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

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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 Africa.

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 risks.

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% of non-agriculture employment within some countries in sub-Saharan Africa. For South Africa, informal employment accounts for 36% 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 destitute. 

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 unregistered.

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 unaffordable. 

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.

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