The informal economy must not be eradicated as it is central to economic development and growth, according to University of Sheffield Professor Collin Williams.
Instead what was needed was an entire government approach focusing on how to formalise the informal economy, which included many SMMEs.
Williams was speaking at webinar hosted by the Open Society Foundation South Africa’s Centre for Economic Development on October 8.
It focused on which policies have worked best to strengthen informal businesses. Participants included professors, members of business chambers and businessmen, such as Frederick Fourie, who is a professor and senior research fellow of the University of Free State, and the president of the Kruger Lowveld Chamber of Business and Tourism, Oupa Pilane.Williams, who works with the European Union to help governments develop good practices, said that by using a strategic integrated approach South Africa could formalise the informal economy.
“The strategic integrated approach is the approach which facilitates the transition to formality using a whole-government approach to structural transformation, and it joins up the fields of labour, tax, social security law,” he said.
“This approach also fully involves social partners, trade unions, chambers, employer federations and, in addition, uses the full range of policy measures which are available.”
Williams said this approach contained three main components, with the first being formalisation.
“Two-thirds of all businesses globally actually start up or operate partially or fully in the informal economy, and half of all enterprises globally operate on an informal basis,” he said.“There is recommendation from the International Labour Organisation which clearly states that the objective is not to reduce or eradicate the informal economy, but to formalise it.”
The second was using the “whole government approach.”
“Traditionally, tax authorities, labour inspectors and social security authorities work separately in a fragmented way,” he said.
This method has four sub-components including one strategy, coordinating operations, sharing data and improving the involvement of social partners like labour, employer federations and NGOs.
Thirdly, the government needed to stop making it difficult for SMMEs to enter the formal economy.
“Traditionally, state authorities seek to punish bad behaviour and punish participation in the informal economy,” he said.
“They use a negative reinforcement approach. All types of penalties are used to deter participation, and business which can be excluded from procurement contracts.”
Instead the state should be focused on amnesties for SMMEs, provide advice to start-ups and give them access to free marketing.