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14 April 2020
Transitioning from the Informal to the Formal Economy: Charleen Duncan Explores A Problem Of Crisis Proportions

(Published - 14 April 2020)

The informal economy plays a vital role in creating jobs and reducing poverty. The sector employs 2-billion people globally and 2.4-million people in South Africa - representing 17% of SA’s labour force - and provides for the economic needs of many more. South Africa’s National Development Plan (NDP) recognises the growth potential of the informal sector and projects that the sector will create between 1,2-million to 2-million new jobs by 2030.

“We simply cannot ignore the informal economy in South Africa if we want to meet the job creation goals in the NDP - especially when we are constantly faced with the realities of the South African unemployment rate,” says Charleen Duncan, Director of the University of the Western Cape’s Centre for Entrepreneurship and Innovation. “Empowering informal entrepreneurs with access to information and opportunities can advance an economy and a society by leaps and bounds.”

Despite the contribution the informal sector makes to the formal economy, it does not share the same privileges that the formal economy has.

“This is a sector almost unrecognised by banks and insurers - an economy governed by few policies but restricted by many municipal by-laws from accessing markets and operating freely,” Duncan notes. “In practice right now, whatever the lofty goals of the NDP, this is a sector that is completely excluded from legal, social and financial benefits. And this needs to change!”

Unfortunately, that change has come in the form of the COVID-19 pandemic, which has disrupted economies as well as health systems, and has powerful repercussions for small businesses - especially in the informal economy.

“The market of street traders disappeared overnight,” Duncan notes. “The public transport and taxis these vendors rely on to transport their goods stopped running. Even township spaza shops were initially expected to close, as if residents on lockdown could access supermarkets near their neighbourhoods.”

If the COVID-19 lockdown demonstrates anything, it’s that the informal sector needs more than encouraging words if it is to survive, let alone deliver all those jobs.

As CEI Director, Duncan has spent a lot of time working with informal traders - and her research into the matter has earned her a Master’s degree from UWC’s Institute for Social Development - cum laude - received via South Africa’s first virtual graduation.

Her thesis, Townships to CBD: The project of ten informal traders in the formal economy of Cape Town, Western Cape, explores the case of a “transitional” informal enterprise support project in Cape Town, wherein informal traders took occupancy of provincial government-sponsored kiosks.

“The Long Street kiosks (LSK) offer ten traders per year a unique trading opportunity in the CBD free of rent and service charges, with access to a unique and potentially large market,” Duncan notes. “It’s aimed at micro-enterprise development - but is it working?”

Her work examined a variety of topics: she looked at the selection and identification mechanisms used to recruit kiosk traders, assessed the informal traders with reference to exposure to business skills development and training within the one-year rent-free space, and investigated the logistical and financial support accessible to the kiosk traders.

The findings show that the informal traders had no formal accounting and bookkeeping processes in place, but employed some rudimentary processes to support the financial aspects of their businesses. The study also highlighted the many challenges that traders experienced when the market sector changed. A lack of understanding of market requirements can lead to failure in the new market.

“This study suggests that South Africa has been focusing on both the creation and retention of jobs across all sectors, and has not prioritised fostering the development of the informal economy, or its transition to the formal economy, despite sentiments in the NDP, the existence of a national department and various programmes,” Duncan says. “The Global Entrepreneurship Monitor (GEM) reports show that entrepreneurship development in South Africa is consistently constrained by the lack of emphasis on appropriate training and education. Another critical factor is access to government financial support.

Growing the informal economy requires a progressive mind-set and a creative approach to policy, training, government regulations, red tape reduction and ongoing support from the stakeholders in the ecosystem.

“These findings provide new insights on the complex relationship between the informal and formal economies, and their relative potential for addressing the challenges of employment and economic growth in South Africa as a whole.”