Displaying items by tag: Informal Economy

Patrick Sathorar acts as a marketing consultant for a group of 25-30 HIV-positive women in Nyanga, Cape Town. They produce textile and beaded products and Patrick facilitates their participation in the formal market by sourcing and negotiating contracts for them. Patrick’s role comprises the following: first, he meets with a client (typically a conference organiser) to discuss the items required (such as beaded lanyards or conference bags) and to negotiate the quantity. Then Patrick sources the raw materials. Often he needs to source fabric from various and geographically dispersed suppliers. Thereafter, Patrick commissions a designer to make up a sample, which is costed and presented to the client. If the client is satisfied, the parties negotiate terms of the contract, including the price per item.

If the client rejects aspects of the design, it is back to the drawing board for Patrick and his producers, who must produce new samples. Often, conference organisers require several samples to send to clients overseas. The negotiation process can last up to three months. Once the parties have contracted, the producers learn to reproduce the sample. Patrick is responsible for quality control; the women for the packaging; and Patrick for delivery of the products to the client. In between, Patrick sources contracts from small retailers.

Patrick generates contracts that produce a turnover of approximately R40 000 per month and each woman earns between R1 000 and R2 000, depending on how much work is available, and how many units she has made. Although this amount does not represent a decent wage, it does make a critical contribution to the women’s livelihoods. It also fulfils another important social goal – that is, to facilitate their economic agency. Without Patrick’s intermediary role, these women, who are functionally illiterate, have a poor command of English, have no formal sector experience and limited numeracy, and would be unable to manage the complex communications and networking necessary to sell products to the formal economy. They would be unable to do this because they do not have the skill set necessary to manage the negotiation process, and because they do not have the necessary resources - such as transport, design expertise, or the ability to manage bulk orders.

Improving small, marginalised producers access to modern markets has increasingly been accepted as an important element in South African policy debates on improving the employment, income and livelihood opportunities for such producers. The importance of market access arises because in the absence of such access, these producers are restricted to servicing proximate, local community markets which are traditionally thin and do not support: increased output volumes, product diversification and value addition, increased employment, increased income generation or increased returns. To date programming in this field has been characterised by two traits. First the majority of programmes have been project based, unsustainable, un-scalable, un-replicable and have impacted a limited number of direct beneficiaries. This project based approach has resulted in market based employment creating programming achieving substantially less penetration, coverage and success than social delivery programming. Second, the majority of programming has largely bought into the orthodox economic view that the “fault” for market exclusion lies largely with producers – their personal characteristics, production methods and location – resulting in a supply side dominated intervention approach. By this logic if small producers improve the quality and consistency of their production then they will almost certainly be included in modern markets. This chapter argues that even if supply constraints are fully relieved, the modus operandi of lead firms (which dominate the South African economy), create a sufficiently hostile and infertile environment, that even if market access can be achieved, the threat of adverse inclusion remains high – making the idea of improving livelihood and employment opportunities by linking small marginalised producers to modern markets an extremely difficult task. Despite these challenges, the chapter offers three system based policy options to address the issues of small producer exclusion, as well as, briefly touching on the idea that alternatives to linkage strategies need to be considered.

The research is based on value chain analysis as it is viewed as the most powerful and relevant tool in understanding the drivers behind the erection and administration of the barriers to entry which prevent small, marginalised producers from accessing modern markets. Understanding market power and governance and the exercise of this power allows economists to understand who the gatekeepers of value chains are, why and how they erect barriers to entry, how they influence the distribution of incomes and rents along a chain and how supply criteria are endogenised into chains via product and process upgrading and critical success factors. As such understanding lead firm behaviour in modern markets not only frames the opportunities and risks facing linkage programme initiatives, but it assists in designing interventions which are realistic and deal with the realities of how lead firms behave and organise their productive networks.

Although traditional value chain analysis is empirically driven and highly specific in terms of product or sector, this chapter discusses generic value chain characteristics and attributes, as a survey of hundreds of case studies across countries, sectors and products revealed that the same constraints arise consistently in the interaction between small producers and lead firm value chains (Lowitt, 2009)

Session 4A: Is Informal Normal in Low Income Countires? If So, What Does this Mean for Development Policy?

Session 4A: Is Informal Normal in Low Income Countires? If So, What Does this Mean for Development Policy?

Session 7A: Survey Data Quality Assessments

Session 4A: Is Informal Normal in Low Income Countires? If So, What Does this Mean for Development Policy?

