THE INFORMAL SECTOR

AND THE CHALLENGES

OF DEVELOPMENT IN
SOUTH AFRICA

Lindile L. Ndabeni, Ph.D., and Rasigan Maharajh, Ph.D., Human Development

and Knowledge Economy, Centre for Development Economics and Innovation
Studies, Punjabi University, Patiala, India, 19-20 February 2013
 INTRODUCTION
• After nearly two decades since the ending of
apartheid colonialism, poverty, unemployment,
inequality, and environmental degradation
remain persistent problems
• In seeking to improve the quality of life for all its
inhabitants, South Africa must also reduce
poverty, create employment, and redress
widening inequalities
• Both at national and provincial levels, policy
development aims to enhance inclusive
development
 DISTRIBUTION OF POPULATION BY
PROVINCE
• Province %
– Western Cape 11,3
– Eastern Cape 12,7
– Northern Cape 2,2
– Free State 5,3
– KwaZulu-Natal 19,8
– North West 6,8
– Gauteng Province 23,7
– Mpumalanga 7,8
– Limpopo 10,4
 AVERAGE ANNUAL HOUSEHOLD
INCOME
• Province Average Household Income
– Gauteng 156 243
– Western Cape 143 460
– Northern Cape 86 175
– KwaZulu-Natal 83 053
– Mpumalanga 77 609
– Free State 75 312
– North West 69 955
– Eastern Cape 64 539
– Limpopo 56 844
 UNEMPLOYMENT RATE BY PROVINCE
IN 2011
• Province Unemployment
– Western Cape 21,6
– Gauteng Province 26,3
– Northern Cape 27,4
– North West 31,5
– Mpumalanga 31,6
– Free State 32,6
– KwaZulu-Natal 33,0
– Eastern Cape 37,4
– Limpopo 38,9
• Republic of South Africa/ National 29,8
% OF POPULATION LIVING IN POVERTY
2007 and 2010
• Province %
– KwaZulu-Natal 59.6
– Gauteng 45.1
– Eastern Cape 62.5
– Limpopo 62.9
– Mpumalanga 63.2
– Western Cape 37.1
– North West 58.6
– Free State 52.2
– Northern Cape 50.3
 HISTORICAL CONTEXT
• 1950s and 1960s, modernisation theory made people
to believe that traditional forms of work and
production would disappear as a result of economic
progress in developing countries
• Initially viewed as a site of simple and adapted
technologies
• These technologies were viewed as responsible for the
static nature of the informal sector
• Viewed as marginal in terms of place and contribution
to the economy
• These observations do not apply uniformly in the
informal sector
 EMPIRICAL EVIDENCE
• The informal sector is linked to the formal economy
• Produces, distributes, and provides services to the
formal economy
• The taxi industry which is mostly unregulated has close
linkages with the formal vehicle companies, petrol and
insurance industries
• The paper company Mondi owns 117 waste recycling
centres in South Africa
• These centres are supplied by more than 300 waste
collectors who are some of the most marginal workers
in the informal economy
 INCREASED FOCUS ON INFORMAL
SECTOR
• Neither the public sector nor the private sector is able
to provide enough jobs for the expanding labour force
• Informal sector is increasingly recognised as an
alternative option to the growing unemployment,
particularly among the youth and the poor
• Efforts to improve the performance of the sector
should be seen in light of the potential contribution of
informal sector to increasing the overall performance
of the economy including its provincial and local
productive economic capabilities
 INCREASED FOCUS ON INFORMAL
SECTOR
• Our emphasis is on the relative importance of the
sector in the economy of South Africa
• Our contribution is on the policy logic and
implications for evidence-base policy
development and innovation
• Policy development and innovation can lead to
improved performance of the informal sector
particularly in the context of increasing need to
reduce poverty and increase employment
opportunities in South Africa
 GEOGRAPHY AND CONTEXT
• Initially, studies of informal sector tended to be
decontextualised
• Increased attention has been towards understanding
the informal sector within its historical, geographical,
political, and social context
• In the developed world, informal sector is often seen
as a product and driver of advanced capitalism
• By contrast, in the developing world the largest part of
informal sector tends to occur in the form of self-
employment
 THE SIZE OF INFORMAL SECTOR
• The size of informal sector is estimated to be
around R157bn (1US$=R7)
– 2,5 times the entire size of the agricultural sector
– 70% of the mining sector
• Trade sector is the largest sub-sector with over 1
million people engaged in this activity
• Another 300 000 are engaged in community and
social services
• Trade, social and community services constitute
around 60% of all employment in the informal
economy
 GROWTH IN THE INFORMAL SECTOR
• Growth in the informal sector tends to be influenced by a
number of factors including;
– Increased urbanisation of blacks
– Slow pace of economic growth
– Incidence of jobless growth
– Decreased incidence of formal employment
– Promotion of SMMEs
– Informalisation of formal businesses
– Costs and regulatory barriers of entry into the formal economy
– Limited education and training opportunities
– Increasing demand for low cost goods and services
– Migration motivated by economic hardships and poverty
 ISSUES OF GENDER
• Women tend to form the majority of workers
• Women and girls tend to form the poorest
group of workers in the sector
• They tend to lack opportunities to accumulate
start-up capital
• They tend to lack assets that can be used as
collateral
• The situation prevents their meaningful
participation in the economy
 HUMAN RESOURCES
• Low levels of education
• Our emphasis is on the role of training in creating
more productive employment, strengthen skills
base of informal sector entrepreneurs
• Skills development among participants can help
participants move away from subsistence
activities and gradually progress towards value
add activities
• Other policy instruments are equally important
– Finance, expanded markets and marketing, BDS
LOCAL ECONOMIC DEVELOPMENT
• In South Africa, new thinking about informal
sector and its contribution to local economic
development
• New thinking encourages local municipalities to
view informal sector as a key service delivery
function
• Municipalities need to balance their regulatory
function of the informal sector with the need to
support livelihoods and employment that reflects
the developmental agenda of the State
 CONCLUSIONS
• Informal sector is demand driven
• Skills are directly linked to the activities that are
undertaken
• The most marginalised and vulnerable groups are
often driven by necessity rather opportunity
motives to become informal entrepreneurs
• Particular significance in the labour market
• No single policy prescription can be applied in the
entire sector
 CONCLUSIONS
• Policy instruments can include the development of
skills and training, and provision of credit
• The overall aim of these improvements is to transform
what are often marginal and survivalist activities into
decent forms of work
• Policy proposals have often been geared towards the
formalisation of informal jobs
• These policy proposals often fail to recognise that
many survivalist economic activities will never become
more than what they are and should be recognised for
the role that they play in reducing vulnerability of the
poor
 CONCLUSIONS
• Our knowledge of informal sector still needs to
be improved particularly the paucity of empirical
studies to enhance evidence base policy
development and innovation
• Not enough policy guidance on how local
municipalities can create an enabling
environment for the development and promotion
of informal sector
• Empirical studies can also assist in determining
the effects of economic policy instruments on
informal sector development and innovation
Thank You

Lindile L. Ndabeni, Ph.D.

Research Fellow

Institute for Economic Research on Innovation (IERI)

Faculty of Economics and Finance
Tshwane University of Technology
159 Nana Sita Street
Pretoria
0001
Tshwane
Gauteng
South Africa

Email: [email protected]
Telephone: +27 (012) 3823073
Facsimile: +27 (012) 3823071

Institute for Economic Research on Innovation