Creating a Positive Business Environment for the Informal Economy: Reflections from South Africa. Francie Lund and Caroline Skinner

Transcription

1 Creating a Positive Business Environment for the Informal Economy: Reflections from South Africa Francie Lund and Caroline Skinner School of Development Studies University of KwaZulu-Natal, South Africa October 17 th 2005 Paper prepared for the International Donor Conference Reforming the Business Environment Cairo, 29 November to 1 December Contact details: lundf@ukzn.ac.za; skinnerc1@ukzn.ac.za School of Development Studies University of KwaZulu-Natal 4041 Durban South Africa 1 This paper draws on one presented at the EGDI-WIDER Conference Unleashing Human Potential: Linking the Formal and Informal Sectors, Helsinki, Finland, September 17-18th, 2004, and the Background Paper The Investment Climate for the Informal Economy: A Case of Durban, South Africa, prepared for the World Bank World Development Report

2 Table of Contents 1. Introduction Approach The Informal Economy in South Africa The Regulatory Environment Labour Legislation Municipal By-laws and Regulations Taxes Registration and Licensing Institutional participation Education and training Access to Markets The Johannesburg Garment District KwaZulu-Natal Traditional Medicine Support Programme Access to Financial Services and Insurance Access to infrastructure Protection against crime Informal Economy Budget Analysis Conclusion: Implications for the Donor Community...23 References...24 List of Tables and Figures Table 1: Formal, Informal and Domestic Work, by Sex, Race, and Proportion of Total Population, March Figure 1: Employment in the Informal Economy in South Africa by Industry, March Figure 2: South African Workers in the Informal Economy by Monthly Income Categories, March Figure 3: Proportion of Formal and Informal Workers by Education Level (Last Completed Year of Education), March

3 1. Introduction The need for effective support for small enterprise, and for promoting a business environment in which small enterprises can flourish, can be advanced in terms of economic growth, its significance for gender equality, and in terms of poverty alleviation. Yet effective support for small enterprises is known to be difficult, requiring a range of interventions, from local to national, across sectors, and taking into account specific needs of small-scale operators. We will argue in this paper that the support and environmental needs of formal and informal enterprises are much the same, but governance in the business environment and in local government can operate in such a way as to create bottlenecks and constraints for the majority of smaller and poorer workers most of whom are women. The paper is set in South Africa, where the 1994 transition to democracy was accompanied by a re-entry to the global economy and a rise in the status and importance of small business development (under which the informal economy is incorporated) in national economic policy thinking. However, the government itself has recognised that new policies have been inappropriate in terms of not being inclusive of the needs and interests of poorer workers or of very small enterprises. Rogerson (2004a), in a ten year review of small business policy in South Africa, concludes that existing government programmes have to a large extent by-passed micro-enterprises and the informal economy. In line with international trends of decentralisation of powers to the local level, South Africa s 1996 Constitution gave local government a range of new tasks, one of which is the promotion of local economic development. Local government is thus emerging as a key player, in South Africa and elsewhere, in shaping the environment in which those working informally operate; local government can play a role in filling the gaps in national government s approach. This has quite profound implications for institutional support for small enterprise development, as will be shown, and this is one of the primary arguments of this paper. We review recent theoretical developments in understanding the informal economy, pointing to the increasing consensus that the economy needs to be viewed in its entirety with a formal and informal end. We then give a brief statistical overview of the informal economy in South Africa, outlining the shift in approach taken by the South African government and some local governments in the transition to democracy. The main part of the paper is then dedicated to different aspects of the economic environment the regulatory environment (taxes and laws), institutions, services (training, financial services and insurance, access to markets), access to infrastructure and protection from crime. In the last section we pose a list of concrete questions that the donor community might wish to reflect on, in the pursuit of effective avenues to support the reform of the business environment for poorer informal workers 2. Approach The defining characteristic of the informal economy is the precarious nature of work. Workers in informal enterprises and informal jobs are generally not covered by social security or protected by labour legislation. Although debates continue about what 3

