Reins Of The Informal Sector In The Trajectory Of Economic Transformation – By Sarah Mokwebo

“The neglect of the informal economy is owed to the historical focus on informality as minute and survivalist economic activity in developing countries. Informality was seen and treated as a symptom of underdevelopment, or the beginning stages of what would eventually become a formalised economic activity. The desertion of the informal economy is also exacerbated by the widespread belief that capitalism, as a result of the free-market economy as well as neoliberal economic methodologies, is becoming more inclusive and hegemonic; expanding its limbs to every economically active individual and thus absorb everyone into the formal economy”

By Sarah Mokwebo

Democratic South Africa is known and characterized by a racialized, monolithic and undiversified economy owing to its colonization and Apartheid history. The South African economy has very few players, with regular occurrences of uncompetitive behaviour in addition to other monopolistic behaviours. In effort to change the distorted ownership patterns, the African National Congress, as the country’s governing party, devised and resolved on a number of intervention measures for the South African economy through its policies and conference resolutions.

An extract from the ANC’s 54^th Conference Resolutions document (2017) states that “The ANC’s vision for the South African economy is guided by the Freedom Charter’s clarion call that the people shall share in the country’s wealth. The ANC is committed to building a more equal society, in which all can find decent work and enjoy a sustainable livelihood.” Some of the notable resolutions on economic transformation are as follows:

1. On the Financial Sector Transformation, State Bank and DFIs
   • The state must develop a more effective programme to ensure access to, and ownership of, financial institutions by black people, youth and women. This should include new approaches to regulation and licensing that fosters competition and enables diversified ownership of these institutions.
   • The use of state banks to promote economic development must be stepped up.
   • Development finance institutions and state banks should give greater emphasis to employment creation, empowerment, industrial diversification and development, small businesses and cooperatives, small-scale agriculture, micro-enterprises and local and regional economic development.
   • Development finance institutions’ mandates should include the development of black-owned companies. Public finance institutions must be given clear developmental mandates.

2. On Economic Concentration
   • The high levels of concentration of ownership in many sectors of our economy is dysfunctional to growth, entry of black South Africans in the economy and effective competition.
   • Conference calls for effective measures that expand the mandate of the competition authorities to identify high levels of concentration and to have the powers to act to de-concentrate levels of ownership, in order to open the market to new, black-owned companies.
   • The penalties for uncompetitive behaviour must be increased and the Competition Commission needs to be strengthened with additional resources to build on its current capabilities.

3. On strengthening Broad-Based Black Economic Empowerment (BBBEE)
   • State procurement should be used as an empowerment lever.
   • The PPPFA should be significantly amended to fully realize all objectives set out in s217 of the Constitution. Set asides must be further strengthened so that they work more effectively in promoting black businesses.
   • Government should intensify the use of state concessions as a policy tool for economic development and transformation, including in minerals, petroleum, fishing, spectrum, land, water, energy, etc.
   • A worker empowerment component should be introduced in the policy framework to massify share-ownership among workers and to provide for worker representatives sitting on the boards of companies.

4. On beneficiation and building high value-added value-chains
   • New measures to inwardly orient those components of mining and upstream production such as petrochemicals and basic iron and steel, which are crucial for metals fabrication, capital goods production especially engineering activities, need to be put in place in support of a coherent strategy of industrial development based on raw minerals beneficiation.
   • The state should apply export taxes to strategic minerals where required to ensure local beneficiation.
   • Encourage recycling, especially of metals and other products such as plastics, rubber and paper. This will require that we promote the local recycling industry, especially metals recycling in order to significantly reduce energy consumption in the process of metals production and fabrication. In this connection, we should continue to limit the export of scrap metal.

The ANC’s economic and social policies are known to be rooted in social democratic systems and are given shape and form by resolutions of Conferences and Councils held regularly. Social democracy is a variant of socialism. It is distinguished by a conviction that democracy makes it both possible and desirable to take advantage of capitalism’s upsides while addressing its downsides by regulating markets and implementing social policies that insulate citizens from those markets’ most destabilizing and destructive consequences.

Current economic policies addressing inequality are devoid of broader inclusivity, and have little to no consideration for people constantly marginalized by both the public and private sectors, structurally and otherwise. Majority of legislative measures and practices geared towards economic and social redress are underlined by race – which is granted owing to the racial segregation policies from the pre-democratic era and current make of the formal economy. However, centering race as the main determinant for economic redress has proved ineffective in multiple ways. Race is a social category that intersects with other types of social disparities such as geography, gender and education levels, which heavily influence people’s access to economic opportunities and thus determine their social class (Dooms and Pillay, 2020).

The pervasiveness of the informal sector in South Africa is also contributed to by high unemployment levels dating back to South Africa’s historical (and Apartheid) policies which had the sole objective of discriminating on the basis of race. Apartheid industrial policy enthused capital-intensive investments which deliberately excluded black people from ownership as well as occupying high levels of employment. This was perfected by other enabling policies which controlled the movement of black people, segregated schooling system, put controls on economic activity that black people could participate in, had lack of access to asset ownership and barriers to entry for black entrepreneurs which still persist (Altman, 2007).

Marginalization owing to the convergence of some or all these social identities and structural barriers have resulted in majority of black people participating in the informal sector/ economy for either business opportunities or employment.

The neglect of the informal economy is owed to the historical focus on informality as minute and survivalist economic activity in developing countries. Informality was seen and treated as a symptom of underdevelopment, or the beginning stages of what would eventually become a formalised economic activity. The desertion of the informal economy is also exacerbated by the widespread belief that capitalism, as a result of the free-market economy as well as neoliberal economic methodologies, is becoming more inclusive and hegemonic. That its expanding its limbs to every economically active individual and will thus absorb everyone into the formal economy (Sallah, 2016). It was assumed in the 1950s that the free-market approach will lead to economic development that would gradually absorb the informal economy into the formal one.

