Picture: Legnan Koula/EPA – A woman makes Kabakrou, or soap-stone, soap in Koumassi, Abidjan, Ivory Coast, 30 July 2016. The kabakrou is a popular soap in Ivory Coast handmade by manufacturers in the informal sector.
By Isobel Frye
Ninety percent of global Small and Micro Enterprise (SMEs) business and more than fifty percent of all employment happens in the informal economy.
Often dismissed by the establishment due to its fluid and amorphous nature, it is clear that as South Africa and the continent battles high unemployment, especially youth unemployment, there is a huge opportunity for state and private sector support and investment into this sector.
Harnessing the energy that drives this thriving sector is a far more appropriate response than whipping it with punitive law enforcement. One of the best ways to begin would be to support the design of appropriate social security systems to enable enterprise owners and workers in the informal economy to build up financial security for the futures of themselves, their businesses and their families. Building social security builds Decent Work and better societies worldwide.
The informal economy has historically been ignored at best or more usually criminalised for not operating according to the laws and standards of the formal economy. In fact, it is when the mainstream drives movements underground that organised criminal involvement moves in and extorts a high tax on vulnerable individuals.
Public sector support for the informal economy has been slow in getting started. But this is thankfully changing, and private investors too are moving in to capitalise new ventures on the continent and Asia. What needs greater attention however is the design of appropriate social security vehicles for informal enterprises with family-run or own-account entrepreneurs and atypical workers whose income is often seasonal and unpredictable, but whose incomes are the heartbeat of developing countries’ economies.
The ILO (the International Labour Organisation) is the global hub for much of the recent research and business design innovation pertaining to the informal economy. The definition of the informal economy used by the ILO was adopted in the 2015 R204 Recommendation concerning the transition from the informal to the formal economy. This definition includes “all economic activities by workers and economic units that are – in law or in practice – not covered or insufficiently covered by formal arrangements”.
The informal economy has historically been seen as a problem that needs to be fixed. In this narrative, key problems include the vulnerability of workers who work beyond the protection of labour legislation such as minimum wages or paid leave; the perceived threat to the establishment’s rule of law and fair competition by unregulated survivalist enterprises and the overwhelming view that informal enterprises cheat the fiscus by not paying their dues and so do not deserve any state support at all.
From the perspective of informal economy actors, the formal economy is characterised by hostile, adverse attitudes that seek to destroy rather than nurture people’s attempts to provide for themselves and their families.
WIEGO (Women in Informal Employment: Globalising and Organising) recently released a report examining these dynamics at play in the vibrant informal economy of Accra, Ghana. The study explores two inter-related phenomena: the extent of the tax burden paid by the informal economy and the concomitant levels of social protection enjoyed by informal workers.
The findings are fascinating because they are presented from the perspective of informal economy actors rather than outsiders. The report looks at the tax burden through the experience of those working in the informal economy and identifies four categories of taxation or monies paid in the pursuit of doing business.
These categories range from formal taxes to licences and operating fees, formal user fees, and finally the illegal or extortionary fees of bribes that are demanded from state officials, right across to organised protection rackets and are allowed because of the failure of officialdom to recognise the validity of informal trade.
Of the legal taxes and fees, most are flat rate taxes which are regressive, taxing the poorest at the same rate as the most successful.
The conclusion of the report is that the tax burden carried by informal economy actors is higher than for formal sector actors, it is unwieldly and certainly not all benefit is received by state coffers.
The same report found that few of the workers are covered under any of the possible social protection schemes offered by the state. There are three possible schemes. Two are contributory social insurance schemes and one is a means tested social assistance programme (LEAP) providing cash transfers (grants) and access to health and agricultural extension services to the very poor. However most informal actors in Accra fall between these social insurance and social assistance schemes. The social insurance schemes’ demand for regular contributions are impossible to meet when income is unpredictable, and yet most of the informal actors’ incomes are too high, placing them beyond the benefit of the means tested LEAP. This is indicative of the situation most informal actors face, and it is an economic policy gap that needs to be plugged with creativity and innovation.
South Africa has been grappling with the design of appropriate state support approaches for the informal economy and has had some early victories. Since 2003 the contributory social insurance UIF (the Unemployment Insurance Fund) wage replacement scheme has included domestic workers and since 2005, taxi drivers and ancillary workers in the tax industry. The National Minimum Wage Act of 2018 includes domestic and farm workers in its purview. But what is still missing is a formal mandatory system that provides universal risk support for loss of income and provides for retirement savings and builds conduit mechanisms for disaster relief such as was necessary but not available to the informal economy during the recent Covid-19 lockdown of the economy.
The Department of Social Development has been working on designs for the inclusion of informal and atypical workers for some time. The magisterial Social Development Green Paper (that was sadly withdrawn at the behest of National Treasury and big business some 12 days after its publication in 2021) recommended a scheme that incentivised informal economy actors to contribute to a voluntary retirement and disability fund through the promise of state-side subsidies to match contributions. Different risk schemes are being considered for both informal economy earnings and assets with the private sector showing considerable appetite for involvement too.
Whether it be protection against a literal rainy day or enabling informal actors to build thriving enterprises through credit and savings vehicles that reflect their realities, it makes absolute sense for the state to drive and support social protection schemes for the informal economy. All of society needs to pivot from the prejudice against the informal sector and seek ways to incentivise rather than criminalise and extort.
The African continent has much to offer the world in terms of knowledge and learning in this field, as the Roman Pliny the Elder is attributed with having said – ex Africa semper aliquid novi. Out of Africa there is always something new.
Isobel Frye is Executive Director of the Social Policy Initiative.