What’s not to like about eyeing SA’s sprawling informal sector as the next frontier for reform? Bringing street vendors, spaza shop owners, car wash joints and other entrepreneurs into the formal system promises alluring gains — a broader tax base, more inclusive growth and better protections for workers.
Still, forcing the informal economy into the formal mould may be a cure that kills the patient. The very hustle and hardiness that make the informality a vital lifeline for millions risk being strangled by red tape and regulatory zeal. Before officials step in to normalise this grey economy, they might consider that some of its vitality stems precisely from existing beyond the reach of the clipboard class.
SA’s informal economy is vast, employing about one in five workers, and functions less like a fringe activity than the country’s unofficial HR department. It is entrenched as a survival engine with its own rules and rhythms. From braai smoke curling above township corners to minibus taxis weaving through urban arteries, to backyard tailors and spaza shops humming along on shoestring budgets, this ecosystem keeps the lights on when formal job creation flatlines. Grit? Absolutely. But it’s grit with street-smart savvy, hustle with heart.
The sector produces an estimated R750bn in economic output, but remains largely untaxed and unregulated. To a cash-strapped government, this is an untapped well of revenue and growth. The temptation to formalise the informal — to register, tax and regulate these businesses — is high.
On paper, formalisation offers clear fiscal benefits. For one thing, this sector is an untapped gold mine for the SA Revenue Service (Sars), which estimates an R800bn chasm of missed tax revenue opportunities. With much of the sector operating off the books, even skimming a slice — from spaza shops to taxi ranks — could inject fresh revenue into strained public coffers.
For another, formalisation is a gateway drug to capital. Virtually all informal businesses lack licences and can’t access credit. But registration flips the script, unless you’re Capitec, unlocking loans, grants and growth schemes that turn pavement hustles into scalable enterprises. Car wash joints that once flew under the radar could tap into real support, and move from survival mode to something far more sustainable.
These points make a compelling theoretical case. It’s no wonder that President Cyril Ramaphosa’s office, the Treasury and Stats SA met Capitec’s outgoing CEO, Gerrie Fourie, last week to explore ways to map this hidden economy. Formalising it sounds like a straightforward win for the state and development. But this coin has another side.
In practice, though, formalising the sector may trade away flexibility and livelihoods for uncertain gains. Turning a street hustle into a formally registered business is more like shoving a micro-entrepreneur into a bureaucratic obstacle course blindfolded. Permits, fees, forms in triplicate — formalisation demands a level of admin costs most informal trades never survive, let alone thrive in.
And then, if they clear the paper hurdles, they face the fiscal cliff. Registration unlocks a deluge of costs, ranging from licence renewals and health inspections to accounting fees and VAT. For businesses running wafer-thin margins, formal might just be a code for fiscally dominated.
Worse yet, it robs the sector of its superpower: agility. Informal businesses adapt fast, scale down overnight, and keep things moving when the formal economy stalls. Introduce compliance, and that nimbleness collapses under the weight of red tape.
And when traders can’t afford to comply, they don’t line up at the licensing office. They disappear further underground, beyond the state’s grasp and the reach of data, policy and help. The bottom line is that if formalisation becomes a sledgehammer, don’t be surprised when it crushes the very enterprises it is meant to grow.
SA should be wary of smothering its informal golden goose with too much formal golden paper. The challenge is to gently encourage the informal segment into brighter light without snuffing out the spark that makes it thrive.
• Motsoeneng is Business Day acting editor.
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