4 exactly informal economic activities are, there is agreement that they are relatively small scale (in terms of individual enterprises); they are not registered, do not pay the taxes associated with formal business, and the working environments are usually It has become widely accepted that strategic planning for the promotion of economic growth in the formal economy should be done on a sector by sector basis. We argue that this should be done for the economy as a whole, with each industry or sub-sector being analysed with respect to both the more formal and a more informal end (Carr 2004). Integrated value chain analysis has been done for patterns of ownership in the garment industry (McCormick and Schmitz 2001); using similar tools, such analysis has been extended to include formal and informal workers needs for social protection as well (Lund and Nicholson 2003). 3. The Informal Economy in South Africa The informal economy has become the predominant form of work in many countries A recent compilation of international statistics concluded: Informal employment comprises one half to three quarters of non-agricultural employment in developing countries: specifically 48% in North Africa, 51% in Latin America, 65% in Asia and 72% in sub-saharan Africa (International Labour Organisation, 2002: 7). Due to restrictive labour and residential policies under apartheid, as well as the existence of a relatively strong formal economy, the size of the informal economy in South Africa is as yet smaller than for other countries in sub-saharan Africa. Apartheid was critical in the formation and the distortion of the South African informal economy. A key component of apartheid was a system of contract and migrant labour. Apartheid imposed a racially hierarchical system of access to economic opportunity and activity for the four racial groups, 2 in the interests of the white minority. The most extensive restrictions were imposed on the African population, followed by those for coloured and Indian people. Restrictions were imposed on access to skills development for certain occupations, the right to establish and operate businesses, the range of goods that could be sold (see Standing 1996: for a list of relevant legislation). It is easy to under-estimate the impact of more than a century of repressive legislation on the development of entrepreneurial economic activities, both formal and informal. The March 2005 Labour Force Survey (LFS) found that 25 percent of all those who worked were working informally. This comprised people operating in the informal sector (which the Statistics South Africa (StatsSA) defines as those operating in unregistered firms and their employees), and domestic workers. 3 There have been a number of changes in the way that StatsSA collects and calculates labour force data, which makes trends over time difficult to determine. Casale, Muller and Posel (2004) recalculated StatsSA data to ensure comparability of years for the period 1997 to 2003, and show that the number of people involved in informal work grew, making it one of the few areas of employment growth in the post-apartheid period. 2 The apartheid government imposed an official system of racial naming of four main groups, African, coloured (of mixed descent), Indian and white. The three groups not classified white are commonly referred to as black. We keep the distinction between the four groups, as legislation and resource allocation were differentially imposed. 3 Note that the figures reported in this section exclude employees working under informal work arrangements in formal firms. For an analysis of South African statistics employing a worker based rather than an enterprise based definition of the informal economy see Budlender et al (2001). 4

5 Table 1 shows the classification by sex and race of those in formal, informal and domestic work (using LFS data for March 2003). As elsewhere in the world (and see Chen, at this conference, for details) there is a gender dimension to the informal economy in South Africa. Of all those who work formally, 64 percent are men and 36 percent are women; of those who work informally, 58 percent are men and 42 percent are women. Within the informal economy, smaller scale surveys and qualitative research indicates that women tend to be over represented in the less lucrative tasks (see for example Lund 1998 for a synthesis of research on street trading in South Africa in the 1990s, all of which pointed in this direction). Table 1: Formal, Informal and Domestic Work, by Sex, Race, and Proportion of Total Population, March 2005 Formal sector Informal sector Domestic Work Proportion of the total SA pop Male 63.5% 57.7% 5.3% 49.2% Female 36.4% 42.3% 94.7% 50.8% Africans 59.2% 88.8% 90.4% 79.3% Coloured 13.4% 5.7% 9.5% 8.8% Indian 4.5% 1.5% 0.0% 2.5% White 22.6% 3.8% 0.0% 9.4% Source: Adapted from StatsSA, 2005:1&13 With respect to race, Table 1 shows that while Africans comprise 79 percent of the total population, only 59 percent of Africans who work are in formal employment. White people, by contrast, comprise only 9 percent of the population, but 23 percent of those who work formally. More starkly, of all those working in the informal economy, nearly nine in ten are African; further, all of the domestic workers (almost all of whom were women) were African and coloured people. Figure 1: Employment in the Informal Economy in South Africa by Industry, March 2005 Business Services, 3.5% Trade, 45.8% Transport, 6.4% Construction, 14.3% Private h/hs, 10.4% Com munity Services, 8.9% Source: Adapted from StatsSA, 2005:11 Manufacturin g, 10.7% 5