The formation of nation-states had capitalism organising through the state, and took the form of national capitalism as an attempt to manage markets and money through a central bureaucracy (Sallah 2016 in reference to Hart 2001). This was prevalent during the Apartheid era in South Africa as well. The informal economy, which is the antithesis of national capitalism, solidified the informal sector as unregulated activities of the marginal poor. More especially in third world countries, this was taking place at mass scales. Over time, the informal sector increasingly became a pervasive feature in modern economies and continues to not being paid attention as a (legitimate) economic activity.

According to Altman (2007), in reference to Chen (2004), the three basic approaches to the informal sector are s follows:

1. The Dualist School of thought that contends that the informal sector would disappear if development and per capita incomes were to rise. There is no evidence however fully supporting this claim as 10-15% of official GDP in most developed countries comes from the informal sector.
2. The Legalist School argues that the informal sector consists of entrepreneurs and businesses who are avoiding the costs that accompany formalisation; more especially when it comes to labour regulation and company tax. However, this is normally prevalent in countries where there’s onerous tax regimes as well as high costs of regulatory compliance.
3. The Structuralist School perceives the informal sector as part of the spectrum of the market, although located and also treated in a subordinate manner. The structuralist approach considers how the informal and formal sectors interact in and with demand-supplier relationships or in employment relationships.

In 2004, the then President of the ANC and state, President Thabo Mbeki, introduced the term “second economy” to the South African economic discourse. It was in many instances used to refer to the informal sector. The guiding policy at the time was the Accelerated and Shared Growth Initiative for South Africa (ASGISA). This policy sought to “eliminate the second economy” along the lines of the dualist school of thought by enlarging the “first economy” in order make it accessible to marginalized people (Altman. 2007).

A notable difference between the formal and informal sector in South Africa is race. The formal economy is dominated by whites and the informal sector is predominately black (Dooms, 2020). As mentioned, in as much as economic discrimination was based on race, there were additional exclusionary practices in place that exacerbated this, and therefore solutions for economic transformation must factor in much more than race.

The informal sector should be assessed by how the sector is shaped by trends in the economy as a whole as there are inter-linkages as well as displacing qualities between the formal and informal sectors. The two sectors may grow a complementary or inverse relationship; depending on circumstances. The complimentary relationship is characterised by supply and demand linkages, where the formal sector is depended on the informal sector for cheap intermediate goods which can be used in further production of its final products (Shodhganga, n.d.). The recycling sector is one such example. With the inverse relationship, the relationship is exploitative as the formal sector crowds out the informal sector. An example is in instances where large retailers displace informal retail (Altman, 2007).

The resolutions of the ANC cited are intended for translation into policy of government, as well to persuade the private sector behind ANC thinking as the governing party. They though do not factor in the existence of the informal sector, or accommodate it within all the intervention measures envisioned for economic transformation in the country.

For instance, the BBBEE policy favours individuals who are already well positioned economically as it enables market access for businesses based on formal and legal (black) ownership and compliance with legal requirements. The BBBEE interventions are reliant on legal compliance in place of practical and inclusive development measures that will offer cross-cutting solutions for black business owners (Dooms, 2020). Businesses that do not comply with the BBBEE requirements become neglected, which practically goes against economic transformation, more especially when it comes to black people as they are the ones in need of economic inclusion. It can also be argued that the BBBEE framework is only enforceable in the state, and not necessarily in the private sector which them limits economic opportunities available for black business.

It is important for us to preoccupy ourselves with the informal sector in order to understand the precariousness and uncertainty in the ability of households to assemble and sustain a livelihood and maintain stability. Some industries in the formal sector are characterized by high wage inequality as well as lack of job security. It is extremely difficult for poor or low-income households to accumulate assets, more especially to aid them in time of crisis. The COVID-19 pandemic was one such instance where poor households suffered, more especially those reliant on informal activities as they had no protection and immediate consideration by the state to avert the structural challenges that they were faced with which threaten their income and livelihoods.

Perhaps the question that should be asked beyond this article is what can be done for the informal sector and by extension marginalized people in order to ensure economic inclusion, and the answer lies on what intension is sought to be addressed. Is the intervention meant to improve the stability of the small businesses in the informal sector and to reduce economic uncertainty in poor people’s lives? Is it to ensure an increase in tax revenue for the state? Or is it to address the explicit avoidance of government regulation? The answer is that the policy implications for the informal sector depend on the aims of the intervention, and what relation that intervention has to economic transformation.

ENDS/

REFERENCES

Altman, M., 2007. What are the Policy Implications of the Informal Sector Becoming the Informal Economy? Conference Paper, Germany.

ANC 54^th National Conference Report and Resolutions, 2017. South Africa.

Battersby, J., 2020. South Africa’s Lockdown Regulations and the Enforcement of Anti-Informality Bias. Springer Nature.

Dooms, T., 2020. Informalizing Black Economic Empowerment. Beyond Tenderprenuership: Rethinking Black Business and Economic Empowerment. MISTRA.

Dooms, T., and Pillay, P., 2020, Black Entreprenuiership Journeys. Beyond Tenderprenuership: Rethinking Black Business and Economic Empowerment. MISTRA.

Kinyanjui, M., 2019. African Markets and the Utu-Ubuntu Business Model. African Minds, Cape Town.

Ruzek, W., 2014. The Informal Economy as a Catalyst for Sustainability. Department of Geography, Florida State University.

Sallah, A., 2016. Re-reading the Narrative of the Informal Economy in the Context of Economic Development in Sub-Saharan Africa”, International Journal of Social Economics, Vol. 43 Iss 10 pp.