Insights

An age of informality: the regulatory crisis in the township economy

Andrew Charman

The upcoming national general elections provides an important opportunity to reflect on the current direction of economic policy. The policy arena on which our work focuses is the under-performing and lacklustre township economy. Instead of debating policies which could impact on this component of the national economy, the political discourse has understandably gravitated to the contrasting strategies on how to fix failing and indeed broken institutions. Keeping SOEs including Eskom functional (and commercially sustainable) is as important to township micro-enterprises as to corporates and so the political contestation over strategies of crisis management which overshadows this election is justifiable. In light of the heightened awareness of institutional crisis, the election build- up presents an opportune moment to broaden the discussion to the institutional crisis of regulation that affects township micro-enterprises in both positive and negative ways.

Before I outline the nature of this crisis, it is worth reflecting on the bigger problem. South Africa has a very high level of unemployment with around one third of the workforce out of work at the national level, with substantially higher levels in particular areas and for socioeconomic groups. The urban townships are sites with alarmingly high levels of joblessness. In the township of KwaMashu, one of the sites in which we have undertaken research, 47% of the workforce is unemployed in terms the broader definition. In spite of this wide scale state of joblessness, we found only 9.3 township micro-enterprises for every 100 households, in other words less than 1 in 10; or stated differently, 21 self-employed out of every 1000 persons. This characterisation of economic exclusion confirms the academic proposition that South Africa is an international outlier in the sense that the unemployed are reluctant to embrace self-employment over job searching (or are simply staying at home), whereas in other developing countries the unemployed soon enter the informal economy. The challenge is not one of entrepreneurship, as is sometimes thought, as most people who operate informal micro-enterprises across the globe are not entrepreneurs in a normative sense, but persons who undertake low risk investments with the aim to derive a small income for survival or to supplement other household income streams.

Too ‘big’ to be informal?

If the unemployed of the townships are reluctant to embrace self-employment, how does this situation relate to institutional regulation, you may wonder? In two ways. First, inappropriate regulation or excessive red tape makes it hard for township micro-enterprises to formalise their business. The most difficult barriers to overcome are often land-related obstacles, such as the requirement on educares or taverns to operate their business from commercially zoned sites and ensure that all structures are compliant with municipal regulations. These obstacles do not stop such businesses from operating, but it does exclude the business from reaping the benefits of formalisation that accompany licencing, which include access to state subsidies, supply agreements and reduced risks from police harassment. Inappropriate regulation can also have indirect impacts on business opportunity creation. One example is the spatial planning of township shopping malls which universally excludes trading space for micro-enterprises, either within the mall or on the street outside. Second, the failure of state institutions to enforce existing regulations and prescribe limits on certain business activities (to ensure broad-based participation), has created a laissez-faire environment in which most businesses are largely unconstrained by institutional oversight. Whilst the SAPS are one state institution that continues to operate in the township economy, its regulatory actions appear to be driven by motives of corruption rather than compliance. The absence of regulation within the townships favours the bold, the resourced, the networked and the powerful. Vulnerable sub-sectors within the ranks of the unemployed, including the youth, (some) women, and (some) migrants, are the least well equipped to complete against the groups that thrive. The people who have most successfully operated businesses in this laissez-faire context in over the past decade are spaza entrepreneurs, taxi thugs and ‘big men’.

There is evidence to support this claim. The spaza sector, which was pioneered by women (often elderly pensioners), is now dominated by entrepreneurs. Our recent research in Nelson Mandela Bay Metro found that 85% of spaza shops are operated by new arrival businessmen. A similar trend is observable across South Africa. I do not dispute that these individuals are genuinely entrepreneurial or that the spaza sector needed a major shakeup. I merely seek to point out that the transformation was enabled by the fact that these shop-keepers have not needed to comply with municipal regulations or labour legislation, to mention two regulatory requirements which would hurdle any formal business. Through their networks, the new township entrepreneurs have brought contraband products into township markets. The availability of contraband cigarettes is now ubiquitous. The tobacco control lobby have argued that this situation is merely a result of the institutional collapse at SARS (and hence fixable), though this argument fails to grasp the consequences of the establishment of sophisticated market supply networks, some which extend beyond SA borders. Even a functional SARS can do little to stem the distribution into township markets of contraband and illicit products whose list includes pharmaceuticals, food and household branded groceries. In the grocery retailing segment alone there are in excess of 150,000 stores nationally, which makes it logistically impossible to inspect this market regularly.

It is unfair to focus attention to the grocery segment alone. It is now common practice for business licence holders in regulated sectors, notably the retailing of liquor and mini-bus taxis, to sell outright or lease out their operational licences. The ease with which such licenses are able to change hands, informally, makes a mockery of regulatory objectives. Every township resident can testify that the TVs sold in high street stores which are run by the opportunist entrepreneurs who exploit informality can be bought without a TV licence. One can also readily obtain pre-RICAed SIM cards. Within the market of traditional healthcare services, a host of charlatans have established businesses selling a combination of informal brands and outright fake remedies, whilst making ludicrous product offers to enhance ‘luck’. There is a faint line between these snake-oil products and the ‘evangelical’ endeavours of so-called ‘churches’ who unashamedly advance their ‘theologies’ of prosperity, with only the ‘church’ leadership benefiting from the resulting accumulation of wealth. And into this mix we should add the businesses purporting to address peoples’ concerns around sexual health, including the termination of unwanted pregnancies. The entrepreneurs behind these businesses are ruthless in their strategies for targeting the desperate and dejected.

This broad-brush overview would be substantially incomplete without mention of the informal taxis, sometimes referred to as amaphela, which scurry about the township connecting people between their homes and the main transport hubs. Whilst their function within the township economy is important (and should be nurtured), their operations are totally unregulated by formal institutions. Many of these unlicensed taxis are unroadworthy, whilst some of these drivers don’t have ordinary driving licences let alone public driving permits. Most of these informal taxis are not owner-operated, but run by the big men of whom I have spoken. As e-hailing taxi services operate on a semi-informal basis, it would be unfair to target the township taxi segment without embracing a more holistic approach to the regulation of sedan public transport services.

As these few examples illustrate, there is indeed a case for regulation and need to fix the capacity and structures within the state to enforce regulation. All three tiers of government have roles. But regulation can be a very blunt tool if it is not finely calibrated. Where heavy handed approaches have been tried, such as the Western Cape provincial policy and strategy to control township liquor retailing, the results have been counter-productive and served merely to foster greater informalisation and the proliferation of survivalist operators. For township micro-enterprises in particular, suitable regulation should take account of the constraints and capabilities of micro-entrepreneurs, differentiating between struggling start-ups and mature (and profitable) businesses which ought to comply fully with all aspects of the law. Whereas the informality of the former is involuntary (in other words beyond their circumstances), the informality of the latter is part of a strategic decision to make as much money as possible with smallest investment in regulatory compliance. Just because a business is situated in the township does not mean that the operators cannot afford to make the necessary investments to operate within the law.

As the required process of fixing institutional capacity must happen across all three tiers of government, including fixing the disconnection between the different regulatory functions of state institutions, the prospects of reversing the trends illuminated in this article are bleak. In the likely event that institutional capacity and the incongruence between regulators says the same, we should not hold out hope that unemployed township residents will embrace business opportunities within their geographic backyard. Instead, we are more likely to see further opportunities accumulating to the bold, the resourced, the networked and the powerful.

1 Comments

  1. Thanks Andrew,
    Keep up the good work up and your team are doing.

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