6 Figure 1 shows the distribution of informal workers by industrial sector, according to the March 2005 LFS. Informal employment is concentrated in trade, with just under half of all informal workers located in this sector (a high proportion compared to other developing countries - see ILO 2002). Further, there are significant numbers of people working in construction, manufacturing, services and in private households. With regard to Durban specifically, from which a number of the examples in this paper will be drawn, according to the Durban Unicity s 4 Economic Development Department and Monitor (2000: 7) only one in three economically active people in Durban are employed in the formal sector. Furthermore, half of manufacturing jobs are in declining industries like footwear, clothing and textiles, printing and publishing and chemical products. In line with international trends, there is evidence of a process of informalisation of the formal economy (see Skinner and Valodia, 2002 for the informalisation of the Durban clothing industry). 4 The Regulatory Environment 4.1 Labour Legislation In the last decade South Africa s labour legislation has been fundamentally changed. The Basic Conditions of Employment Act (BCEA) of 1997 outlines minimum standards of employment and is meant to cover all workers, and this Act thus has the most potential relevance to those working in informal employment. It covers parttime and contract workers including workers of sub-contractors, except workers working for less than 8 hours per week for a given employer. The BCEA particularly recognises two large groups of vulnerable workers, and in 2002 it made provision, for the first time in South Africa, for minimum wages for domestic workers (most of whom are women) and farm workers. Unemployment insurance was also extended to informal workers, and by 2003 the labour minister maintained that of the approximately employers of domestic workers had registered their employees for the Unemployment Insurance Fund (Cape Argus 09/07/2003). The changes in labour legislation are likely to have positive consequences for those working in conditions where compliance can be secured. However most of those working in the informal economy, a significant number of whom are self-employed, will not be covered by this new legislation. Concern has been raised about the capacity of the labour department to enforce the regulations for those who are employees. The National Labour and Economic Development Institute estimated that to ensure employer compliance with the minimum wages as stipulated in the sectoral determinations for domestic and for agricultural workers, the Department of Labour would need labour inspectors, 3000 and 7000 for the domestic and agricultural sectors respectively. A year after the new legislation came into effect, the populous Eastern Cape Province had only 60 labour inspectors for all sectors in the province (The Daily Dispatch, 19/08/2003). 4 A note on terminology: Since 1996, Durban (and all local authorities in South Africa) has undergone a two phased boundary adjustment accompanied by internal restructuring processes. The first phase created the Durban Metropolitan Area, which amalgamated what had been 48 racially based local authorities. The second phase came into effect in 2000 and entailed a substantial increase in the physical area. From then Durban was referred to as a Unicity; it is also more frequently being referred to by its Zulu name ethekwini. 6

7 Worldwide, organisations of informal workers and individual workers are facing the difficulty of seeking to secure decent working conditions, while trying to protect against job loss. Worldwide, there are distances between what laws say should happen, and what can be implemented. It is unlikely that a single-focus strategy of pursuing a route of litigation, trying to enforce implementation of basic working conditions, will be very effective on its own, and particularly in a context of high unemployment as in South Africa. It is likely that the new South African legislation will be associated with a continued increase in contractualisation and use of labour brokers, though direct cause and effect relationships are difficult to pin down. 4.2 Municipal By-laws and Regulations As we said in the introduction, local government is coming to exert an important influence on the conditions under which informal workers and informal enterprises operate. Municipal by-laws and regulations significantly shape the working environment. For example, by-laws regulate street trading in different parts of urban areas; zoning regulations can impact on home based workers. By-laws are an important tool to enable city officials to manage public space; at the same time, informal operators need regulations that deal with them as working people, as economic actors, rather than as public nuisances. Street trading by-laws can be punitive, harshly dealing with any transgression and in the process destroying livelihoods. Clauses such as indefinite confiscation of goods with no warning, or the imposition of high fines for trading in non-demarcated areas are detrimental to traders businesses. Alternatively street trading by-laws can create an enabling environment for traders to operate, one in which the roles and responsibilities of each party are outlined. Under apartheid, street trading was disallowed, and move-on laws dictated that hawkers had to move their site of trading every half hour. The 1991 Businesses Act removed barriers to the operation of informal activities, and made it an offence to enforce the move-on laws. The Amended Businesses Act of 1993 then allowed local authorities to formulate street trading by-laws. These regulations typically contain clauses which prevent traders from, for example, obstructing the movement of traffic or pedestrians, which prevent unsafe stacking of goods, which limit the attaching of equipment to buildings and road signs, and which ensure that traders keep their sites clean. The amendment to the Businesses Act allows for an area to be declared a prohibited or restricted trade zone. Before this can be enforced, however, the local authority has to demonstrate to provincial government that by this action a large number of street traders will not be put out of business. This has restrained local authorities from declaring large areas prohibited trade zones (with no informal trading at all) or restricted trade zones (with only a few sites allocated to trading). At a stroke, then, one piece of legislation changed the regulatory environment for thousands of people, removing constraints to their operating. In 1995, the Businesses Act was devolved to a provincial level, and provinces can amend the Businesses Act. As a result, the approaches of different cities now vary. The Johannesburg City Council has declared the whole inner city a no-trading zone. Markets have been built to accommodate some of the ten thousand traders who were previously operating, and the total number of traders has been substantially reduced. Durban in contrast took a much less restrictive approach, and street trading sites were 7

