The impact of the coronavirus crisis remains difficult to quantify, but it is clear that measures such as lockdowns will cause significant economic damage.
It has prompted governments to offer stimulus packages and measures to limit business failures and job losses. These efforts focus primarily on the formal sector, thus ignoring the informal economy and the most vulnerable businesses and persons in society.
The informal economy represents all work by individuals or businesses which, by law or practice, is not sufficiently catered for through formal arrangements.
Examples include food and flea markets, street vendors, laundromats and the like, mostly in rural or informal areas. It is considered informal since these businesses are rarely registered at national or regional levels, are cash-based and thus do not pay taxes and usually do not have formal arrangements with employees.
This lack of formality also means that little is known of the ‘shadow’ economy and, as such, it is prone to be overlooked or ill-considered during policy formulation, disregarded in business strategy and too easily associated with nefarious activities.
Yet this ‘formal invisibility’ belies its true significance. According to Statistics SA, the informal sector accounted for 5.2% of South Africa’s GDP in 2015 and employed 2 641 000 individuals (17% of all employed) in 2016. Other estimates place it as high as 15% to 18% of GDP.
The informal ‘muti’ market is estimated to be worth between R3 and R6 billion, while there are about 120 000 Spaza shops contributing between R100 and R200 billion per year. The township fast-food market alone is worth an estimated R80 billion per year.
Yet, despite its size, businesses in this sector are extremely vulnerable to external shocks. While formal companies may have built up reserves, can access debt financing or can afford insurance against loss of income, informal businesses often live hand-to-mouth and thus need to operate daily to survive.
The impact on unemployment and business continuity as a result of this crisis on this sector will be immediate and severe.
The value of the informal economy
It is easy to assume that informal trade exists as a result of joblessness alone, but this does not consider its true value. The informal sector does act as a safety net for the formal economy, thus allowing the unemployed and unemployable to find work or start their own businesses, boosting income and alleviating poverty.
But it also offers goods and services in areas that may be impossible or unattractive for formal networks. Townships and informal settlements are spatially distant from central business areas, where formal trade usually operates. The cooperatives and SMMEs in these areas thus have an important role to fulfil.
It often also offers these goods in a manner more suited to the needs of customers (for example, individual items over pre-packed sizes, and in terms of preferences of taste, price and variety).
For example, Parmalat used the Spaza shop network to promote and sell its individually wrapped cheese products, which now contributes more that R1 billion to its revenue.
The informal sector sources most of its goods from the formal economy, pays rent to landlords, and is clearly an important participant in the value chains of even large companies.
Covid-19 has shown how interconnected economics and markets are
Viewing the informal and formal sectors as two separate market participants is erroneous and has led to ineffective policy to support and develop the informal economy.
What the coronavirus crisis has shown is just how interconnected economies and markets are and the formal and informal sectors are no different.
Quite often, these two interact in a reciprocal manner as opposed to a purely competitive one. There is very little support for an “us and them” argument in this case and, without offering support to mitigate the impact of the crisis, there will be not only an immediate increase in unemployment and business failures, but the impact on the broader economy will also be significant.
There are clearly solid business fundamentals behind the need for both government and companies to support the informal sector during these times and beyond.
What can government do?
The government has established the Ministry of Small Business Development to grow the contribution of SMMEs in the economy, but this is mostly focused on formal businesses.
What is needed are adequate relief packages, but obvious issues include: Who do you include and exclude from these relief packages? How much can and should be offered?
How will the funds be distributed? A lack of data makes this very difficult to solve other than to follow either a blanket approach (such as a Covid-19 grant) or requiring the formalisation of applicants.
Funding
The government has launched a Spaza relief fund for stock purchases, but it comes with strict formalisation requirements. Stores are required to register with the CIPC, SARS and UIF, and will only qualify for bulk-buying discounts from pre-approved suppliers. Furthermore, businesses are required to submit financial records.
These measures may appear reasonable, but will take time to implement. Also, it will increase the complexity of doing business in the informal sector, which is beyond the means of many.
Previous research has found that most informal businesses are willing to pay taxes and municipal fees, but this means that they also need access to legal and social protection and support services, which is either not available or unaffordable.
In fact, most informal businesses do pay VAT on purchases, but cannot claim it back since they are not registered as vendors.
These compliance requirements further limit the market activity of informal trade. For example, limiting supply to a pre-selected list undermines the ability to find the best possible prices in the market on the day and may impact long-standing supplier relationships.
Most informal businesses also do not have bank accounts, which further limits their ability to raise funding of any kind.
Remove red tape
Bureaucracy is often cited as being a great burden on informal business. At the national level, government support comes with the expectation of rigid adherence, but with a lack of support and guidance on what is expected and how to comply.
At the municipal level, zoning restrictions and other regulations as well as fees often restrict business activity as opposed to promoting it. The view that all informal goods are counterfeit, all traders are illegal immigrants and do not comply with regulations is anecdotal and in most cases, false.
Naturally, control is extremely important, but interventions are often applied using a blanket approach which treats those who are compliant and those who are non-compliant in the same manner.
A review of these measures has been called for to ensure that the informal sector is recognised for its role in a community as opposed to viewing it as a nuisance.
Basic infrastructure
The formalisation of the sector can be facilitated through the availability of adequate infrastructure. Safety, health and security can be significantly enhanced by making available pre-determined areas for informal trade including shelter, storage facilities and sorting spaces.
Yet even basic services such as the availability of running water and ablution facilities will go a long way in facilitating this economy. Since many informal traders are female, childcare facilities are a further consideration.
These measures should also be considered during the development of low-cost housing projects, ensuring that town planning takes into account the needs of the informal business and its customers.
What can business do?
Formal businesses can support any of the measures already mentioned, but what is required is a careful analysis of a company’s value chain to better understand the role that informal business plays in its distribution channel.
They should, having identified informal stakeholders, assess their needs and develop strategies and activities to assist with business continuity. Companies, both big and small, must review what can be done to assist stakeholders during and after the crisis.
Use other networks
If a company does not currently have programmes in place to access the informal economy by way of an established network, it may be able to leverage other networks within the community, such as schools, churches and NGOs.
The little things
Informal businesses will need assistance with stock availability, funding and administration. As such, any efforts that will assist with these will be of value. For example, simply contributing to the different government relief programmes will make an impact.
To assist businesses to access these relief programmes, companies can make available their legal and accounting services to offer advice on the specific government requirements, setting up basic financial accounts, registering with SARS, CIPC and UIF, drafting simple employment contracts, and the like.
Assistance will also be required to set up a business bank account. Assisting businesses in accessing debt finance may require formal businesses to offer surety or guarantees against loans. Similarly, by offering a payment relief programme to informal customers, a business will assist with cash flow management.
Sources:
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Fourie, F. 2018. The South African Informal Sector: Creating jobs, reducing poverty. HSRC Press.
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DIRECTOR: First River Capital / VISITING LECTURER: Corporate Finance: USB MBA / M.Inst.D
