people.

With its restrictions and the disruption of movement, Covid-19, unsurprisingly, is argued to have reduced those numbers. There has been a direct impact on informal traders, whose precarious livelihoods depend daily on the organic movement of people and exchange of cash in low-income communities.

Millions of rand pass through this segment of the economy and millions of families are clothed and fed through an informal economy driven by necessity, hard work, dynamism and the fighting spirit of people who are often failed by the government and excluded from the kinds of support and validation the formal economy receives.

Some have argued that this marginalisation of informal trade is warranted as, being largely unregulated, various taxes that accrue to the state through formal businesses are lost in the informal economy. Hence the continued push for formalisation.

Yet formalisation is rejected by informal traders. The barriers of red tape and financial obligations that come with it make it a prospect that takes valuable time and resources away from the millions in this sector. For many, losing one hour of trading to administration or hundreds of rand to bookkeeping often means the difference between their family eating or not.

The government has recognised the need to reduce barriers to trade for informal sector businesses. The presidency has announced a special desk in the president’s office to reduce red tape, the Gauteng legislature has recently passed the Townships Economic Development Bill and the City of Johannesburg is working on an informal sector policy, all aimed at supporting informal traders.

These initiatives, though well intended, will not succeed without a radically different approach to informal sector development, as opposed to the push towards formalisation punted as a silver bullet during the Mbeki years. The informal sector requires more than clever regulatory tricks to manage, tax and act as gatekeeper in the sector; it needs a focus on business development skills, basic infrastructure and services, and increased market access to maximise the entrepreneurial energy of millions of South Africans.

The informal economy should be developed by nurturing informal businesses as opposed to narrowly regulating them, introducing innovations and interventions that make informal trade easier, and charting paths for growth into formalisation.

There are examples, both locally and internationally, of success through a developmental approach. In Kenya, the introduction of Mpesa, a low-tech innovation that enables trade through mobile money has improved the efficiency and market access of informal traders. From tradesmen selling wooden furniture at street markets to a person selling apples on a street corner, Mpesa has made informal business trade more secure by reducing the need for cash.

Mpesa’s success has been so transformative that the Kenyan government has adjusted its financial services regulation to enable its growth and have a mechanism for a tax benefit that does not directly require the informal traders to formalise.

Closer to home, Youth Lab, a youth-led policy think-tank, in partnership with the private sector, successfully reached 3,000 SA  spaza shop owners in a three-year period through providing entrepreneurship skills, micro grants and infrastructure support that has turned hawkers into more established businesses and improved the business models of existing spaza shops trying to be more competitive.

These and other initiatives challenge us all to see the informal sector as an opportunity, rather than an impediment, to truly inclusive economic growth.

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