8 properly demarcated throughout the inner city. In 2004 and 2005, however, there have been signs that the city is moving towards a more restrictive, Johannesburg-like approach. In about 2000, Durban started the process of changing the legal framework that governs street trading, away from criminal law, to administrative law. This could be a key to the conceptual shift from seeing street traders as public nuisances to seeing them as economic actors. Progress has however been slow. A number of towns in the Eastern Cape province have established an appeal mechanism as an alternative way of dealing with conflict. A trader who feels wronged by any municipal decision is able to go to an appeal committee which consists of a maximum of five members, at least one of whom has to be from the street trading sector. There the aim is to have a userfriendly system for resolving conflict. Traders have to be aware of the legislation that governs their operating in public space if they are to make informed business decisions and operate within the legal framework. Currently, the by-laws of many cities are still in English or Afrikaans only, and these are not the first languages of the vast majority of traders. Furthermore, they are typically written in legalistic and unintelligible language. To enable street traders to understand the regulatory framework, the language of by laws should be simple and clear and all written information should be in a language that is understood by the majority of street traders. Further the information should be widely distributed in a format that is accessible even to those who are not literate. Finally there should be public meetings were the legislation is explained. 4.3 Taxes A characteristic of economic informality is that informal workers and their enterprises are not subject to taxation in the conventional sense, and many believe that the choice to operate informally is mainly motivated the desire to avoid or evade taxes. In fact, considerable costs are attached to working informally (Chen et al 2005); and the income of the vast majority of informal workers are below tax thresholds. Many South African informal workers earn less than the total taxable income threshold. Figure 2 shows monthly income figures, drawn from the March 2005 Labour Force Survey. The personal income tax threshold in South Africa was then R a year or R2 500 a month. The figure shows that 92 percent of those working in the informal economy reported monthly earnings which were below this threshold. Even more striking is that of those reporting an income, over two thirds reported earning R1000 or less, much less than half of the tax threshold. 5 Exchange rate at data collection, March 2005 was Rand 5.96 to the US Dollar. 8

9 Figure 2: South African Workers in the Informal Economy by Monthly Income Categories, March % 35% 34% 30% 25% 20% 16% 23% 18% 15% 10% 7% 5% 1% 0% None R1-R500 R501- R1001- R2501- R8000+ R1000 R2500 R8000 Source: Adapted from StatsSA, 2005:17 One form of payment made by street traders is the monthly fee for trading space (different local authorities have different levels of success in collecting payments). The site fee can be seen as a form of taxation. A 2003 comparison of fees charged in four different cities varied from a low R10 in Durban for a site without shelter, to Cape Town s R125 flat rate for anyone in the inner city, to Johannesburg where the amount could be as high as R600 depending on the level of services provided. Calculated as a proportion of traders reported monthly income, this is a lot of money. The tendency in South Africa and internationally is that informal workers pay blanket levies which are too high for the very poor, and too low for the better off. Flat rate charging is regressive: a trader who earns R500 month and pays R75 for her site is paying 15 percent of her income, compared to a trader earning R1500 a month, where the R75 comprises only 5 percent of her income. In many cases the introduction of permits has not been accompanied by an improvement in the infrastructure provided for traders - shelter, tables, storage or toilet facilities. Durban charges substantially less than other cities for the use of inner city space. While still charging a flat rate for sites, the new policy recommends a system of differentiated rentals, so that formal and informal businesses alike are charged different rents and rates for different levels of service. This is seen as a vital conceptual step in integrating informal and formal workers and their enterprises. The policy recommends that rentals should be linked to site size, desirability of location, and the level of services provided. For street traders, a basic site rental would be set, and then differentiated rentals for different levels of service provision would be introduced. Components of a package of services would be basic shelter, solid waste removal, water, toilets, lighting, and storage facilities (Durban Unicity, 2001:11). Many street traders want to pay for their sites. In selected cities in South Africa, for example: 9

10 In all the focus group interviews women street traders said that they were happy for sites to be demarcated and were willing to pay permit charges because this gave them security over their sites. Having a place to sell that they knew was theirs was prioritised. This is a prerequisite to traders investing in and growing their businesses. (Skinner, 2000a: 57) The co-ordinator of Streetnet, the international alliance of street vendor organisations points out that in South Africa and internationally, it often happens that traders who do not pay rents to the local authorities have to pay much more in the form of bribes to informal authorities who take over the management of trading spaces. She argued that it was therefore preferable for local authorities to manage public space (Interview 28/08/03). 4.4 Registration and Licensing The World Bank s World Development Report (World Bank 2005) which focused on creating a better investment climate for everyone focused on regulation of smaller enterprises, showing that starting a new business takes longer, at the same time as being more costly, in developing countries, and that license fees for small formal firms in Tanzania, for example, imposed a disproportionately higher burden on the small firms (World Bank 2005: 100). The same report gives the example of Bolivia s city La Paz, where reducing the numbers of procedures for registering a small business resulted in an increase of 20 percent of the numbers of businesses; positive gains were also found in Vietnam and Uganda (ibid.) In South African cities, the procedures to secure a licence to trade with the local authority are complex and costly. A street trader has to go to numerous different local government departments to register. A person wishing to trade in foodstuffs in Durban, for example, has to apply to the Licensing Department for a license to trade, and to the Informal Trade and Small Business Branch for a site permit. The new Health Act now requires that the City Health Department issue a certificate of acceptability to a person trading in foodstuffs, so a triple system of registration operates. The process of registering a company or sole proprietorship with the Department of Trade and Industry is also a lengthy and complex procedure particularly for those who do not have easy access to the internet or a telephone. Different forms have to be filled in at different stages in the process, and these need to be copied and accompanied by revenue stamps, as well as by letters from accounting officers. Private business support organisations will assist people with this process, but this service comes at a steep price for the small operator. The economic situation of foreigners is especially difficult. Cross-border traders contribute to important aspects of the South African economy (e.g. crafters servicing the tourism industry); they also invest the majority of their profits in South African goods to take home (Peberdy and Crush (1998). This international flow of goods is exactly what is being encouraged in the national government s economic policy stance for the formal economy, yet almost insurmountable barriers are put in the way of stimulating growth in informal enterprises of foreigners, who are known to be competitive and skilled business-people. The national government s response to 10

