Informal and formal businesses are components of the broader economy, and imposing a transition of all informal businesses to formal businesses is not a clear-cut answer to supporting job creation or ensuring access to civil and social services, government agency Productivity South Africa (SA) chairperson Professor Mthunzi Mdwaba has said.

"While it is the case that informal businesses are not recognised and identified to receive social services and support, such as the Temporary Employee/Employer Relief Scheme (TERS) deployed during the Covid-19 impacted period to support employees and businesses, transitioning informal businesses to formality is not straight-forward.

"For example, ride-hailing services employees, despite typically working for large, listed and/or international enterprises, are not recognised as being in formal employment, and therefore about 12 000 drivers were not identified to receive TERS. This meant that about 12 000 families did not receive support during this trying time," he noted during a stakeholder roundtable discussion hosted by Productivity SA on September 15.

However, informality does not necessarily mean that social services and support cannot be extended to informal businesses, nor that they cannot access such services without becoming formal businesses. Instead, this requires innovation in recognising and supporting them, Mdwaba added.

"We want to ensure ample jobs are available to help alleviate unemployment and poverty and ensure dignity for everyone. We want more people to work and, therefore, helping informal businesses to access social services can help to ensure that more informal businesses are sustainable and support employment and the dignity provided to our people from having work," he said.

Informal businesses in South Africa account for about one-third of all the jobs in the country and the informal sector contributes about 6% of gross domestic product, according to Statistics South Africa’s 2022 data, highlighted Productivity SA CEO Mothunye Mothiba.

"The buying power of the informal sector has not been established, as they are not formal and do not pay taxes directly. However, the sector does buy from the formal sector, therefore paying value-added tax on those transactions.

"A further worrying factor is that the informal sector has low productivity and low productivity growth, effectively leading to them not being competitive or sustainable," he said.

Studies have shown that the informal sector is relatively stagnant and struggles to transition from informal operations to established businesses.

To address work deficiencies in the broader economy, it could be more efficient to make the uppermost informal businesses more productive and efficient, and thereby more competitive, after which they would be in a position to transition to formal businesses as sustainable enterprises. The country would then be in a position to harvest the benefits of decent work opportunities, he added.

"This view has several policy implications, including for the Department of Small Business Development, which focuses on formal small and cooperative businesses and which critics argue is insufficient," Mothiba said.

"South Africa shies away from interventions in this sector, but, as a country, we should look at implementing an integrated enterprise development and support ecosystem that includes informal sector businesses and smaller formal businesses to make them more productive, competitive and sustainable," he added.

People participate in the informal economy for various reasons, with some having no other choice, while others participate by choice. An example is a person who managed to secure funding to transition an informal business to a formal business, but who still owns two informal stalls, said Tshwane University of Technology researcher Dr Lindeni Ndlabeni.

Similarly, a senior manager, to support his retirement, bought a food cart from which he sells food outside nightclubs in Gauteng between 22:00 and 02:00, making about R40 000 a week, he illustrated.

"The informal sector partly drives productivity in the formal sector. This is evident in the fact that the majority of potatoes produced by Limpopo farmers that are sold in the Pretoria Fresh Produce Market are sold to the informal sector," he highlighted.

Similarly, the taxi industry buys taxis, fuel and tyres from the formal industry. The informal economy is found in all economic sectors, he noted.

"The main question is where people can find and participate in economic activities. Productivity and productivity growth in the informal sector help to drive production in their markets," he said.

South Africa must measure its informal sector and then focus on providing training based on existing skill sets in these enterprises to round out the additional skills required for informal businesses to transition to higher productivity.

For example, anyone can plant and prune orange trees and harvest oranges, but manufacturing skills are required if an informal enterprise wants to produce orange juice.

"There are strong relationships between the formal and informal economy, and we should look at these relationships to use the informal sector to drive the formal sector and vice versa," Ndlabeni said.

ECONOMIC UNITS
Meanwhile, it is important to view the informal-formal dichotomy from the perspective of economic units, which include small, medium-sized and microenterprises, cooperatives and worker-owned enterprises, said street vendor advocacy organisation StreetNet senior adviser, International Labour Organisation Recommendation 204 South African National Task Team member and Self-Employed Women's Union (Sewu) founder Dr Patricia Horn.

"There are obstacles in the informal economy, including a lack of job and workplace security, which impact on productivity, as well as a well-known deficit of decent work opportunities in South Africa," she emphasised.

"This raises the need for an integrated legal and policy framework, as well as legal reform, to ensure workers in the informal economy can have direct access to social protection measures," she said.

The legislation and legal framework surrounding businesses in South Africa is dominated by large businesses and trade unions, and economic units in the informal economy do not have a voice and often only experience the impact of the law when it is used to shut down their operations when they must meet impossible requirements.

In 2002, the eThekwini municipality was the first city in the world to adopt a policy on the informal economy, following negotiations with Sewu to provide better facilities for street vendors, including toilets and clean tap water, shelters, storage, affordable overnight accommodation, safety and child day-care centres.

"We need to provide a voice for workers in the informal economy. However, the primary implementer is government, not only at national level, but also at the local government level, as it is at the local government level where informal traders are managed."

Additionally, it is often the case that intermediaries between the informal and formal sectors make much more income than the primary producers in the informal economy. However, the focus should be on maximising the income of producers of goods bought by the formal economy, she noted.

"The conversation needs to start at the local government level, and in the National Economic Development and Labour Council community constituency we must ensure that there is cooperation with labour to bring forward the importance and role of workers in the informal economy," she said.

"However, unilateral implementation of initiatives by government or big business, despite their intentions, may not be appropriate to the way people are working in the informal economy.

"We need to start where people are in the informal economy and then change and improve their operations, and help them to transition to higher levels of productivity in consultation with the workers in the economic units in the informal economy," said Horn.