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Informal Economy: Counting Entrepreneurs In South African Townships

Informal Economy: Counting Entrepreneurs In South African Townships

A team of bike-riding researchers armed with clipboards and GPS mapped eight South African townships in an effort to document the informal economy, counting 9,500 informal businesses, according to a report in VentureBurn.

The informal economy, though large, is poorly documented, said Leif Petersen, founding director of the Sustainable Livelihoods Foundation. The South African nonprofit works to eliminate poverty through research.

Current estimates put the contribution of the informal economy at about 5 percent of South Africa’s gross domestic product, but Petersen said he believes that figure exceeds 10 percent.

More reliable data, insight and a new approach are needed for businesses and the South African government to understand business opportunities in townships, Peterson said.

His foundation counted more informal businesses than the government documented, according to the report. For example, researchers counted 880 businesses in the Belhar township community of the Western Cape, which has 8,000 houses and a population of 45,000. The government recognized 125 businesses there, VentureBurn reported.

Africa, with its young population and urgent need for infrastructure, is the frontier for impact investing, according to Peterson. The need to fully understand potential opportunities in townships is a no-brainer.

An estimated 75 percent of all the micro enterprises found in the township economy include shebeens (informal liquor stores), spaza shops (informal convenience stores), child care, hair salons, traditional healers, street vendors and micro manufacturers, VentureBurn reported.

There’s little support for them. Most are excluded from the formal economy because of unrealistic, costly barriers to entry, Peterson said. These barriers include zoning laws that make it illegal for them to operate in certain areas.

Shebeens, for example, rely on their neighborhood location, making it impossible for them to formalize. They are subject to abuse from corrupt police who collect bribes.

“How do you formalize a business when the very place from which they work is breaking the law?” Peterson said. “We’ve criminalized these business and there are huge implications for that.”

Getting informal entrepreneurs into the banking system is difficult, Petersen said. “As soon as you’re banked, your money can be found, and as soon as your money can be found, you can get taxed.”

The South African government is losing tax revenue opportunities, and informal businesses miss out on financial services that could give them access to loans and insurance, according to VentureBurn. Instead informal entrepreneurs must deal with large amounts of cash which can be easily stolen.

Tax revenues pay for everything governments do, or hope to do. But no politician ever got popular by creating new taxpayers, PublicFinanceInternational reported. Expanding a country’s tax base is treated with some caution.

Alongside the many development challenges facing African countries, few governments want to run the risk of increasing taxes they collect from individuals and businesses.

Countries that have done the most to increase their tax base have some factors in common, says Caleb Fundanga, executive director of the Macroeconomic and Financial Management Institute of Eastern and Southern Africa. These include creating incentives to bring the informal sector into the official tax system.

Most African countries are not well equipped to take some parts of their economies into the tax system, such as the informal sector and the other components of the “unobserved” economy. Fundanga told PublicFinanceInternational.