11 migration has been conservative: the Refugees Act of 2000 does not allow asylum seekers to support themselves through employment or self-employment while awaiting approval of their applications; no provision is made for state support, despite the fact that this process can take a number of years (Rogerson and Peberdy, 2000). Asylum seekers then have no choice but to work where barriers to entry are lower, often as informal street traders. But as foreign traders frequently do not have the correct documentation, local authorities often do not give foreign traders licences to trade. In the inner city of Durban for example, in 2003 not one inner city site license had been granted to a foreigner (Interview, Area Manager, Informal Trade and Small Business Opportunities 08/09/03). It is an economically inefficient and humanly unjust Catch-22 situation. Those working in the informal economy, whether nationals or foreigners, need transparent and simple systems which encourage them to take small steps on the path to regulation. Transaction costs should be low enough that they do not act as a disincentive to register. Particularly for the self-employed, time away from their businesses is money lost. Durban has introduced a system of decentralised registration and pay points, both of which serve to reduce transaction costs for poorer traders who wish to register and pay. Durban also recognised the importance of establishing an integrated information system which would be able to link incentives (for example access to subsidised training) to registration. Ideally there should be an accessible one-stop shop staffed by officials who understand business, and who value the economic contribution of the informal economy to the city. Front-line officials dealing with informal workers should speak the first language of the people they are working for. The steps between recognition of these important aspects of a coherent and economically sound approach to support for small enterprises, and implementation of systems of support, has been slow. Foreigners specifically will continue to be vulnerable until changes are made to the national legislation. The application process for asylum seekers needs to be streamlined. Furthermore, the law specifying that they may not be self employed while awaiting the outcome of their application violates United Nations Conventions, and should be changed accordingly. 5. Institutional participation Informal workers and their enterprises should be able to have the same expectation of participating in governance mechanisms as formal businesses do. If there is to be consistency in local government s approach it is necessary to have a politically mandated policy which lays out the city s vision for the way in which these activities are to be approached. In such an approach, informal operators need to be dealt with as economic actors, as formal businesspeople are. Their associations need to be consulted over policy issues, and there need to be structured mechanisms of appeal. It is inherent to informality that it is more difficult to structure interaction between associations of workers and governance institutions, yet most cities have few, if any, structured institutional spaces for ongoing interaction over decisions about, for example, the sites of new markets, and priorities for development, and participation in trade fairs. 11

12 Institutional location provides an important clue as to how the informal economy is perceived. In many cities street trading is located in the Health Department, or in Traffic Control, or in Policing, giving clear clues as to how the informal economy is seen as health hazard, as obstacle to clear flows of traffic, and as a criminal threat. In Durban and in Cape Town, by contrast, informal trade is situated in the Economic Development Department. In Durban, informal traders are represented as stakeholders in pilot initiatives in Area Based Management (ABM), and in ongoing ABM Committees. Durban engaged in a year-long consultative policy development process, eliciting the views of formal and informal business associations, politicians, civil society and community organisations, about priority issues (Lund and Skinner, 2004). The consultation was an integral and budgeted part of the process. The policy recommended the establishment of an appeal mechanism so that disputes which can easily lead to an escalation of hostility and violence among traders, or between traders and officials, can be quickly settled. One hears of occasional, one-off initiatives, led by a charismatic official, to negotiate over a sensitive issue. Mostly, however, officials are unskilled in conflict resolution; there are no appeal mechanisms to settle disputes; and there is a high potential for violence to be used to address conflicts around property, assets, and trading spaces. 6. Education and training6 Liimatainen (2002: 4), after reviewing the literature on training and skills acquisition in the informal economy, said there was consensus that the development of relevant skills and knowledge is a major instrument for improved productivity, better working conditions and the promotion of decent work in the informal economy. But the rub lies in how to achieve skills and knowledge, when in any particular country the skills and knowledge deficits are historically rooted. South Africa may well have a worst case scenario. Formal education in South Africa has been wholly inadequate in terms of addressing critical problem-solving and entrepreneurial skills. Under apartheid informal work for black South Africans was illegal, and so we have to speculate that there has as yet been relatively little opportunity for the inter-generational transmission of knowledge about running informal enterprises through families, such as reported on in other countries. There are obvious sectoral exceptions, such as in craft work, but the general point holds. Indeed, one might imagine that a child seeing her/ his parents business assets being repeatedly confiscated and destroyed by local authorities would pick up a strong message about not risking starting entrepreneurial activity of her/ his own. The recent freeing up of the informal economy means that informal enterprises are new; the high unemployment rates, and late age of first entry into the labour market, combine to present a very loaded situation. A recent survey (Skinner 2005) of small firms in Durban shows this starkly. Of the more than 500 respondents, 37 percent had established their enterprises in the three years before the interview was held, and only a quarter (26 percent) had been established before In terms of their previous work, 48 percent had been unemployed prior to starting the business, but more alarmingly, only a fifth or 22 percent had ever had experience as formal workers. 6 This section of the paper draws from Devey et al 2003b. 12

