Deregulation is key to jobs

6 October 2020

The performance of our informal sector is intimately linked to the rest of the economy. This has profound implications for public policy.

There’s a myth that the informal sector is a fallback for those who have lost formal sector jobs. The National Development Plan says the informal sector offers a “cushion” for those who lose formal sector jobs or need to supplement incomes “during crises”.

This has led some to argue that, given the effects on the formal economy of the pandemic, lockdown and restrictions on economic activity, people can create or find informal sector jobs. The Black Business Council thinks “parts of the informal sector have proved resilient” and “those businesses that have been worst hit are the formal sector SMMEs”. The International Labour Organisation suggests that “informal employment tends to increase during crises”.

The reality is the opposite: the performance of our informal sector is intimately linked to the rest of the economy. This has profound implications for public policy.

A steady wage in formal employment would significantly improve the quality of life of millions of jobless South Africans.

It is imperative for policymakers to understand that, while some have exploited opportunities to start businesses or find jobs in the informal sector, this will not offset the loss of formal sector firms and their expansion and productivity. There are three important considerations to keep in mind.

First, formal employment is the best vehicle for improving opportunities for poor people. Informal employment tends to be characterised by greater instability, with more people doing odd jobs in a more unstructured way. Formal employment can offer protection against unsafe and undesirable working conditions. These realities should not be taken as an argument to shut down informal employment, but as a call to prioritise the rapid expansion of parts of the formal economy. Aside from striking oil, the one tried and tested method for developing countries around the world to escape from poverty is labour intensive growth.

The second reality is that the growth and sustainability of small informal firms depend on an expanding formal sector. The two sectors are inextricably interlinked. Incomes in the informal sector are driven by disposable incomes of consumers and households, most of which are derived from formal sector sources. This is one reason the informal sector takes a hit when the formal sector is in a downturn. The final consideration is that SA’s informal sector is extremely small and unproductive by global standards.

In work commissioned by the Centre for Development and Enterprise, development economist and informal economy expert Professor Colin Williams found that 85% of South African businesses start unregistered in the informal sector, compared with 93% in Brazil, 99% in India and 98% across the rest of Africa. These factors imply that the informal sector is not a sufficient buffer to a severe dropoff in formal sector economic activity. The NIDSCRAM study indicates that four times as many jobs have been lost due to the coronavirus crisis than as a result of the global financial crisis. Expanding the informal sector is therefore not an alternative to growing the formal sector.

However, in a context where we had 40% unemployment and 70% youth unemployment before Covid19 struck, any state action to restrict legitimate informal sector activities is perverse.

The most useful shortterm policy intervention is to minimise state harm to informal firms. If government left alone all but the most problematic of informal activities, more people would generate livelihoods.

Government should be looking to enable informal entrepreneurs with potential, rather than discouraging them. This will require speedy action on deregulation. Only in a supportive environment can informal businesses begin to voluntarily formalise at scale and help get the country on to a more inclusive growth path.

Bernstein heads the Centre for Development and Enterprise. This article is based on a CDE publication: South Africa’s informal sector in the time of Covid19.

Article first published by the Daily Maverick