Street trading is the most common type of informal self-employment activity in South Africa. Traders sell a range of products such as fruits and vegetables, cooked food, new and used clothing, cosmetics, footwear, dvds, “public” telephone services and mobile phone accessories. Most traders operate from stalls or tables in market areas or on sidewalks. Some of these traders are licensed and rent their business space from the municipality.

The aim of this project is to understand whether the macroeconomic environment and other barriers to entry into the informal street trading sector offer insight into the relatively small size of the South African informal economy. The paper explores macroeconomic linkages and other barriers that traders encounter when entering street trading and while sustaining their businesses. The motivation for this research question is the paradox of South Africa's very high rate of open unemployment, estimated to be at least 40 percent using a broad measure (Cichello et al. 2006), but low level of participation in the informal economy. Because street trading is thought to be among the sectors in the informal economy with the lowest barriers to entry, identifying the barriers that traders do confront may offer some clues to the reasons so many of the unemployed do not enter trading.

The paper is divided into seven sections. The first provides an overview of the South African informal economy and unemployment. The second section contains an assessment of statistics on street trading in South Africa and the role of trading in the South African economy. Section three describes the fieldwork that was conducted to gather information about the barriers that traders confront. Section four explores linkages between the formal and informal economies and suggests that rather than operating as distinct “sectors,” there are concrete ways that they are tied together and mutually reliant. Section five offers a comprehensive analysis of trader-identified barriers to starting and maintaining their business. The sixth section connects macroeconomic policies to traders' experiences. The report concludes with a brief summary of the report and policy implications.

This paper deals with informality and its transition to modernity. The transit to formalization will enable those working in the informal economy to improve their chances of being included, become less vulnerable, and ensure a better performance of their activities. But this also requires recognition of the fact that formality has been tailored according to the needs of those already there, rather than to incorporate the excluded. The mechanisms of formalization should be improved upon and adapted, as well as the capacity of the informal to effectively use these for empowerment purposes.

The paper reviews the evolution of the concept of informality and analyzes the size, characteristics and evolution of the informal economy in Latin America. The author also considers a strategy for inclusion and opportunities for both enterprises and workers in the informal economy. The paper concludes with a brief comment on the cultural change required to ensure the success of a strategy of inclusion and of opportunities.

Most of the communal arable lands in the former homeland areas are currently either underutilized or not utilized at all. Among some of the reasons given is the absence of 'land markets' owing to the communal nature of the rights bestowed on the owners/users of the land. This paper aims to propose the creation of semi-formal 'land markets' in communal areas through the development of land registers, which will enable smallholder farmers to transfer land user rights among each other.

A semi-structured questionnaire was administered on land parcel owners in three villages in the Thaba Nchu. The main purpose of the questionnaire was to establish among others the sizes of land parcels held for arable production, whether it is currently being used and if the owners would be willing to temporarily transfer their rights to other villagers. The study found that there is a general interest in arable production, 95% of the respondents would not transfer their rights as they are still interested in arable production. Among these, fifty-five (70%) respondents would enter into one of the following user rights transfer arrangements; sale, lease, share-cropping and free loan. The commonly preferred arrangements are share-cropping and free loan (46% and 15%, respectively), but sharecropping is the most preferred land transfer arrangement. Selling and leasing are the least preferred (both with less than 10%). The reason for their unpopularity may be understood in the context of the land tenure system wherein land holders only hold user rights and not private ownership of the land. Furthermore, the results underscore the importance of land as an asset that households would not want to lose. This is further expressed in terms of the length of periods for which households are prepared to transfer their rights; more than 70% of the respondents would transfer their user rights for a maximum period of four years. Within this, the majority will let their fields for a period of two to four years (41%) and the remaining 33% for only one to two years. The study recommends the creation of functional semi-formal land markets in communal areas as there is an interest in participating in such markets.

Siyakhula, or the Western Cape Bus Operators’ Transport Cooperative Ltd, operates within the bus sector of the transport industry. A brief description of the sector follows in order to contextualise the operations of the cooperative.

The transport, storage and communications sector increased its share in real output growth in the Western Cape from 8% in 1995 to 11% in 2002. However, the sector’s growth was due primarily to high growth in the communications sub-sector rather than within the transport sub-sector. The total income of the transport sector was estimated at R14-billion in 2002.

A review of the public transport system in the Western Cape showed that scheduled bus services in the province, particularly in the Metro, declined dramatically over the past decade in terms of the extent (or coverage) of routes, frequency and quality of services. This was largely due to the impact of poor service levels coupled with increased competition from minibus taxis providing commuters with a convenient alternative.