13 These findings have serious implications for the challenges of education and training, and more so as the study sample was biased towards larger small firms (55 percent had at least one person else working for them, as opposed to being own account operators). Training is identified as an important need in a series of Durban studies (Skinner 2005 on informal firms; Cross et al 2000 on home-based work). Figure 3 demonstrates the stark disparities in education levels between people operating in the formal and the informal economy, as well as the diversity of education levels within the informal economy. Figure 3: Proportion of Formal and Informal Workers by Education Level (Last Completed Year of Education), March 2005 Formal I nformal Domestic 33% 39% 39% 37% 32% 27% 22% 12% 10% 14% 16% 9% 3% 3% 0% No education Primary Secondary M atric Post matric Source: Adapted from StatsSA, 2005:18 Ten per cent of those working in the informal economy compared to 3 percent of those in the formal economy have no education at all. Furthermore, one third of informal workers have completed only primary schooling and an additional one third have been through secondary school up to but not including the final year - Grade 12 or Matric. More than half of formal workers have completed 12 years of school (matric) or have a tertiary qualification, compared to less than one fifth of informal workers. In a more local area study of workers in a township Kwamsane in the north of KwaZulu-Natal, over half (56 percent) of the random sample of 300 working people had not completed high school. Almost a third or 32 percent of the most informal wage workers, and close to a quarter or 24 percent of the self-employed had no formal education at all, while two thirds or 66 percent of the most formal wage employed had a university degree (Lund and Ardington 2005: 28). With regard to the relationship between educational levels and incomes, at the national level Devey et al (2003b: 16) found that returns to education for those in the informal economy were not significant for primary education, but were for secondary and higher education. The pattern was not so clear for the self-employed in the KwaZulu-Natal study: for them, some basic 13

14 education was associated with higher wages, but after that there appeared to be no distinct relationship (Lund and Ardington 2005: 28). The National Department of Labour is the primary source of government funding for training business service providers. The Skills Development Act of 1998 established a system of Sector Education and Training Authorities (SETAs), which are funded through a skills levy on employers (not public service employers, and not employers whose annual wage bill is less than R ). SETAs must design and implement sectoral skills development strategies, and disburse levies in their sector. During the initial stages of designing the skills development system there was some debate about whether a separate SETA should be established to cater for the needs of the informal economy or whether informal economy interests should be incorporated into the existing sectoral SETAs. The Department of Labour opted for the latter given that informalisation characterises many different sectors. Emphasis is thus placed on including small business representatives in all SETA structures a welcome sentiment, but one which assumes a degree of organisation among small businesses. This may be true for small and medium businesses, but micro- and survivalist businesses may find it difficult to engage in a continuous way with such institutions. The system is not performing adequately. For example, while the February 2000 Labour Force Survey estimated that over 50 per cent of those working in the clothing industry were in the informal economy, the clothing industry SETA had not trained any informal enterprises, nor did they intend to. The head of the Clothing and Textile Sectoral Education and Training Authority (quoted in Devey et al, 2003), argued that they had to prioritise the needs of formal economy enterprises since they are the ones paying skills levies. Twenty per cent of the skills levy goes to the National Skills Fund, which is a source of potential support to those working in the informal economy. The Department of Labour s approach is to rely on incentives to attract training service providers to offer training in the informal economy. However, in the Durban area, trainers, even not-forprofit trainers, are very reluctant to service those working in the informal economy. In one study, training providers said that it was not profitable to train informal workers because government funding was difficult to secure, at the same time as trainees were not in a position to cover their own costs. Informal workers were regarded by some as untrainable due to their low levels of education; trainers could not use their familiar and traditional training methods. In addition, trainers said that informal workers were very mobile and therefore difficult to access; linked to this, high crime rates meant that trainers and fieldworkers were frightened to go to the areas where the potential trainees lived and worked (Skinner, 2000b). The study concluded that reliance on the private sector would lead to the continued neglect of those groups who do not have a history of being serviced, are difficult to service and/or are not lucrative to service (Skinner, 2000b:7). We suggest here that these perceptions need to be problematised and addressed by training providers, and local government and donors alike may be able to play a proactive role in doing this. It seems inefficient to make large investments in getting training content right, if the constraints to training lie not in the content, but in such externalities. The founder and former general secretary of the Self Employed Women s Union emphasised the need to engineer a fit between the needs of informal workers, and training offered to them: 14

