Eddie Rakabe: Informal business relief isn’t hitting the mark

Recent concessions made by government to relax informal
trading restrictions, amid a growing risk of coronavirus infection, highlights
the precarious socio-economic situation of low paid workers – not to mention the
enduring contradictions of managing an unequal society and economy in South

As the Covid-19 induced economic shutdown tightens its grip,
many people must make an unenviable choice between earning a livelihood, or
risk infection from the virus.

Regrettably, the choice of action and inaction are both
life-threatening.  This is a
disheartening situation for any human being to put up with, and startlingly marks
the plight of the forgotten and disenfranchised sections of our community.

Informal work or business, by its very nature, needs
uninterrupted daily activity to generate an income – perhaps as does any other
business – but the low incomes typically earned in this sector make people
extremely vulnerable to work stoppages as they live from hand to mouth.

People in this sector do not have the privilege of legal
employment contracts, insurance for loss of income or social security, social
networks and saving buffers to protect themselves against unforeseen economic

Their agitation to return to work is not an act of
ignorance, as many have disparaged, but the desperation to support their
families and survive. This is especially crucial for families whose children
are beneficiaries of the school feeding program – that has been a primary
source of supplementary nutrition during schooling days.

South Africa and many of the African economies find
themselves in this quandary owing to years of neglect and antagonising the
informal sector, despite compelling evidence that it absorb millions of work
seekers who cannot find jobs in the formal sector. It is unsurprising that the
Minister of Small Business Development, Khumbudzo
Ntshavheni, has been battling to develop a suitable coronavirus
relief package for workers and business operating in the informal sector, as
she has swiftly done with the debt finance and business growth schemes for
small businesses.

The jobs factor

It may come as a surprise to many people that the informal
sector is responsible for up to 86{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of non-agriculture employment within some
countries in sub-Saharan Africa. For South Africa, informal employment accounts
for 36{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of non-agriculture employment. It is the third-largest employer after
the community and social services and the wholesale and trade sectors with a
total headcount of just under 3 million people.

By way of perspective, this means that 2 out of 10 employed
people in South Africa eke out a living in the informal economy. They provide
goods and services that essential to the functioning of the entire economy and
local economies.

When the affluent households began stock piling groceries
before the Covid-19 lockdown, the markets which rely on these informal businesses
for daily supplies could not afford such a shopping rush – largely because they
rely on small and affordable quantities supplied by the informal traders. 

These very informal traders are a critical distribution
channel for the agriculture sector and food industry in general. Thus, the
lockdown of the informal traders meant that people are not only unable to earn
income, but also farmers cannot access their key distribution channel and most
importantly, communities are deprived of food supplies.

Yet, little consideration has been given to how the informal
sector benefits the economy at large and perhaps cushion communities from
complete devastation during economic crises.  

What about tax?  

The overriding unease with the proliferation of informal work
and business activities from the perspective of government relates to the inability
or unwillingness of those involved to pay tax, to earn decent wages and to
comply with municipal by-laws.

These fears are fuelled by the perception that people join the
informal sector purposefully, to avoid tax, labour regulations on minimum wages
as well as health standards among other things. The sector continues to endure
a number of structural and locational constraints including ‘heavy-handed’
treatment by the police. 

The City of Johannesburg has become synonymous with stories
of insensitive confiscation of goods from non-compliant informal traders. Some
of the Metro police storage brims with piles of daily confiscated perishable
stock from old and young informal traders who are clearly desperate to escape
the unemployment crises. 

Many who are unlucky to afford the penalty fee have their
stock disposed and end up in deep financial distress. With this antagonistic
approach it’s quite easy to see that much of the success made by the informal
sector in generating employment happened with limited government support. 

Impending disaster

In the wake of the coronavirus outbreak and the economic
shutdown, 3 million people and their dependents face immediate job losses and
hunger. Critics blame this impending disaster squarely on government for failing
to envisage and mitigate the effect of the shutdown on the vulnerable income groups. 

Perhaps this explains the pushback government has had to
endure against blanket retail shutdown and the resulting lifting of restrictions
on Spaza shops and un-prepared food informal traders.  To be fair, no government could ever be prepared
enough for a crises of magnitude posed by Covid-19.  What matters are the economic relief
responses to the people affected in order to minimise devastation and

The South African government has been uncharacteristically expedient
in rolling out a business relief package for small and registered formal
businesses against the economic shutdown.

Unfortunately for informal traders, designing an appropriate
and responsive relief proves rather impractical because many of them are

Targeting a relief package for such a group will be riddled
with errors of inclusion and exclusion. 
Some people went as far as proposing a temporary basic income grant of
R500 – R1000 per month targeted at people outside the social safety net and
allocated on the basis of self-selection. No doubt, such an intervention will
be a welcome relief for many people facing abject poverty.  However, with the high unemployment situation
in the country a basic income grant would simply be oversubscribed and

The department of small business has instead introduced a
funding scheme for Spaza shops and informal traders with stringent
formalisation requirements. To qualify for the fund, informal businesses must
be registered with CIPC, SARS, UIF and be willing to buy products produced by selected
South African small manufacturers and submit monthly financial records over a
12 months period.  

Notwithstanding the good intentions, insisting on
formalisation of the informal business clearly shows limited understanding of
how the sector operates and the support it needs.

First, the average incomes earned in the sector are far
below tax payment income thresholds and compliance costs are simply too high.

Second, informal traders optimise profits by buying from
different suppliers depending on prices and lastly, not all informal business
and workers want to formalise. 
Formalisation occurs organically as the business’s level of
sophistication develops (attracts bigger buying customers).

There can be no quick solutions to problems that have
accumulated over many years.  A social
relief may very well be an inevitable intervention for the informal sector
workers in the interim. Authorities must use this opportunity to understand the
needs and challenges of informal sector as whole – and not just the hawkers and
Spaza shops.

For the sector to develop, it requires access to
infrastructure (cold storage), dedicated business space closer to high streets
and feet traffic, basic services, protection from the police and skills.  Policy support should also be given to
informal businesses that may not necessarily want to formalise. They play an
important developmental and poverty-alleviation role in providing livelihoods
to numerous poor households.

Rakabe is an economist, researcher and writer. Views
expressed are his own.

Source Article