Informal economy overplayed, says UCT's Prof Haroon Bhorat

The impact of the informal economy in South Africa is much smaller than it’s made out to be, says Haroon Bhorat, professor of economics at the University of Cape Town.

The real contribution of the informal sector to GDP is around 6%, he said. While South Africa’s unemployment rates are among the highest globally, the share of workers in the informal economy remains relatively low.

“Most economies have an average of between 20% and 30% as a contribution to GDP from the informal economy; ours is 6%.”

He cited fellow Brics nations India and Brazil, where the informal economy contributes 45% and 20%, respectively. 

Former Capitec CEO Gerrie Fourie ignited a storm when he suggested that the contribution of the informal economy was being undercounted in official statistics, and that the real unemployment rate was closer to 10% instead of the 32.9% reported by Stats SA. 

Relative to where [Capitec CEO Gerrie Fourie] comes from, which is Stellenbosch, it may seem like a lot, but relative to other developing countries, it’s not — there’s an aggregation bias built into his argument. In some townships, the contribution to output may be 30%, but that doesn’t mean it’s 30% nationally

—  Prof Haroon Bhorat

He said Stats SA ignored the country’s large “emerging market”, describing township and rural entrepreneurs as “discouraged” job seekers. He said this segment was looking to replicate its retail success in business banking.

“To grow South Africa, we need to understand what is happening there [in the emerging market]. If we really had a 32% unemployment rate, we would have had unrest. If you go to the townships, most people have back rooms to rent out; everyone is doing something. If we are talking job creation, let’s go out and encourage these entrepreneurs,” Fourie said in June.

Bhorat rubbished this assessment, dismissing the argument that the informal sector’s contribution is higher than what has been reported. “Relative to where he comes from, which is Stellenbosch, it may seem like a lot, but relative to other developing countries, it’s not — there’s an aggregation bias built into his argument. In some townships, the contribution to output may be 30%, but that doesn’t mean it’s 30% nationally.”

He said the size of South Africa’s informal economy cannot be inferred from the micro detail of selected vibrant township economies. “Our unemployment problem is actually a function of low informality." 

David Francis, deputy director at Wits University’s Southern Centre for Inequality Studies, said informal traders in the country faced a lot of hurdles from hostile municipalities confiscating goods, xenophobic violence and spatial barriers that separate sellers from consumers. He said competition from the formal sector, such as shopping malls, also pushes traders out of established markets.

“The reason that the informal sector has high barriers to entry is because the authorities, the states, municipalities, take a very negative view of informality. In South Africa, we think of informality as chaotic, disorganised. We think of ourselves as an upper-middle-income country and think we shouldn’t have people trading on the streets,” he said.

Francis cited Operation Clean Sweep in 2013 as an example of the treatment of informal traders, when more than 6,000 street vendors in the Johannesburg CBD were forcibly evicted as part of a mayoral campaign targeting stalls deemed unlawful or disorderly.

Naudé Malan, senior lecturer in development studies at the University of Johannesburg, said formalisation only becomes worthwhile for informal businesses if they reach R30m in turnover, as costs outweigh benefits at smaller scales. He said for formalisation to work, the government would need to incentivise smaller businesses, allowing them to build value through labour, training, contracts, security and investments, and reward these efforts through the tax system.

Neva Makgetla, senior economist at Trade and Industrial Policy Strategy, said neither established business nor government can support small enterprises at scale, as these producers are decentralised, under-resourced, and often less profitable than larger firms.

“We need new ways to support [informal traders] that effectively outsource to dedicated agencies, through franchising, smallholder schemes, and outsourcing schemes,” she said.

Capitec told Business Times it stood by the views of its former CEO. “Our data shows that around one-third of fully banked clients earn income outside formal employment, often through trade, services, or rentals,” it said.

A spokesperson for the bank said: “These individuals may not appear in official labour statistics but display consistent financial activity, [which] suggests unemployment figures may understate true economic participation.”

Stats SA once again refuted the claim that it undercounts the contribution of the informal sector. It said its Quarterly Labour Force Survey (QLFS) covers all segments of the labour market and was based on standards set by the International Conference of Labour Statisticians to ensure individuals are correctly classified. 

The latest QLFS results show about 3.3-million South Africans are employed in the informal sector, which accounts for 19.8% of total employment.

According to the 2024 FinScope MSME Survey, informal businesses contribute R2.3-trillion, the township economy R2.4-trillion, and the rural economy R256bn.

“A central problem for government has always been to take on the risk of supporting small business on the scale required to make a difference. As a result, we never put in the resources required for a structural shift,” Makgetla said.