Jobs growth from informal producers that supply the formal sector? The case for intermediaries

21st January 2013 By: Econ3x3

Government’s vision for the development of informal businesses(1) is that, with the right supply-side inputs (such as micro-credit, business and skills training), they will flourish, formalise, contribute to economic growth and create jobs (DTI 2005). This article interrogates the perspective of this policy. It argues that most small business are structurally excluded from forging forward linkages (selling their goods and services to formal markets) without the facilitation of intermediaries, although they do participate in the formal economy through backward linkages (as consumers for personal and business consumption). This article draws on the author’s empirical study of intermediaries which was undertaken for the Second Economy Strategy project.(2)

Almost 65% of informal business in South Africa is in the retail and service sectors. Typically, they sell groceries (‘spazas’), alcohol (‘shebeens’), fresh or grilled meat, second-hand furniture, or trade as hair salons, own car/radio/television repair shops or catering/function hire businesses. The demand for their products and services in the formal economy is low and they are thus relegated to operating in their local markets (Development Bank 2005). These local markets are over-traded, highly competitive, and the profit margins are low. Training or credit may grow the beneficiary business, but at the cost of other informal businesses. Rogerson (1997) coined the term ‘involutionary growth’ to describe the churning that accompanies growth in the informal economy. An estimated 12% of informal manufacturing businesses are active in ‘soft’ sectors such as paper-making, tailoring and craft.

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Written by Marlese von Broembsen, Senior lecturer, Department of Public Law and Institute of Development and Labour Law, University of Cape Town

This article was first published on the Econ3x3 website – Accessible policy-relevant research and expert commentaries on unemployment and employment, income distribution and inclusive growth in South Africa.