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Covid-19: Informal economy vulnerable during lockdown

What Covid-19 has shown is just how interconnected economies and markets are, and that the formal and informal sectors are no different.

Government’s stimulus packages and measures to limit business failures and job losses focus primarily on the formal sector, ignoring the informal economy of businesses most susceptible to shock, operating in the most vulnerable communities.

Brett Hamilton, visiting lecturer in corporate finance at the University of Stellenbosch Business School (USB) said the value of this sector is highly underestimated.

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StatsSA has reported that the informal sector accounted for 5.2 per cent of South Africa’s GDP in 2015 and employed 2 641 000 individuals (17 per cent of all employed) in 2016.

“Viewing the informal and formal sectors as two separate market participants is erroneous and has led to an ineffective policy to support and develop the informal economy.

“What Covid-19 has shown is just how interconnected economies and markets are, and that the formal and informal sectors are no different,” Hamilton said.

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“South Africa’s response to the pandemic has starkly highlighted the inequitable treatment and negative perceptions of the informal sector which actually plays a key role in the overall economy.”

Hamilton said that because little is known of the “shadow” economy, the sector is easily overlooked or ill-considered during policy formulation, disregarded in business strategy and too easily associated with nefarious activities.

“The view that all informal goods are counterfeit, that all traders are illegal immigrants and do not comply with regulations is anecdotal and, in most cases, false,” Hamilton said.

There are about 120 000 spaza shops contributing between R100 and R200-billion per year to the economy, and the informal settlement fast-food market alone is worth an estimated R80-b per year.

Hamilton said despite the size of the informal economy, businesses in this sector are extremely vulnerable to external shocks.

While formal companies may have built up reserves, can access debt financing or can afford insurance against loss of income, informal businesses often live hand-to-mouth and thus need to operate daily to survive.

“The impact on unemployment and business continuity on this sector as a result of the public health crisis will be immediate and severe,” he warned.

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