Informal sector has the potential to address poverty

South Africa, June 2023

Tracey Chambers, CEO of Taking Care of Business (formerly known as The Clothing Bank), explains why entrepreneurship in the informal sector is the silver bullet to address poverty and unemployment

Having worked as a social entrepreneur for over a decade, I’ve seen first-hand that self-employment and entrepreneurship – specifically in the informal economy – can play a crucial role in breaking the cycle of intergenerational poverty. These have the power to uplift the social foundations of South Africa and provide the allusive economic growth we so often hear about but seldom see.

We know that our country is one of the most unequal in the world. Most South Africans are stuck in an inequality trap, with wealth concentrated in the hands of a few. The majority experience intergenerational poverty with few opportunities to escape. Breaking this vicious cycle requires a fundamental change in someone’s life trajectory.

At Taking Care of Business (TCB) we have seen that self-employment and informal trade is one of the most impactful ways we can kick-start this change for individuals – and I believe also for our country. 

However, self-employment does not simply rely on someone having an idea and pursing it. Unemployed individuals face multiple challenges on their road towards social and financial independence such as lack of access to the economy, relevant and practical business and financial skills, digital literacy, and proven business ideas. 

These roadblocks are compounded by socio-emotional factors like low-self-belief, insufficient role models and high risk aversion. 

The need for an entrepreneurial economy

Informal trade, which refers to any unregulated, unregistered, unprotected and untaxed activities, enterprises or transactions, is an essential source of income for many poverty-stricken South Africans. Already the informal sector accounts for an estimated 18% of South Africa’s GDP. While these numbers are much smaller than in other developing countries, they emphasize the importance of informal trade in an economy with a stark unemployment rate.

The Director of the Development Policy Research Unit at UCT, Professor Haroon Bhorat, recently shared this eye-opening statistic which tells the story of South Africa’s unemployment woes. He says that on average, for developing and emerging countries similar to South Africa, employment happens 45% in the formal sector and 45% in the informal sector, leaving on average 10% of people unemployed. 

For South Africa, however, the data looks very different: 50% of people are in formal employment, with only 16% in informal jobs and 34% unemployed[i]

The opportunity is clear: We cannot expect the formal sector to “save” us from our unemployment issue. Instead, South Africa needs more informal opportunities and should create an ecosystem that encourages and supports individuals in starting and operating small businesses.

Internationally, more than 60% of the world’s employed population are in the informal economy. [ii] A 2018 International Labour Organization report shows that two billion people work informally. Most of these people are in emerging and developing countries such as ours. 

In Africa, 85.8% of employment is informal. The proportion is 68.2% in Asia and the Pacific, 68.6% in the Arab States, 40.0% in the Americas and 25.1% in Europe and Central Asia. The report shows that 93% of the world’s informal employment is in emerging and developing countries.[iii]

SA is lagging behind with low entrepreneurial rates

In contrast, South Africa has consistently ranked poorly in the Global Entrepreneurship Monitor survey regarding entrepreneurial activity[iv]. South Africa’s rate of entrepreneurial activity is meagre for a developing nation – a mere quarter of that seen in other sub-Saharan African countries. 

South Africa is not producing a sufficiently entrepreneurial economy. This needs to be addressed if we wish to create employment, expand markets, increase production, and equip people to support their families.

How to grow an entrepreneur

At Taking Care of Business (TCB for short), we believe that everyone can become self-employed with the right support structure. We have developed a holistic model that incorporates the head, heart and hands to do so consistently. Our Resell, Repair and Remake programmes are enterprise development programmes that leverage supply chain waste to create job opportunities within the circular economy. We equip aspiring entrepreneurs with the skills and resources they need to unlock their full potential and access the economy.

We can measure – and prove – our impact using the Greenlight poverty tool

What keeps us awake at night is the question “are we really making a difference?” Are the lives of the people on our programmes changing for the better? Is this impact sustained? Thanks to the support of the Greenlight Office, we have been measuring our impact and poverty alleviation efforts across 50 poverty indicators for many years.

The Greenlight metric is an unusual survey that uses visual and text elements to help peoples elf-diagnose their quality of life. As poverty is multi-dimensional, socio-economically challenged individuals can see and understand the ways in which they are stuck, struggling, or doing well. Respondents rate the quality of different aspects of their lives using indicators: extreme poverty (red), poverty (yellow) or no poverty (green).

Recently our results showed, once again, that TCB programmes are effective in alleviating poverty in the short term and that this impact is sustained over time.

This is how we are getting it right

As our wish is that all non-profits and organisations involved in poverty reduction are successful, we’re happy and willing to share some of our proven strategies. 

1. Create an ecosystem that supports change

Over the past 12 years, we have learnt that poverty is multi-dimensional and the road out of poverty is littered with many obstacles. We have, therefore, consciously created an ecosystem that supports change. Our model is practical as our beneficiaries run real businesses rather than only learning about them in theory in the classroom. We also recognise that eradicating poverty is complex. 

Therefore, our model has many layers of intervention (we call this our “heads-hearts-hands” approach): 

  • access to a proven business opportunity; 
  • stock and capital; business, 
  • financial and life-skills training; 
  • peer and professional coaching and mentoring; 
  • and even counselling ).  

Escaping intergenerational poverty requires deep work and time. That’s why our programmes are 12-24 months long. Short term programmes are simply not as effective in achieving long-term change.

2. Changing the entrenched poverty mindset

It is not only about improving the financial situation of our beneficiaries but also about changing an entrenched poverty mindset which embeds intergenerational poverty. This approach leads to a lasting transformation of the individual as we focus on a hand-up, not a hand-out, which creates dignity, volition and personal ownership – rather than dependence.

Through our programmes, we have given over 5000 unemployed individuals the opportunity to become traders and small business owners. Providing them with the necessary tools and resources to start their businesses and succeed. 

And we know that the programme is having sustained impact. Our most recent Greenlight Survey results prove that our model effectively eradicates poverty and leads families to financial and social independence.[v] The best part is that our impact is sustained and often continues to improve long after leaving our programme.

Final thoughts: let’s roll up our sleeves and do the hard work

To address the unemployment crisis in South Africa, we need systemic changes that support and encourage the entrepreneurship economy: reduced regulation and barriers to entry, access to affordable capital and real business opportunities. 

We must also do the hands-on work to move people from dependence to dignity. This includes creating a deliberate ecosystem that unlocks human potential by engaging the head, heart and hands. This is the most demanding work and the most overlooked requirement. 

There are no quick fixes when dealing with a multi-layered, intergenerational issue such as poverty: we need to be willing to roll up our sleeves and invest in people if we want to create a new generation of economically active, contributing citizens.

Bradley Freeman

Bradley Freeman, a TCB Repair Graduate, overcame drug addiction and is now self-employed, running an appliance repair and sales business. He has eradicated poverty from his life and is financially and socially independent. Most importantly, he has dignity. Now, he is paying it forward.

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