Creating a Positive Business Environment for the Informal Economy: Reflections from South Africa

Creating a Positive Business Environment for the Informal Economy:
Reflections from South Africa


Francie Lund and Caroline Skinner

School of Development Studies
University of KwaZulu-Natal, South Africa


October 17th 2005

Paper prepared for the International Donor Conference
‘Reforming the Business Environment’

Cairo, 29 November to 1 December 20051


Contact details:
lundf@ukzn.ac.za; skinnerc1@ukzn.ac.za

School of Development Studies
University of KwaZulu-Natal
4041 Durban
South Africa


1 This paper draws on one presented at the EGDI-WIDER Conference ‘Unleashing Human Potential: Linking the
Formal and Informal Sectors’, Helsinki, Finland, September 17-18th, 2004, and the Background Paper ‘The
Investment Climate for the Informal Economy: A Case of Durban, South Africa’, prepared for the World Bank
World Development Report 2004.


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Table of Contents
1. Introduction...............................................................................................................3
2. Approach...................................................................................................................3
3. The Informal Economy in South Africa ...................................................................4
4 The Regulatory Environment.....................................................................................6
4.1 Labour Legislation ..............................................................................................6
4.2 Municipal By-laws and Regulations ...................................................................7
4.3 Taxes ...................................................................................................................8
4.4 Registration and Licensing................................................................................10
5. Institutional participation........................................................................................11
6. Education and training ............................................................................................12
7. Access to Markets ...................................................................................................16
7.1 The Johannesburg Garment District..................................................................16
7.2 KwaZulu-Natal Traditional Medicine Support Programme..............................17
8. Access to Financial Services and Insurance ...........................................................18
9. Access to infrastructure...........................................................................................20
10. Protection against crime........................................................................................21
11. Informal Economy Budget Analysis.....................................................................22
12. Conclusion: Implications for the Donor Community ...........................................23
References....................................................................................................................24

List of Tables and Figures

Table 1: Formal, Informal and Domestic Work, by Sex, Race, and Proportion of Total
Population, March 2005.........................................................................................5

Figure 1: Employment in the Informal Economy in South Africa by Industry, March
2005........................................................................................................................5
Figure 2: South African Workers in the Informal Economy by Monthly Income
Categories, March 2005.........................................................................................9
Figure 3: Proportion of Formal and Informal Workers by Education Level (Last
Completed Year of Education), March 2005.......................................................13


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1. Introduction
The need for effective support for small enterprise, and for promoting a business
environment in which small enterprises can flourish, can be advanced in terms of
economic growth, its significance for gender equality, and in terms of poverty
alleviation. Yet effective support for small enterprises is known to be difficult,
requiring a range of interventions, from local to national, across sectors, and taking
into account specific needs of small-scale operators. We will argue in this paper that
the support and environmental needs of formal and informal enterprises are much the
same, but governance in the business environment and in local government can
operate in such a way as to create bottlenecks and constraints for the majority of
smaller and poorer workers – most of whom are women.

The paper is set in South Africa, where the 1994 transition to democracy was
accompanied by a re-entry to the global economy and a rise in the status and
importance of small business development (under which the informal economy is
incorporated) in national economic policy thinking. However, the government itself
has recognised that new policies have been inappropriate in terms of not being
inclusive of the needs and interests of poorer workers or of very small enterprises.
Rogerson (2004a), in a ten year review of small business policy in South Africa,
concludes that existing government programmes have ‘to a large extent by-passed
micro-enterprises and the informal economy’. In line with international trends of
decentralisation of powers to the local level, South Africa’s 1996 Constitution gave
local government a range of new tasks, one of which is the promotion of local
economic development. Local government is thus emerging as a key player, in South
Africa and elsewhere, in shaping the environment in which those working informally
operate; local government can play a role in filling the gaps in national government’s
approach. This has quite profound implications for institutional support for small
enterprise development, as will be shown, and this is one of the primary arguments of
this paper.

We review recent theoretical developments in understanding the informal economy,
pointing to the increasing consensus that the economy needs to be viewed in its
entirety with a formal and informal end. We then give a brief statistical overview of
the informal economy in South Africa, outlining the shift in approach taken by the
South African government and some local governments in the transition to
democracy. The main part of the paper is then dedicated to different aspects of the
economic environment – the regulatory environment (taxes and laws), institutions,
services (training, financial services and insurance, access to markets), access to
infrastructure and protection from crime.

