Hope or Hopelessness


If there is one thing I want to do right for my honours thesis is to give it a snazzy title. Higher order goals, like a first class pass, a man can dream, are secondary. But before I start thinking of that I need to get the heavy lifting out of the way first and boy is it heavy.

My research looks at informal self-employment in South Africa by using the unnecessarily comprehensive National Income Dynamics Study. So comprehensive it is that I know that in 2008 no South African households gave away green peppers (what happened to Ubuntu?), but did spend R16.80 per month on peanut butter. Fortunately, those aren’t my variables of interest. The question I hope to have answered by the 14th of September 2015 is what is driving South African to open and close their informal enterprises. Initially, I thought that I would simply be doing a determinants of informal enterprise performance what makes them grow. However, when I first opened the data set to begin the cleaning, merging and other boring data preparation, I found that only 42 observations in the sample had run businesses which had survived from the first wave of NIDS to the third. NIDS is a panel study, which means that it tracks the same observations overtime. In total the sample consists of about 29 000 observations and is obviously meant to be representative of the South African population at the national level. The fact that only 42 observations remained in informal self-employment between 2008 and 2012 presents a far more interesting question than performance. Where are these business people going and coming from? Who is most likely to enter and who to leave? The answer could have serious policy implications in country facing and employment and growth crisis.

The literature which exists at the moment on this question as it pertains to developing country’s points to the informal sector being a place of refuge for those who for whatever reason are not able to find formal employment in the informal sector. Most scholars take the view that it is a form of “disguised unemployment”. An innovation approach applied to Argentine data finds that it is when the macro economy is in the pits that the informal sector swells and the opposite occurs when times are good. Intuitively, this hypothesis can be said to hold for South Africa too.

My interest in the enterprise behaviour of the poor began when I became involved with a student-run microenterprise development project operating in Khayelitsha. The people who came to us to start a business where doing so because their survival depended on it since they were unemployed and living on welfare which was not enough to meet the needs of their families. I’m sure that many of them wouldn’t have joined the program if they had a stable job and sufficient income.

It can argued be that there are non-monetary benefits to this kind of employment. As many informal enterprises are home or neighbourhood based, entrepreneurs (particularly female) are able to look after children and elderly family members without having to forgo their income. In addition there could be a psychological gain from being one’s own boss or profiting from your talents. Unfortunately, the empirical evidence in support of this is ambiguous at best.

The policy question to come out of this then is whether or not, given our too huge unemployment levels and too slow economic growth rate, we should continue pouring resources into this political silver bullet? South Africa has established an entire Ministry for Small Business Development in addition to the many government agencies with this mandate and NGOs doing the same work. Business Development is also at heart of the Democratic Alliances plans for the economy when they come into power in 2029 with nearly 60% per cent of the vote. I believe that this question can only be answered once we know the nature of informal self-employment decision at the micro-level because it is essentially entrepreneurship from scratch and could possibly act as a business incubator, as policy-makers hope, if the right people are choosing it instead of employment as opposed to being forced into it by unemployment.

If the answer is the latter, the next question becomes how should we treat the informal sector. More specifically, should we not rather look at it as a source of short-term welfare and not long-term prosperity generation? We hope that those who are the recipients of government grants will one day no longer need to rely on the state for their daily bread and will use at least some of the proceeds to make welfare increasing investments (for example in education) to that effect. The same should be said for informal self-employment at it currently stands. Perhaps only once these investments have been made and their returns realized will we be able to look at self-employment from a growth orientated lens.