Perhaps the most pressing economic challenge in SA is insufficient jobs. Unemployment is the biggest driver of inequality and, were it not for social grants, would be the most important determinant of poverty.
"Amazingly few people work in SA," Harvard economics professor and former Venezuelan economics minister told a Johannesburg audience nearly a decade ago.
Ricardo Hausmann headed the "Harvard group", which came to SA in 2007 at the behest of the Treasury to investigate ways of growing the economy that would dent the unemployment rate.
The latest figures for the first quarter of 2017 put the unemployment rate at nearly 28%. Surprisingly, for a country with high unemployment and poverty, the informal sector is relatively small, comprising about 17% of the workforce — between 2.3-million and 2.6-million people.
The equivalent figures for the region and large parts of Asia and Latin America are much higher, leaving SA "an outlier not only in the region but in the Global South", as researchers Michael Rogan and Caroline Skinner write.
Rogan, an economist at Rhodes University, and Skinner, a University of Cape Town (UCT) urban expert and advocate for informal traders, are contributors to the Research Project on Employment, Income Distribution and Inclusive Growth (REDI3x3), a national project aimed at promoting evidence-based policy-making.
Other work in this project by Free State University provides an in-depth focus on enterprises in the informal sector. It found the sector is not homogenous. The majority — about 1.1-million entrepreneurs — are one-person enterprises mostly engaged in the retail or services sectors.
A growing proportion of informal enterprises — about 300,000 — have paid employees. Most are in construction, retail trade and services, but also in manufacturing and communication. These businesses provide paid work to about 850,000 people — more than double that of the declining mining sector.
A World Bank survey of informal enterprises in Johannesburg found that each small enterprise generated about three jobs, the vast majority paid work.
Amid churn in the sector — and hurdles such as crime and a lack of suitable premises and accounting skills — enterprises with employees are more likely to survive than those with only one person.
In new research for the REDI3x3 project, Rogan, working with fellow economist Paul Cichello of Boston College in Massachusetts, found that informal sector jobs play a critical role in reducing poverty.
Informal sector income similarly has a relatively high effectiveness in reducing poverty as income from informal sector work mostly flows to households that are still poor.
They argue that the informal sector should play a central role in government strategies to reduce income poverty. Authorities at all levels should think carefully before enacting policies that could destroy informal sector jobs.
Cichello and Rogan did research on employment status and household income to determine how many and which households fell below the poverty line. They relied mainly on data from the National Income Dynamics Study, run by UCT-based Southern African Labour and Development Research Unit.
They measured the contributions of formal and informal employment to poverty reduction relative to their contributions to total household income. The largest contribution to the income (more than half) comes from work in the formal sector.
But the effect on lifting households out of poverty is proportionately greater from the informal sector and from social grants. Although they comprise just 6.6% of all household income, their share of poverty reduction is more than 20%.
Informal sector income similarly has a relatively high effectiveness in reducing poverty as income from informal sector work mostly flows to households that are still poor. Formal sector income mostly benefits households that are already some distance above the borderline of poverty.
As a result, informal sector employment is roughly twice as effective in bringing poor households out of poverty than formal sector employment.
The authors found that an informal sector job has a 63% to 81% potency in reducing poverty compared with a formal sector job. Destroying 100 jobs in the informal sector is the equivalent of losing about 60 to 80 jobs in the formal sector. That is huge. (These numbers are calculated with a poverty line of R307 per person per month, the "food poverty" line. Other poverty lines produce a similar result.)
Yet there is no coherent government policy on the informal sector. The Department of Small Business Development has tabled an informal business upliftment strategy but has yet to develop detailed and research-based policy interventions.
Parts of the government appear to have adopted quite different and even contradictory policies. The Gauteng government, for instance, promoted the development of the township economy four years ago at the same time as the municipality embarked on "Operation Clean Sweep", which wiped out the livelihoods of about 6,000 informal traders in the inner city of Johannesburg. The courts are playing an increasing role in protecting informal traders from overzealous local government authorities.
At best, as Rogan and Skinner write, the policy environment is "ambiguous". At worst, it has been actively hostile, as manifested in the draft Business Licensing Bill, which would require all businesses, no matter how small, to have a licence. The first draft of the bill proposed jail sentences for transgressors in some cases.
Because of the heterogeneity of the sector, policies need to be tailored differently for the own-account worker and companies that have employees, as well as differentiating by sector.
Policies that focus on supporting and enabling informal enterprises rather than on compliance with regulations and bylaws could be a crucial element. Such an enabling approach would also require an overview of the regulatory environment.
At the very least, policy should start from the principle of "do no harm".
• Green is a journalist working for REDI3x3; Fourie, an economist, convened research on employment in REDI3x3.
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