In the last section we pose a list of concrete questions that the donor community
might wish to reflect on, in the pursuit of effective avenues to support the reform of
the business environment for poorer informal workers
2. Approach
The defining characteristic of the informal economy is the precarious nature of work.
Workers in informal enterprises and informal jobs are generally not covered by social
security or protected by labour legislation. Although debates continue about what

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exactly ‘informal’ economic activities are, there is agreement that they are relatively
small scale (in terms of individual enterprises); they are not registered, do not pay the
taxes associated with formal business, and the working environments are usually It
has become widely accepted that strategic planning for the promotion of economic
growth in the formal economy should be done on a sector by sector basis. We argue
that this should be done for the economy as a whole, with each industry or sub-sector
being analysed with respect to both the more formal and a more informal end (Carr
2004). Integrated value chain analysis has been done for patterns of ownership in the
garment industry (McCormick and Schmitz 2001); using similar tools, such analysis
has been extended to include formal and informal workers’ needs for social protection
as well (Lund and Nicholson 2003).
3. The Informal Economy in South Africa
The informal economy has become the predominant form of work in many countries
A recent compilation of international statistics concluded: ‘Informal employment
comprises one half to three quarters of non-agricultural employment in developing
countries: specifically 48% in North Africa, 51% in Latin America, 65% in Asia and
72% in sub-Saharan Africa’ (International Labour Organisation, 2002: 7). Due to
restrictive labour and residential policies under apartheid, as well as the existence of a
relatively strong formal economy, the size of the informal economy in South Africa is
as yet smaller than for other countries in sub-Saharan Africa.

Apartheid was critical in the formation and the distortion of the South African
informal economy. A key component of apartheid was a system of contract and
migrant labour. Apartheid imposed a racially hierarchical system of access to
economic opportunity and activity for the four ‘racial groups’, 2 in the interests of the
white minority. The most extensive restrictions were imposed on the African
population, followed by those for coloured and Indian people. Restrictions were
imposed on access to skills development for certain occupations, the right to establish
and operate businesses, the range of goods that could be sold (see Standing 1996: 86-
87 for a list of relevant legislation). It is easy to under-estimate the impact of more
than a century of repressive legislation on the development of entrepreneurial
economic activities, both formal and informal.

The March 2005 Labour Force Survey (LFS) found that 25 percent of all those who
worked were working informally. This comprised 2 071 000 people operating in the
informal sector (which the Statistics South Africa (StatsSA) defines as those operating
in unregistered firms and their employees), and 850 000 domestic workers.3 There
have been a number of changes in the way that StatsSA collects and calculates labour
force data, which makes trends over time difficult to determine. Casale, Muller and
Posel (2004) recalculated StatsSA data to ensure comparability of years for the period
1997 to 2003, and show that the number of people involved in informal work grew,
making it one of the few areas of employment growth in the post-apartheid period.


2 The apartheid government imposed an official system of racial naming of four main groups, African, coloured
(of mixed descent), Indian and white. The three groups not classified white are commonly referred to as black. We
keep the distinction between the four groups, as legislation and resource allocation were differentially imposed.
3 Note that the figures reported in this section exclude employees working under informal work arrangements in
formal firms. For an analysis of South African statistics employing a worker based rather than an enterprise based
definition of the informal economy see Budlender et al (2001).

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Table 1 shows the classification by sex and race of those in formal, informal and
domestic work (using LFS data for March 2003). As elsewhere in the world (and see
Chen, at this conference, for details) there is a gender dimension to the informal
economy in South Africa. Of all those who work formally, 64 percent are men and 36
percent are women; of those who work informally, 58 percent are men and 42 percent
are women. Within the informal economy, smaller scale surveys and qualitative
research indicates that women tend to be over represented in the less lucrative tasks
(see for example Lund 1998 for a synthesis of research on street trading in South
Africa in the 1990s, all of which pointed in this direction).

