HILARY JOFFE: Cities should welcome informality in tackling jobs crisis

The upside of the controversy that has erupted over Capitec CEO Gerrie Fourie’s 10% unemployment estimate is that it has shone the light on SA’s informal economy and the need to enable more of it, not less, to tackle SA’s unemployment crisis.

Capitec has been hugely successful at targeting the lowest end of the market, suggesting many of those informal street traders, mechanics, hairdressers, scooter drivers and backyard landlords bank there and so are overrepresented in Capitec’s data, which cannot be extrapolated to the economy as a whole.

The official numbers are also far from perfect — Stats SA’s 33% estimate may well be out by a few percentage points. But it’s not out by two thirds. Which is why Haroon Bhorat and his colleagues at the University of Cape Town have spent years looking for the “smoking gun” that explains SA’s uniquely high unemployment rate. None of the usual culprits do — not labour regulation, nor wages and unions.

The relationship between output and jobs is no worse in SA than in any other middle income country. The difference is that in those other countries the informal sector absorbs the labour the formal sector can’t. SA, by contrast, stands out for its low level of informality — 16%, against 33% in Brazil or 50% in Thailand. The typical middle income country has an informality rate of 45% and unemployment rate of 10% — which is about where SA’s unemployment rate would be if it had similar levels of informality.

The past is one reason it does not. Cities are another. As Bhorat puts it, pre-1994 SA was Switzerland for a minority of its people; post-1994 SA still wants to be Switzerland but for the whole of its population, which is impossible. SA has a vast, complex web of regulations more appropriate to an advanced economy than a developing one.

The latest report on SA by the Organisation for Economic Co-operation & Development (OECD) finds economywide regulation is the most restrictive of the countries surveyed. On licence and permit requirements SA is twice the average for Group of Twenty (G20) emerging market and developing economies.

That has a chilling effect on small and medium sized business (of which SA needs more too). But it is crippling for the survivalist, microenterprises of the informal economy. And much of it is to do with local government. The web of complex, costly, often punitive municipal bylaws on everything from zoning and licensing to tariffs and health requirements puts up high barriers. The cities tend to view informal traders as a nuisance, not as part of the economy. So do most middle class South Africans, who tend to see the “crime and grime”, not the jobs.

Part of the answer is that the cities have to invest in the kind of infrastructure informal operators need. They need lockable storage and ablution facilities, as well as running water, waste removal and night-time lighting, and access to Wi-Fi, surveys have found. And they need crime prevention, because their businesses are vulnerable to theft and attack.

All this is in a context in which the geography of the cities is itself a constraint, with high transport costs acting as a barrier to trading in areas where people have money to spend, and the cities themselves often pushing informal traders out to public transport hubs or townships where the market is limited and infrastructure poor.

The government tends to obsess about lack of access to finance for small business, but this is a small part of the problem of SA’s suppressed informal economy. The more important solutions lie in stripping away regulatory barriers and bylaws, and providing urban infrastructure that will crowd in street traders and hustlers for business, not crowd them out. Crime must also be tackled, with the spatial apartheid of the cities.

Few will love it though. Many of us, city managers included, still aspire to cities that look more like Zurich than Delhi or Nairobi. Encouraging informality would require a significant mindset shift. It would need careful piloting to see what works and what doesn’t. But if SA is to make a serious dent in its unemployment rate, there is little alternative.

• Joffe is editor-at-large.