There are about 22,000 buses in the transport industry in South Africa of which approximately 17,000 are involved in formal public transport activities (i.e. for reward/subsidy). The other 5,000 buses are found in commerce and industry and government institutions where they are mostly used for in-house purposes (i.e. not for reward/subsidy). Within the industry, it is possible to distinguish between the big operators, such as Putco and Golden Arrow, and the small operators who own between one and 30 buses.

The public transport buses provide direct employment to about 30,600 people throughout the country with about 153,000 people indirectly dependent on the industry (or directly related to employment in companies). The industry also supports a large number of suppliers, such as bus and chassis manufacturers, fuel and tyre companies, that are in some way dependent on the industry for employment. The public transport operators undertake approximately 816 million passenger trips per annum.

The public transport industry is represented by the Southern African Bus Operators’ Association (SABOA). SABOA was formed as a national body in 1980 by the five leading bus companies in order to protect their interests as subsidised transport operators by the Department of Transport. SABOA has gone through a significant transformation and now represents about 76% of the public transport fleet.

Members are offered the following services by SABOA: commuter, contract, learner, organised party, charter and tourism, cross border (international), and scheduled coaches. Given the broad membership of SABOA, its profile could be regarded as representative of the industry as a whole, as evident in Table 1.

This executive summary is not presented in the usual manner of summarising the findings of each chapter of the report. The complexity and detail covered in the report, and the nuances in the debates, makes such an option impossible. Rather, a brief overview of the key issues and approaches is presented as a separate think piece.

This study was commissioned by the Presidency as a follow up to the Review of Second Economy Programmes conducted by the Second Economy Strategy Project. In the Review, it was noted that while social delivery programmes targeting poor people had largely been successful and implemented at scale over the past 15 years, the same could not be said for economic programmes aimed at creating market based employment opportunities. Generally, these latter programmes were found by the Review to be highly project focused, not scalable and, as a result, only reached a small number of direct beneficiaries. The Review cited six contributing factors to the modest success of these economic programmes. One of the cited problems was market access for small and marginal enterprises. It was that broad issue which framed this study.

More specifically, the terms of reference required that the study contemplate mechanisms to support a change in the trajectory of small marginalised producers which will lift them out of poverty. This trajectory change is based upon exploring what it would take to shift these producers away from selling to local, thin markets in favour of selling their outputs to external, developed markets – on fair terms. The terms of reference proposed the use of value chain analysis as the theoretical construct upon which the study is based, and very importantly, that it focus on what kinds of systemic-level changes would facilitate such linkages or allow them to take place at scale.

The study is designed to deliver two outputs. The first output is a linkage framework which will guide policymakers, researchers and practitioners in identifying the systemic issues which consistently, across sectors and nations, constrain marginalised producers from entering deeper and more established formal value chains. The identification of these issues, using value chain analysis, provides a list of issues which any policy intervention will need to address. The second output of the study is to stimulate policy debate in this area by suggesting new and novel approaches to possible linkage strategies. Two strategies are presented, although, an infinite number of strategies could emerge from the framework. The terms of reference are clear that the strategies presented in the second output do not need to be developed to the point where they are ready for programmatic roll out, but should rather catalyse debate. In addition, the terms of reference remove the need for the strategies and framework to deal with all areas of second economy production and poverty, because this study sits alongside other work streams all dealing with different aspects of the challenge.

Value chain analysis has been the cornerstone of the study. The appeal of value chain theory to our linkage study is fourfold.

Firstly, value chain analysis emphasises the issues of governance and power in markets which provides us with important information on the advantages and disadvantages of entering a specific value chain and different realities which will be experienced at different links within a given chain. Importantly, governance and power also direct our attention towards understanding how and why barriers to entry are created by value chain controllers and how these inhibit, but also potentially create, opportunities for small and marginalised 5 producers. Understanding how and why barriers are created and who ‘controls’ these barriers is crucial if one wishes to breach or harness such barriers.

The second appealing feature of value chain analysis is that it directly addressed how and why economic and other rents are distributed across a chain. By understanding which activities are ‘well’ rewarded along a chain, and which activities attract poor returns, we are able to develop a feel for which types of activities in the value chain that are likely to attract a return sufficient to positively impact on incomes and returns and which activities are like to result in immiserising growth. This is a crucial point because linking marginalised and small producers to developed value chains is not a guarantee that the livelihoods of such participants will improve. It is possible to increase such linkages without improving income generation or returns to small producers. As such, chain activity and product selection within a given power and governance environment must be carefully considered to ensure that the created linkages do in fact result in improved circumstances for small producers.

