SA can make a dent in unemployment if it frees the informal sector from overbearing regulations, including restrictive zoning in urban centres, a working paper from UCT in conjunction with Harvard University suggests.
The paper says the country’s high unemployment could be partly explained by informal sector activity that is abnormally low relative to its peers.
“Despite the puzzle, explaining SA’s uniqueness of high unemployment and low informality has received less attention in the public debate. This is unfortunate because, qualitatively, if SA’s informal sector were as large as its income per capita would predict, its unemployment rate would also be much lower,” the paper, led by UCT's Haroon Bhorat reads.
It found SA and Mexico in 2018 had similar levels of GDP per capita but the big difference is that SA has high unemployment and low informality, while Mexico has relatively low unemployment and high levels of informality.
SA is regarded as the most unequal society in the world, with unemployment, particularly among the youth at astonishing levels. SA’s economy also has one of the highest Gini coefficients in the world. The Gini coefficient is a measure of income, wealth or consumption inequality within a country.
SA seems to be ‘missing’ much employment in informal hospitality and retail sectors.
— Harvard University working paper
The working paper flagged the country’s “restrictive” zoning in urban centres as one of the impediments to a thriving informal sector and has possibly displaced trading to township communities where the potential market is both smaller and certainly less wealthy.
“In turn, the upper limit placed on the number of traders — a highly unusual practice for any developing country city — has the effect of acting as a clear barrier to entry into economic activity for informal sector operators,” the paper reads.
“Zonal laws, however, also go hand-in-glove in urban centres with licence issuance for informal traders. Again, this remains a highly unusual practice in a developing country context in relation to informal trade. When we compare SA’s labour market to that of other middle-income countries, we can see that SA seems to be ‘missing’ much employment in informal hospitality and retail sectors.”
The working paper also flagged SA’s licensing of informal businesses — embedded in most cities — as highly unusual for a developing country.
Transport costs and infrastructure shortcomings have also been flagged as key impediments, with Harvard calling for subsidies to address this, adding that SA’s history of spatial segregation, which has remained entrenched in the post-apartheid period, has served to also mitigate against the growth of informal trading in the country.
“Based on our evidence above, we settle on two possible short-term targeted options to incentivise individuals to operate businesses in the informal sector in SA. These would be firstly to lower, remove or, indeed, change the conditions of licensing and registration costs of, and stipulations to, informal trading,” the paper reads.
“Secondly, post registration for a trader, we consider the possibility of infrastructure and transport subsidies to overcome capital and spatial constraints for informal sector operators.
“A critical caveat to these proposed short-term options: clearly the most important policy shift would be to entirely deregulate the management and oversight of the informal sector. Hence, this would in specific terms require the dismantling of the entire edifice of the business trading and urban management regulatory architecture for local governments and cities in SA.”
One piece of legislation the working paper identifies as ripe for reform is the Businesses Amendment Act 186 of 1993, adding many more pieces of legislation would need to be altered to effectively deregulate the informal sector.
“Such a freeing up of informal sector access to markets, however, requires a long and detailed — and possibly contested — amendments process, which many city governments will either oppose or be unable to see the benefit of.”
Update: December 13 2024
The story has been updated to reflect the study was conducted by UCT in conjunction with Harvard.
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