15 In our experience our members are often education hungry. In many cases however they have not been in a classroom context for sometime. They may be quickly alienated if training does not draw on their experience, build their confidence levels and is not correctly pitched or relevant... If training service providers find those working in the informal economy are not attending their courses then they must not blame the participants but must look seriously at the design of their training intervention. (quoted in Skinner 2000b: 22) As far as the content of training is concerned, different groups have different requirements. Some need basic literacy and numeracy skills. Street traders express the need for training in business English, as they recognise that the world of business generally uses the medium of English (Skinner 2000b). With respect to business skills, informal economy workers require an adapted and expanded set of business skills as well as other skills. Informal firm owners frequently do not separate personal from business expenditure and therefore cannot calculate profit (Cross et al 2001; Skinner 2000b). Those working in the informal economy need traditional business skills - financial management skills and skills market analysis, buying, costing and customer care but adapted to an informal economy context. Life skills such as assertiveness training, negotiation skills, and conflict resolution skills would assist informal workers. Training interventions need to take industry specific dynamics into account. Training interventions should provide information about the institutional environment within which informal enterprises operate since this is often a stumbling block to business growth (Skinner 2000b). For the self-employed, time away from the business is money lost; few are in a position to take consecutive days off to attend training. Training should be part time. However, the Department of Labour does not fund part-time training, thus excluding a significant group of those who are currently economically active in South Africa. This criterion needs to be reconsidered. Ideally trainers/advisors should also be available to visit informal operators at their site of work. Courses should be conducted in the learners mother tongue and, in view of the low levels of literacy discussed earlier, should not only be text-based. As far as possible training should take place close to where informal operators work. Consideration has to be given to the provision of child-care facilities for women. The Department of Labour subsidises training providers. It could easily design incentives to favour providers who take the gendered needs and educational levels of informal operators into account in their curricula. Associations of informal workers in partnership with government could draw up a charter of good practice in training this is something which could be facilitated with a very modest amount of financial support. In Durban, City Health has provided accredited training in environmental health for food-vendors, and this certificate brings recognition, a degree of security and small yet appreciated prizes for good performance. Also in Durban, the Economic Development Department invited invitations to informal traders to attend an annual Small Business Trade Fair, so they could be exposed to entrepreneurial practices and displays. In the past, only much more formal enterprises had been invited. The challenge is clearly to provide training interventions that are both relevant and that are delivered in an appropriate way. 15

16 7. Access to Markets South African industry grew behind high and complex tariff barriers. In 1994 the new government embarked on a process of rapid integration of the South African economy into the global economy with a comprehensive attempt both to quickly reduce tariff barriers and also to simplify the tariff structure. In some cases, for example the clothing industry, tariff levels were lowered more rapidly than World Trade Organisation requirements. This rapid exposure to international competition has been both positive, in that some industries have managed to specialise and access new markets, as well as negative, in that in certain industries there have been significant job losses. Those working in both the formal and informal economy need access to markets to grow their businesses. Formal businesses are better placed than informal businesses to capture the opportunities that global markets present. South Africa s informal economy is dominated by service activities. Informal operators tend to service oversaturated markets, keeping profit margins low. There is no evidence to indicate that any of those working in the legal informal economy in South Africa are successfully accessing international markets (in contrast for example to India). We give some detail here of two South African initiatives that have assisted those working in the informal economy to access new or different markets. The one is the building of the garment district in inner city Johannesburg, where an attempt is being made to position the industry as pan-african and continental. The other is the traditional medicine industry in Durban, where the local government is collaborating in a partnership which aims to upgrade and add value to very traditional products, in a way that is environmentally sustainable. 7.1 The Johannesburg Garment District In an attempt to revitalise the decaying inner city of Johannesburg, a multi-partite intervention focused on upgrading the garment sector. Two groups of clothing producers had occupied abandoned office blocks: immigrants from Francophone Africa, who were predominantly men, well-educated and highly skilled in embroidery and in design; and black South African women, with fewer skills, and producing daily wear for the lower end of the market. The City Garment Project was set up in 1999 as a collaboration between an entrepreneur, the municipality, a group of consultants to the municipality, and an NGO. Research on the micro-entrepreneurs (Cachalia et al 2004) revealed the complete lack of support for small businesses in the area in training, in business advice, and in machinery service repairs, for example. It also revealed there was little connection between the two groups of producers. The project focused on skills upgrading, and on securing access to new markets. By 2004 training had been provided to 400 of the South Africans (the Department of Labour not being allowed to subsidise training for non-south Africans). A study (Rogerson 2004b) compared the performance of supported enterprises with a control group of non-beneficiaries: the supported group reported improved outputs, sales and incomes. Significantly, they also reported much greater networking among producers, and greater co-operation between South Africans and immigrants enterprises. 16