The third appealing feature of value chain analysis is that product and/or process upgrading is an intrinsic part of the theory. Firms go to the trouble and expense of implementing governance structures in order to assure themselves of access to the right goods, of the right quality, at the right time. As such, lead firms often see investing in their suppliers as a sound business decision and may either offer embedded services or facilitate the access of suppliers to appropriate upgrading services. The fact that upgrading to meet standards and critical success factors is intimately tied to governance and the exercise of chain power means that at least some of the supply side issues which will need to be dealt with in relation to small, marginalised producers can be dealt with endogenously i.e.: a successful linkage programme will by its nature incorporate some upgrading within the linkage itself, thereby decreasing the need to provide extensive, external supply side support over and above that provided by the core economy linkage partner.

The final appeal of value chain analysis is the fact that it is a demand side approach. For too long, policies, programmes and strategies in South Africa (and the rest of the world) have been supply driven, often resulting in production and productivity improvements in small and marginalised economic activities which do not translate into improved livelihoods; either due to a lack of final demand or low prices/returns earned. By adopting a demand side approach, we improve fundamentally the probability that if a linkage is successfully created, the activities or products of such producers will have an effective market in which to sell their outputs and services at a price that will improve their income and return earning potential.

These four appealing features of value chain analysis have motivated us to use value chain analysis as an appropriate construct on which to base our framework and strategic thinking. Essentially, these features offer us a consistent and rigorous methodology with which to isolate and express the crucial questions that will need to be answered in any attempt to link, at a systemic level, mainstream and marginalised economy players in South Africa.

Using value chain analysis for this study has not, however, been a simple task. Value chain theory is based on investigations of a specific product or sector, in a specific location, with specific actors, at a specific time. It is an empirically driven analysis. In our study, where we are searching for systemic obstacle identification and systemic solutions to obstacles, this sector specific approach creates difficulties in terms of the level of analysis.

To counter this, a framework has been developed, and strategic options compiled, based on cross-cutting issues. The study looked at hundreds of case studies and specific sector value chain analyses undertaken in scores of countries. Surprisingly, the same issues arose time and again. This leant credence to the study’s assertion that, irrespective of sector, some characteristics of lead firms in the mainstream economy, and some characteristics of small producers in the second economy, lead consistently to the same obstacles to successful linkages. As such, we identify these cross-cutting issues as systemic in nature and believe that they reveal the key constraints which must be addressed in order to implement a successful linkage strategy.

Uganda is one of the few African countries which has experienced quite substantial growth in the period since 1990. Growth of GDP has been estimated at 6.9% per annum for the period 1990-2002, compared to only 2.6% for all African countries and Ugandas own far weaker performance of 2.9% in the 1980s (World Bank 2004: 183) This paper focuses on identifying the factors that influence credit demand and also those that result in the poor being credit rationed by lenders. An understanding of both these sets of determinants could assist policy formulation to enhance the welfare of the poor through improvedcredit access. In this respect we were fortunate in having a dataset that contains questions not only on actual credit given, but also on loans applied for.This allows us to investigate both credit demand and credit supply, and to model these using observed household and individual characteristics.

This paper examines the impact of formality of employment on the utilisation of financial services, using data from the October 2000 Income and Expenditure Survey and the September 2000 Labour Force Survey. The presence of an employed member in the household is seen to be important for the utilisation of both bank accounts and funeral insurance, even after controlling for income. Furthermore there are strong links between the nature of this employment and utilisation of financial services. Employees are more likely to utilise financial services than the self-employed. Among employees, the probability of utilising financial services increases with the degree of formality of employment. These effects are stronger for formal banking services than for funeral insurance which includes informal burial societies.

This paper examines the gender dimensions of the growth in informal and flexible work in South Africa and the government's policy response to this. The paper outlines the growth in informal and flexible work practices, and as illustrative examples, analyses how trade and industrial policies and labour market policies are impacting on the growth informal and flexible work. It is argued that the South African government's trade and industrial policies are shifting the economy onto a path of capital intensification. Allied to this, firms are undergoing a process of extensive restructuring. These developments are further promoting the growth of flexibilization and informalization, and thereby disadvantaging women. The paper demonstrates that whilst government offers a vast package of support measures to large business, its policy is largely irrelevant to the survivalist segment of small business, where most women in the informal economy are to be found. The picture for labour policy is more diverse. Aspects of the labour legislation are promoting the growth of a dual labour market, whilst there seems to be some tightening up of practices aimed at by-passing aspects of the protection provided to workers.