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Government’s good intentions for informal sector have fallen by the wayside
29 September 2020
As the latest devastating GDP numbers have shown, Covid-19, the nationwide lockdown and a dizzying assortment of regulations, many of which defied comprehension, have had a devastating effect on SA firms and households. The impact has been particularly harsh on the informal and small business sector of our economy.
It was encouraging that at the beginning of the crisis there was an upsurge of recognition and concern for informal businesses, especially street traders, waste pickers and other visible entrepreneurs. This had seldom been evident from policymakers in the past. Indeed, President Cyril Ramaphosa himself acknowledged “the vital importance of the informal sector and of small businesses in meeting the basic needs of our people”.
But what has actually been done to support the informal sector through the crisis? In his address to the nation on April 21, Ramaphosa said R2bn would be allocated “to assist SMEs and spaza shop owners and other small businesses”. He later clarified that the assistance, in the form of grants, loans and other credit facilities, would specifically include informal firms.
The department of small business development’s small, medium and microenterprises (SMME) debt relief scheme was duly set up, though demand for funds, mostly for paying salaries, far exceeded the R2bn available. It is not clear how much of this disbursement went to informal firms as the criteria for assistance included registration with the SA Revenue Service and permits to trade, which, almost by definition, most firms in the informal sector do not have.
The Treasury’s employment tax incentive, originally designed for young first-time employees, was increased by R750 a month and expanded to all workers earning under R6,500 for three months, yet according to numerous reports uptake was very low.
As a further sign of the disjointed government response, the entire informal sector was initially locked down. Spaza shops were excluded from “essential services” such as formal supermarkets, some service operations and many financial services that were allowed to operate during lockdown level 5, leaving owners and workers without income for five weeks.
More irrationality has been evident. Rather than help childcare centres get back on their feet after being locked down for more than three months, the department concerned decided to spend R1.3bn on 36,000 young people whose job it would be to monitor the childcare centres. This left little money for the actual centres, and it is not clear what the beneficiaries would be monitoring.
Shebeens have likely fared among the worst of the informal subsectors due to two long alcohol bans. Consumer reports estimate that of 34,500 licensed tavern owners, 10,000 shebeen permit holders and 2,700 independent liquor store owners, at least 70% have had to retrench employees to save costs, and 40% have not received any form of government loan or support.
It would therefore appear that when it comes to support for the informal sector, high-level official rhetoric has not matched reality. Sadly, this is usually the case in SA. As we emerge from lockdown and seek to rebuild the economy, it is important to think clearly and strategically about the informal sector, focusing on enhancing people’s livelihoods and prioritising inclusive growth.
As a first step, it is important to move away from the overly statist and bureaucracy-heavy approach that is the government’s default. If the goal was to provide temporary assistance to people confronting extreme circumstances, the approach should have been to get money to people quickly and efficiently, using private sector providers where possible.
The second step is to adopt the principle “first do no harm”. People in the informal sector are trying to make a living in whatever ways are possible under SA’s desperate economic circumstances. The government at all levels should not unnecessarily add to their challenges.
Brian Phaaloh, CEO of the SA Informal Traders Forum, recounts how the local government in Johannesburg obstructed informal street traders from operating despite their complying with Covid-19 regulations and safety requirements. If these complaints are accurate — and they link up with a long history of tension between metro police and inner-city traders — their contrast with Ramaphosa’s calls to assist the informal sector could not be starker. There is room for authorities to ensure traders comply with health and safety measures, but as Phaaloh put it: “We do not need to be policed; we need to be managed. We are enterprise owners and we want to be treated as such.”
The third vital step is to actually implement the long-standing commitment to deregulate the economy. Ensuring a significant reduction in the cost of doing business would help unleash the growth potential of small and informal firms. Making it easier for firms to become compliant will reduce the cost of operating formally and thus reduce the need to operate informally.
The president promised in his February 2019 state of the nation speech to do exactly that, noting that SA had slipped down the rankings of the World Bank’s ease of doing business index from 34th out of 190 countries in 2010 to 82nd in 2019. He said he wanted SA to be in the top 50 within three years. However, thus far there is little evidence of action in this area, and we tumbled further to 84th in 2020.
At the metro level, there are also many regulatory burdens that could be eased. In a study of SA’s cities published in 2018, the World Bank highlighted that the “procedural complexity and the cost to complete regulatory processes are generally still obstacles for SA entrepreneurs”. Obtaining building permits in the metros, for example, requires nearly six more procedures and is nearly 40% more expensive than the average for Organisation for Economic Co-operation and Development (OECD) countries.
Inclusion in our economy requires much greater urgency and action. Small firms need to survive 2020’s pandemic and lockdown, and conditions must be created for many more firms to emerge and expand.
What is the delay with respect to deregulation? Are small and informal firms’ views being heard? Are the cities taking decisive steps on their own and is national government pushing for this?
A faster growing economy and the creation of many more jobs will be the best way to improve the prospects of informal firms. A faster growing economy means more customers with more to spend, as well as more resources for informal firms, allowing them to grow and, eventually, to formalise.
National government energy should be focused on the reforms necessary for faster economic growth. We need priorities, a clear plan and then urgent implementation of the fundamental reforms, such as those proposed by the Treasury, business, investors, ratings agencies and international organisations, which have been talked about for so many years now. This is the only way to ensure the economy expands rapidly, opens up opportunities for new informal, small and larger firms, and becomes more labour intensive.
Bernstein is head of the Centre for Development and Enterprise (CDE). This article builds on a new CDE report: “SA’s informal sector in the time of Covid-19”.
Ann Bernstein is head of the Centre for Development and Enterprise. This article is based on a new CDE publication: South Africa’s informal sector in the time of Covid-19.