17 The project has subsequently re-branded itself, moving from its explicitly pro-poor focus, to re-positioning Johannesburg as the Urban Edge of Fashion in Africa. Whether the training and business support will be sufficient to continue enabling the poorer and less skilled South African women to compete, remains to be seen. 7.2 KwaZulu-Natal Traditional Medicine Support Programme 7 A significant component of the informal economy in South Africa is the traditional medicine (or muthi) sector. Eighty per cent of black South Africans use traditional medicine, often in parallel with modern medicine. It is estimated that 61 million rand (+- US$8.7 million) of medicinal plant material is traded in KwaZulu-Natal (KZN) annually, with Durban/eThekwini the primary trading and dispensing node. Over 30,000 people work in this sector, mostly as rural gatherers who are largely women. Collecting and dispensing of traditional medicine occurs almost entirely in the informal economy. The muthi demand and turnover figures cited above convinced the Durban/eThekwini City Council to take this industry seriously. Consequently the Council, in consultation with existing traders, traditional health practitioners, cultivators, farmers, various research institutions and private sector companies, have initiated and facilitated a number of support strategies across the traditional medicine value chain. At the retail or dispensing level a dedicated built market has been developed with shelter, storage, water and toilet facilities and which accommodates 550 stallholders. The market facilities, which more recently include practitioner consultation booths and a basic processing plant using grinders purchased by the Council, have significantly improved the working environment for traders. There are also initiatives aimed at addressing environmental sustainability issues. These include (a) training gatherers in sustainable harvesting techniques, which has led to the establishment of a sustainable bark harvesters association (the first organisation of its kind in South Africa); and (b) a cultivation drive, including a dedicated medicinal plant nursery that produces seedlings to supply farmers and trains traditional healers in growing methods. It was soon found that the nursery alone was failing to meet the demand for medicinal plants. Consequently, five additional labour intensive pilot nurseries have been established across the municipality since 2004 and training facilities have been expanded. Given the longer growing time needed for many medicinal plants and the need to generate sustainable livelihoods, the pilot farms also produce seedlings for subsistence food crops and landscaping plants to be procured through the municipality s substantial landscaping budget. It is hoped that demand for medicinal plant seedlings will grow over time as a result of other support activities taking place along the traditional medicine value chain. To improve communication between cultivators, harvesters and the market traders and to reduce the problem of wasteful oversupply of unsustainable harvested goods, a market information centre is currently being established and a Market Information Systems Manager has recently been appointed. The Manager will communicate the needs of the market through a call network of cultivators. It is intended that the 7 Case study updated by Anna Marriott and prepared for Chen et al 2005: 100) 17

18 information centre will also serve as a tourism resource to inform visitors about traditional medicine. At the same time the City Council has invested substantial funds in the research and development of traditional medicine in partnership with the Traditional Healers Organisation, the Medical Research Council, the Nelson Mandela School of Medicine at the University of KwaZulu-Natal, and the Regional Biotech Innovation Centre with the intention to develop home grown and patented mainstream preventative and curative medicine. A feasibility study has been commissioned and is underway to explore the potential of a public-private black economic empowerment partnership to invest in a major processing facility to develop traditional medicine, protect indigenous knowledge and to process, package and market the resulting pharmaceutical products for both the national and international market. What are the key features of these two South African city initiatives? Both were based on collaboration between stakeholders with different interests and different expertise. Both were based on thorough research about the sector and the market. In both, importantly, physical space was put aside and purpose-built for the specific needs of the sector. In both, a conscious attempt was made to re-position the products and the profile of the sector. Emphasis was placed on skills upgrading. In the Johannesburg case, serious energy was put into monitoring the impact of the intervention. In both, physical space was demarcated, for both production and for marketing. 8. Access to Financial Services and Insurance Access to financial services and insurance for poorer people has been undeveloped in South Africa, despite the fact that compared to other African countries it has a wellestablished and resource-rich private financial and insurance industry. In most rural areas financial services simply do not exist while in urban areas the poor are excluded by eligibility criteria: to open a bank account potential clients may be required to have a track record of a formal job, there are high minimum deposits, and high charges on transactions. To address the financing needs of poorer South Africans, the new government established Khula Enterprise Finance Limited in Khula is a wholesale finance institution, and entrepreneurs thus access assistance thorough Khula-supported intermediaries. Once Khula was established many new, very small retail finance intermediaries were established countrywide. These institutions have had very little success in achieving sustainable growth and a significant proportion have closed. Given that very few South Africans have had access to retail credit with the mainstream retail financial services industry, there has been a burgeoning of the small scale private micro-lending industry, where exorbitant interest rates are typically charged. In the 1999 the Department of Trade and Industry established the Micro Finance Regulatory Council to regulate the activities of the micro-lending sector and to protect consumers. 18