Table 1: Formal, Informal and Domestic Work, by Sex, Race, and Proportion of
Total Population, March 2005

Formal sector Informal sector Domestic Work Proportion of the total SA pop





Male
63.5%
57.7%
5.3%
49.2%
Female
36.4%
42.3%
94.7%
50.8%





Africans
59.2%
88.8%
90.4%
79.3%
Coloured
13.4%
5.7%
9.5%
8.8%
Indian
4.5%
1.5%
0.0%
2.5%
White
22.6%
3.8%
0.0%
9.4%
Source: Adapted from StatsSA, 2005:1&13

With respect to race, Table 1 shows that while Africans comprise 79 percent of the
total population, only 59 percent of Africans who work are in formal employment.
White people, by contrast, comprise only 9 percent of the population, but 23 percent
of those who work formally. More starkly, of all those working in the informal
economy, nearly nine in ten are African; further, all of the domestic workers (almost
all of whom were women) were African and coloured people.

Figure 1: Employment in the Informal Economy in South Africa by Industry,
March 2005
Business
Trade, 45.8%
Services, 3.5%
Transport,
6.4%
Construction,
14.3%
Private h/hs,
Manufacturin
10.4%
g, 10.7%
Com munity
Services, 8.9%

Source: Adapted from StatsSA, 2005:11


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Figure 1 shows the distribution of informal workers by industrial sector, according to
the March 2005 LFS. Informal employment is concentrated in trade, with just under
half of all informal workers located in this sector (a high proportion compared to other
developing countries - see ILO 2002). Further, there are significant numbers of people
working in construction, manufacturing, services and in private households.

With regard to Durban specifically, from which a number of the examples in this
paper will be drawn, according to the Durban Unicity’s4 Economic Development
Department and Monitor (2000: 7) only one in three economically active people in
Durban are employed in the formal sector. Furthermore, half of manufacturing jobs
are in declining industries like footwear, clothing and textiles, printing and publishing
and chemical products. In line with international trends, there is evidence of a process
of informalisation of the formal economy (see Skinner and Valodia, 2002 for the
informalisation of the Durban clothing industry).
4 The Regulatory Environment
4.1 Labour Legislation
In the last decade South Africa’s labour legislation has been fundamentally changed.
The Basic Conditions of Employment Act (BCEA) of 1997 outlines minimum
standards of employment and is meant to cover all workers, and this Act thus has the
most potential relevance to those working in informal employment. It covers part-
time and contract workers including workers of sub-contractors, except workers
working for less than 8 hours per week for a given employer. The BCEA particularly
recognises two large groups of vulnerable workers, and in 2002 it made provision, for
the first time in South Africa, for minimum wages for domestic workers (most of
whom are women) and farm workers. Unemployment insurance was also extended to
informal workers, and by 2003 the labour minister maintained that 533 000 of the
approximately 800 000 employers of domestic workers had registered their employees
for the Unemployment Insurance Fund (Cape Argus 09/07/2003).

The changes in labour legislation are likely to have positive consequences for those
working in conditions where compliance can be secured. However most of those
working in the informal economy, a significant number of whom are self-employed,
will not be covered by this new legislation. Concern has been raised about the
capacity of the labour department to enforce the regulations for those who are
employees. The National Labour and Economic Development Institute estimated that
to ensure employer compliance with the minimum wages as stipulated in the sectoral
determinations for domestic and for agricultural workers, the Department of Labour
would need 10 000 labour inspectors, 3000 and 7000 for the domestic and agricultural
sectors respectively. A year after the new legislation came into effect, the populous
Eastern Cape Province had only 60 labour inspectors for all sectors in the province
(The Daily Dispatch, 19/08/2003).


4 A note on terminology: Since 1996, Durban (and all local authorities in South Africa) has undergone a two
phased boundary adjustment accompanied by internal restructuring processes. The first phase created the Durban
Metropolitan Area, which amalgamated what had been 48 racially based local authorities. The second phase came
into effect in 2000 and entailed a substantial increase in the physical area. From then Durban was referred to as a
Unicity; it is also more frequently being referred to by its Zulu name – eThekwini.

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Worldwide, organisations of informal workers and individual workers are facing the
difficulty of seeking to secure decent working conditions, while trying to protect
against job loss. Worldwide, there are distances between what laws say should
happen, and what can be implemented. It is unlikely that a single-focus strategy of
pursuing a route of litigation, trying to enforce implementation of basic working
conditions, will be very effective on its own, and particularly in a context of high
unemployment as in South Africa. It is likely that the new South African legislation
will be associated with a continued increase in contractualisation and use of labour
brokers, though direct cause and effect relationships are difficult to pin down.
4.2 Municipal By-laws and Regulations
As we said in the introduction, local government is coming to exert an important
influence on the conditions under which informal workers and informal enterprises
operate. Municipal by-laws and regulations significantly shape the working
environment. For example, by-laws regulate street trading in different parts of urban
areas; zoning regulations can impact on home based workers. By-laws are an
important tool to enable city officials to manage public space; at the same time,
informal operators need regulations that deal with them as working people, as
economic actors, rather than as public nuisances. Street trading by-laws can be
punitive, harshly dealing with any transgression and in the process destroying
livelihoods. Clauses such as indefinite confiscation of goods with no warning, or the
imposition of high fines for trading in non-demarcated areas are detrimental to
traders’ businesses. Alternatively street trading by-laws can create an enabling
environment for traders to operate, one in which the roles and responsibilities of each
party are outlined.

