Re­leas­ing the bot­tle­neck to eco­nomic growth

Finweek English Edition - - Economic Trends & Analysis -

SOUTH AFRICA FACES two ma­jor chal­lenges to eco­nomic growth, namely labour con­straints and high lev­els of in­for­mal­ity. This is ac­cord­ing to Har­vard’s Pro­fes­sor Michael Porter, speak­ing at the Uni­ver­sity of Pre­to­ria’s Gor­don In­sti­tute of Busi­ness Sci­ence re­cently. Small, Medium and Mi­cro En­ter­prises (SMMEs) play a sig­nif­i­cant role in the coun­try’s eco­nomic per­for­mance, pro­duc­tiv­ity and as a source of liveli­hood and em­ploy­ment for many South Africans, with many SMMEs be­long­ing to the in­for­mal sec­tor.

The in­for­mal sec­tor or sec­ond econ­omy can be de­scribed as the en­ter­prises that are not legally reg­u­lated by the in­sti­tu­tions of so­ci­ety in a le­gal and so­cial en­vi­ron­ment in which sim­i­lar ac­tiv­i­ties are reg­u­lated, i.e. it is nei­ther taxed nor mon­i­tored by the gov­ern­ment and is not in­cluded in the gov­ern­ment’s GNP. By con­trast, the for­mal or first econ­omy is a set of eco­nomic ac­tiv­i­ties that are recog­nised by the state.

Re­search un­der­taken by Dr Frank Aswani, a re­cent GIBS MBA grad­u­ate, shows that the in­for­mal sec­tor in Africa is grow­ing while the for­mal sec­tor is stag­nat­ing. While in­for­mal em­ploy­ment helps to al­le­vi­ate poverty, the jobs are of­ten low qual­ity and do not fit within the In­ter­na­tional Labour Or­gan­i­sa­tion’s def­i­ni­tion of “de­cent work”. In­for­mal en­ter­prises also op­er­ate out­side of the gov­ern­men­tal sys­tem of reg­u­la­tions, re­strict­ing their abil­ity to in­cor­po­rate them in poli­cies and strate­gies in pur­suit of na­tional so­cio-eco­nomic goals. The fail­ure of in­for­mal op­er­a­tors to com­ply with reg­u­la­tions that pro­tect em­ploy­ment, the en­vi­ron­ment and con­sumers, low­ers the ceil­ing on the qual­ity of their de­vel­op­ment and their po­ten­tial for growth and wealth ac­cu­mu­la­tion.

While the first econ­omy in South Africa is mod­ern and in­te­grated with the global econ­omy, the sec­ond econ­omy is not. The first econ­omy is un­able to re­duce poverty quickly on the mas­sive scale needed, how­ever, so ro­bust in­ter­ven­tion in the sec­ond econ­omy is nec­es­sary for the gap be­tween the two to nar­row.

The ex­pe­ri­ence of coun­tries such as Spain which have suc­cess­fully re­duced their in­for­mal economies sug­gest a need for a three­p­ronged ap­proach; re­duc­ing the bur­den of for­mal­ity by re­form­ing the tax sys­tem and labour laws, im­prov­ing the en­force­ment of laws and reg­u­la­tions and cre­at­ing a cul­ture of for­mal­ity by rais­ing pop­u­lar aware­ness about the sec­ond econ­omy’s harm­ful ef­fect on eco­nomic de­vel­op­ment. Some of th­ese mea­sure should be sec­tor spe­cific, while oth­ers should broadly ad­dress struc­tural prob­lems across sec­tors. The ben­e­fits of for­mal­is­ing a busi­ness in­clude be­ing able to con­clude legally en­force­able agree­ments with sup­pli­ers and cus­tomers, gain­ing ac­cess to trade fairs, ex­port op­er­a­tions and gov­ern­ment pro­grammes, and be­ing able to ex­pand your busi­ness without fear of gov­ern­ment in­ter­ven­tion. Ben­e­fits for gov­ern­ments in­clude an ex­panded tax base and in­creased eco­nomic ac­tiv­ity, while ben­e­fits for con­sumers and so­ci­ety in­clude im­proved in­come dis­tri­bu­tion, en­hanced health and safety stan­dards, eco­nomic growth and an im­prove­ment in the so­cial se­cu­rity sys­tem.

Ro­bust in­ter­ven­tion in the sec­ond econ­omy is nec­es­sary for the gap be­tween the

two to nar­row.

The main con­straint on en­ter­ing the for­mal sec­tor is the cost vs ben­e­fit for the in­di­vid­ual en­tre­pre­neur. In de­vel­op­ing coun­tries, reg­is­tered com­pa­nies pay up to 80% of taxes, com­pared to ap­prox­i­mately 50% in de­vel­oped coun­tries. Other costs in­clude regis­tra­tion, reg­u­la­tions and com­pli­ance costs, busi­ness mod­i­fi­ca­tions, hu­man re­sources, in­sur­ance and in­dem­ni­ties.

Bar­ri­ers and fa­cil­i­ta­tors to for­mal­i­sa­tion can be classified into fi­nan­cial and non­fi­nan­cial in na­ture. Non-fi­nan­cial bar­ri­ers to for­mal­i­sa­tion in­clude pro­tracted regis­tra­tion pro­ce­dures, skills short­ages, util­i­sa­tion of ob­so­lete tech­nol­ogy, poor lo­ca­tion of busi­nesses, lim­ited ac­cess to mar­kets and busi­ness sup­port ser­vices, and lack of in­cen­tives by the gov­ern­ment. In­for­mal busi­nesses also rarely get the op­por­tu­nity to ten­der for gov­ern­ment busi­ness.

Fi­nan­cial fa­cil­i­ta­tors to drive for­mal­i­sa­tion are that the cost of cap­i­tal is gen­er­ally far higher for the in­for­mal sec­tor than the for­mal, and that the in­for­mal sec­tor of­ten have to pay as much as 15% of their gross in­come in bribes to cor­rupt of­fi­cials.

Non-fi­nan­cial fa­cil­i­ta­tors to drive for­mal­i­sa­tion in­clud­ing im­proved ac­cess to skilled labour, cap­i­tal and le­gal ad­vice, as well as reg­u­lar in­spec­tions by the gov­ern­ment which would in­cen­tivise en­ter­prises to com­ply with reg­u­la­tions and there­fore level the com­pet­i­tive land­scape. The pro­vi­sion of se­cure busi­ness lo­ca­tions served by pub­lic trans­port would en­hance mar­kets, as would gov­ern­ment ef­forts to pro­vide a re­li­able mar­ket, tech­nol­ogy trans­fer, train­ing and su­per­vi­sion.

The in­for­mal sec­tor is seen as the only source of in­come for many South Africans. For­mal­is­ing this sec­tor would release the bot­tle­neck to eco­nomic growth that is sorely needed to re­duce the mas­sive lev­els of un­em­ploy­ment that ex­ist.

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