The Informal Economy: A Growing Industry

When walking around Cape Town, especially around St. George’s Mall, where our hotel is located, one of the first things that you notice is the massive amount of vendors lining many of the streets. The areas where the vendors set up are normally very crowded, as there are usually more formal stores on the outside with the vendors’ stands in the middle of the road. At first, the majority of vendors come off as very pushy and dishonest, just trying to cheat a foreigner out of as much money as possible. It also appears there is little structure, as each vendor constructs his or her own stand every morning, presumably wherever he or she wants. In addition, when considering more developed countries, it is assumed that these informal markets are the traditional economy that will slowly disappear with modern, industrial growth.111

The informal economy, however, has a very long, important history and it is essential to understand the practice within the context of this history and its political background and how it has influenced economic, legal and social development initiatives to date. During the apartheid era (1948-1994), the words informal, black and illegal were often treated almost synonymously with unwanted economic activity. Therefore, most informal selling, especially in informal centers was defined as illegal, and most black businesses were treated as completely illegal (Van Der Heijden 4). Because of this, the local government tended to approach the informal economy as a problem and developed laws and policies accordingly. However, many organizations are beginning to highlight the importance of the informal economy through conferences such as the Informal Trading Summit, which is meant to open dialogue between the City of Cape Town and stakeholders in the informal economy and provide a platform to review the City’s legislative and policy framework (Informal Trading).

One of the main reasons the informal economy is so important is because of its size. Although difficult to measure because of its informal nature, some estimates value the informal sector at around 28% of South Africa’s GDP (Van Der Heijden 7). Therefore, the size of the informal economy is estimated at R160 billion, or $13 billion, which is 2.5 times as large as the entire agriculture sector, or 70% of the size of the mining sector. Although trade is the most important sub-sector of the informal sector, there is a very wide range of economic activities that are included in the informal sector, making it almost as diverse as the formal sector.

Due to its aforementioned size and support, the informal economy is developing a new role in the overall economy, and many people are promoting a “new view” for local government to take on in regards to the development of policy around the informal economy. For one, the new view states the informal economy is “here to stay” and will continue to expand with modern, industrial growth, rather than wither away and die. Also, in terms of productivity, the old view looked at the informal economy as marginally productive, while the new view considers the informal economy a major provider of employment, goods and services for lower-income groups, contributing a significant share of GDP. In addition, rather than being representing a reserve pool of surplus labor, the new view explains the recent rise of informal employment as relating to the decline in formal employment or to the in-formalization of previous formal employment relationships. Lastly, the informal sector is often looked at as containing entrepreneurs who run illegal and unregistered enterprises in order to avoid regulation and taxation. However, the new view looks at the informal sector as comprised of non-standard wage workers, as well as entrepreneurs and self-employed persons, producing legal goods and services through irregular or unregulated means. They would welcome efforts to reduce barriers to registration and related transaction costs and to increase benefits from regulation (Van Der Heijden 11).

The informal sector of the South African economy is clearly essential, especially with the country being in a post-apartheid state. During the apartheid, many people were forced out of their homes and into overcrowded rural areas with the intent of segregation. A lot of these people are still stuck in these areas, which don’t have formal infrastructure or regulation for businesses (along with many other towns across the country), making informal business one of their only options to survive and put food on the table. Walking around Cape Town and some of the local townships, you quickly notice the informal economies, and when taking a closer look, you start to realize it’s a real, effective system and really is part of the South African culture and necessary for the South African people’s advancement.

Sources

“Informal Trading or Citizen Traders?” Cape Craft + Design Institute. N.p., n.d. Web. 16 Jan.

  1. <http%3A%2F%2Fccdi.org.za%2Fmedia-room%2Fericas-blog%2Finformal-

trading-or-citizen-traders>.

Van Der Heijden, Tracy. “Making the Informal Economy Visible.” Ed. Caroline Skinner. South

African Local Government Association (2012): n. pag. June 2012. Web. 16 Jan. 2015.

<http://led.co.za/sites/led.co.za/files/cabinet/orgname-

raw/document/2012/municipal_informal_economy_guidelines_final_june2012_v2_0.pdf>.

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