Under apartheid, street trading was disallowed, and ‘move-on laws’ dictated that
hawkers had to move their site of trading every half hour. The 1991 Businesses Act
removed barriers to the operation of informal activities, and made it an offence to
enforce the move-on laws. The Amended Businesses Act of 1993 then allowed local
authorities to formulate street trading by-laws. These regulations typically contain
clauses which prevent traders from, for example, obstructing the movement of traffic
or pedestrians, which prevent unsafe stacking of goods, which limit the attaching of
equipment to buildings and road signs, and which ensure that traders keep their sites
clean. The amendment to the Businesses Act allows for an area to be declared a
prohibited or restricted trade zone. Before this can be enforced, however, the local
authority has to demonstrate to provincial government that by this action a large
number of street traders will not be put out of business. This has restrained local
authorities from declaring large areas prohibited trade zones (with no informal trading
at all) or restricted trade zones (with only a few sites allocated to trading). At a stroke,
then, one piece of legislation changed the regulatory environment for thousands of
people, removing constraints to their operating.

In 1995, the Businesses Act was devolved to a provincial level, and provinces can
amend the Businesses Act. As a result, the approaches of different cities now vary.
The Johannesburg City Council has declared the whole inner city a no-trading zone.
Markets have been built to accommodate some of the ten thousand traders who were
previously operating, and the total number of traders has been substantially reduced.
Durban in contrast took a much less restrictive approach, and street trading sites were

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properly demarcated throughout the inner city. In 2004 and 2005, however, there
have been signs that the city is moving towards a more restrictive, Johannesburg-like
approach.

In about 2000, Durban started the process of changing the legal framework that
governs street trading, away from criminal law, to administrative law. This could be a
key to the conceptual shift from seeing street traders as public nuisances to seeing
them as economic actors. Progress has however been slow. A number of towns in the
Eastern Cape province have established an appeal mechanism as an alternative way of
dealing with conflict. A trader who feels wronged by any municipal decision is able to
go to an appeal committee which consists of a maximum of five members, at least one
of whom has to be from the street trading sector. There the aim is to have a user-
friendly system for resolving conflict.

Traders have to be aware of the legislation that governs their operating in public space
if they are to make informed business decisions and operate within the legal
framework. Currently, the by-laws of many cities are still in English or Afrikaans
only, and these are not the first languages of the vast majority of traders. Furthermore,
they are typically written in legalistic and unintelligible language. To enable street
traders to understand the regulatory framework, the language of by laws should be
simple and clear and all written information should be in a language that is understood
by the majority of street traders. Further the information should be widely distributed
in a format that is accessible even to those who are not literate. Finally there should be
public meetings were the legislation is explained.
4.3 Taxes
A characteristic of economic informality is that informal workers and their enterprises
are not subject to taxation in the conventional sense, and many believe that the choice
to operate informally is mainly motivated the desire to avoid or evade taxes. In fact,
considerable costs are attached to working informally (Chen et al 2005); and the
income of the vast majority of informal workers are below tax thresholds.

Many South African informal workers earn less than the total taxable income
threshold. Figure 2 shows monthly income figures, drawn from the March 2005
Labour Force Survey. The personal income tax threshold in South Africa was then
R30 0005 a year or R2 500 a month. The figure shows that 92 percent of those
working in the informal economy reported monthly earnings which were below this
threshold. Even more striking is that of those reporting an income, over two thirds
reported earning R1000 or less, much less than half of the tax threshold.







