The informal and formal economies are interconnected in multiple ways. The growth of the informal sector is the effect of the lack of expansion of the formal employment. Although, the expansion in the informal sector is directly linked to its integration with formal sector enterprises. The informal economy is anticipated to represent 72% of Africa’s economy and 38% of regional GDP.
Improving the economic situation of informal workers is thus a powerful potential lever for raising living standards and reducing poverty in the developing world. The informal sector in developing nations not only makes a significant contribution towards gross domestic product, but is a major potential source of entrepreneurship, hence a source of income too especially for the less educated and less skilled.
The informal sector is a feature of precapitalist societies that can exist side-by-side with capitalist production for extended periods of time. As economies modernize, informal employment will atrophy and eventually fade away. Formal sector typically is more skills intensive, one would expect that those who fail to find a job in the formal sector, would turn to the informal sector. The informal employment might not be a sector of preference, paying much lower remuneration, but presumably it requires significantly lower skills than the formal sector.
The informal sector is heterogenous and has varying capacity to cope with economic shocks. Cash is fuelling what’s called the invisible economy, limiting productivity, and growth of vibrant sectors such as micro- and small enterprises, and making it infinitely more difficult to include these economic activities in any form of official statistics, oversight, taxation and regulation.
The informal sector is the outcome of a capitalist process that conspires to keep labour costs low. Key policy issues relate to increasing the bargaining power of informal workers through enforcement of labour standards, unionization, labour market regulation, and expansionary macroeconomic policies. Informal sector includes work such as petty (small-scale) trading, self-employment, casual and irregular work. It is unregulated, relatively labour intensive, exists outside the tax system and is often illegal. Such work is increasing throughout the world.
During the 1980s, the state and major capitalist interests sought to modernize apartheid, not least by promoting the evolution of a sizable black middle class. This process is currently becoming even more crucial as the struggle to secure the continued dominance of capitalist relations of production in post-apartheid South Africa intensifies.
Wage work, which differs from self-employment, makes up a significant proportion of total employment in South Africa due largely to the labour intensive industrialization promoted under the Apartheid regime. The subsequent process of de-industrialization in South Africa today has led to a rise in informal employment.
South Africa’s high involuntary unemployment and small informal sector are attributed to an underperforming formal sector and barriers to entry in the informal sector. However, the informal sector is not necessarily a symptom of degraded quality of employment, but is a consequence of entrepreneurs striving to escape burdensome regulation and/or official corruption associated with the formal sector. The manner in which the precarious employment conditions associated with informality are increasingly to be found at the heart of ‘formal’ enterprises and economies.
In South Africa, technological platforms for informal businesses or SME’s are creating an alternative prospective to the notion of business growth. Big businesses and startups are creating digital channels for informal business owners to gain access to services and data they typically wouldn’t have as an unregistered business. The aspect of business growth in this regard for informal business is the access to services and a modern ‘real time’ approach to interacting with consumers. This also provides a new path for big business to collaborate, partner and work with informal business.
While the informal sector is the ‘forgotten’ sector in many ways, it provides livelihoods, employment and income for about 2.5 million workers and business owners. One in every six South Africans who work, work in the informal sector. Almost half of these work in firms with employees; these firms provide about 850 000 paid jobs almost twice direct employment in the mining sector. The annual entry of new enterprises is quite high, as is the number of enterprises that grow their employment. There is no shortage of business initiative and desire to grow.
The biggest and probably the most dominant constraint faced by the informal business sector is lack of finance, which is very much needed to bear possible losses. However, obstacles and constraints cause hardship and failure, pointing to the need for well-designed policies to enable and support the sector, rather than suppress it. The same goes for formalisation. In South Africa, wages and incomes are also highly unequal between the informal and formal economy. At the same time, it increases formal employment, hurts informal producers, and favours informal traders, who benefit from lower import prices.
The South African informal sector is predominantly made up of women. Women in the South African economy tend to be clustered in informal employment in trade and services. In all industries in the informal sector, with the exception of mining and quarrying, female earnings fell well below the male earnings for black workers.Thereby concentrating on low-profit activities (such as street trading, food preparation, childcare and dressmaking) while more profitable work (such as metal production, wood processing and transport enterprises) tends to have male proprietors.
There are two schools of thought around the role and value of a country’s informal sector. Some argue that it’s an important alternative to the limited opportunities available in the formal sector; a survivalist strategy that allows those without much formal education to work and earn money. While others argue, the informal sector is also an important space for entrepreneurs.
South Africa’s unemployment rate rose to 30.8% in the third quarter of 2020 from 23.3% in the previous period, though below market expectations of 33.4%. It was the highest jobless rate since quarterly data became available in 2008, with more people searching for work amid the easing of lockdown restrictions, according to Trading Economics.
Using the unemployment rate, there are twice as many people unemployed as are working in the informal sector in South Africa. Informal markets, like Durban’s Warwick Markets, provides jobs for those who are unable to find formal employment. Thousands depend on these markets for produce, cooked meals and clothing at affordable prices.
In the long term, access to formal employment may be the best path to improve the livelihoods of very many informal firms’ owners and employees, while any attempt to help small businesses will fail unless the economy as a whole gets onto a stronger footing and starts growing at an acceptable stride.