5 Exchange rate at data collection, March 2005 was Rand 5.96 to the US Dollar.


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Figure 2: South African Workers in the Informal Economy by Monthly Income
Categories, March 2005
40%
34%
35%
30%
23%
25%
18%
20%
16%
15%
7%
10%
5%
1%
0%
None
R1-R500
R501-
R1001-
R2501-
R8000+
R1000
R2500
R8000

Source: Adapted from StatsSA, 2005:17


One form of payment made by street traders is the monthly fee for trading space
(different local authorities have different levels of success in collecting payments).
The site fee can be seen as a form of taxation. A 2003 comparison of fees charged in
four different cities varied from a low R10 in Durban for a site without shelter, to
Cape Town’s R125 flat rate for anyone in the inner city, to Johannesburg where the
amount could be as high as R600 depending on the level of services provided.
Calculated as a proportion of traders’ reported monthly income, this is a lot of money.

The tendency in South Africa and internationally is that informal workers pay blanket
levies which are too high for the very poor, and too low for the better off. Flat rate
charging is regressive: a trader who earns R500 month and pays R75 for her site is
paying 15 percent of her income, compared to a trader earning R1500 a month, where
the R75 comprises only 5 percent of her income. In many cases the introduction of
permits has not been accompanied by an improvement in the infrastructure provided
for traders - shelter, tables, storage or toilet facilities.

Durban charges substantially less than other cities for the use of inner city space.
While still charging a flat rate for sites, the new policy recommends a system of
differentiated rentals, so that formal and informal businesses alike are charged
different rents and rates for different levels of service. This is seen as a vital
conceptual step in integrating informal and formal workers and their enterprises. The
policy recommends that rentals should be linked to site size, desirability of location,
and the level of services provided. For street traders, a basic site rental would be set,
and then differentiated rentals for different levels of service provision would be
introduced. Components of a package of services would be basic shelter, solid waste
removal, water, toilets, lighting, and storage facilities (Durban Unicity, 2001:11).

Many street traders want to pay for their sites. In selected cities in South Africa, for
example:

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In all the focus group interviews women street traders said that they were
happy for sites to be demarcated and were willing to pay permit charges
because this gave them security over their sites. Having a place to sell that
they knew was theirs was prioritised. This is a prerequisite to traders investing
in and growing their businesses. (Skinner, 2000a: 57)

The co-ordinator of Streetnet, the international alliance of street vendor organisations
points out that in South Africa and internationally, it often happens that traders who
do not pay rents to the local authorities have to pay much more in the form of bribes
to ‘informal’ authorities who take over the management of trading spaces. She argued
that it was therefore preferable for local authorities to manage public space (Interview
28/08/03).
4.4 Registration and Licensing
The World Bank’s World Development Report (World Bank 2005) which focused on
‘creating a better investment climate for everyone’ focused on regulation of smaller
enterprises, showing that starting a new business takes longer, at the same time as
being more costly, in developing countries, and that license fees for small formal
firms in Tanzania, for example, imposed a disproportionately higher burden on the
small firms (World Bank 2005: 100). The same report gives the example of Bolivia’s
city La Paz, where reducing the numbers of procedures for registering a small
business resulted in an increase of 20 percent of the numbers of businesses; positive
gains were also found in Vietnam and Uganda (ibid.)

In South African cities, the procedures to secure a licence to trade with the local
authority are complex and costly. A street trader has to go to numerous different local
government departments to register. A person wishing to trade in foodstuffs in
Durban, for example, has to apply to the Licensing Department for a license to trade,
and to the Informal Trade and Small Business Branch for a site permit. The new
Health Act now requires that the City Health Department issue a certificate of
acceptability to a person trading in foodstuffs, so a triple system of registration
operates.

The process of registering a company or sole proprietorship with the Department of
Trade and Industry is also a lengthy and complex procedure particularly for those who
do not have easy access to the internet or a telephone. Different forms have to be
filled in at different stages in the process, and these need to be copied and
accompanied by revenue stamps, as well as by letters from accounting officers.
Private business support organisations will assist people with this process, but this
service comes at a steep price for the small operator.

The economic situation of foreigners is especially difficult. Cross-border traders
contribute to important aspects of the South African economy (e.g. crafters servicing
the tourism industry); they also invest the majority of their profits in South African
goods to take home (Peberdy and Crush (1998). This international flow of goods is
exactly what is being encouraged in the national government’s economic policy
stance for the formal economy, yet almost insurmountable barriers are put in the way
of stimulating growth in informal enterprises of foreigners, who are known to be
competitive and skilled business-people. The national government’s response to

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