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Second best? Trends and linkages in the informal economy in South Africa1

Development Policy Research Unit Working Paper 06/102

Richard Devey, Caroline Skinner, Imraan Valodia

School of Development Studies, University of KwaZulu-Natal

February 2006

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In August 2003, President Mbeki introduced the idea of South Africa being characterised by a ‘first economy’ and a ‘second economy’ operating side by side. In November, in an address to the National Council of Provinces he stated:

    “The second economy (or the marginalised economy) is characterised by underdevelopment, contributes little to GDP, contains a big percentage of our population, incorporates the poorest of our rural and urban poor, is structurally disconnected from both the first and the global economy and is incapable of self generated growth and development.”
This idea of a ‘second economy’ is increasingly part of policy rhetoric at all levels of state. For example, the KwaZulu-Natal Minister for Finance and Economic Development, Dr Zweli Mkhize began his 2005 budget speech with a description of the economy using the analogy of an apartheid era train with the first economy occupying the first class compartments and the second economy being the second and third class sections. Having made substantial reference to the notion throughout the speech he argues that interventions in the second economy are ‘even more crucial’ than projects aimed at stimulating growth in the first economy.

In his 2004 State of the Nation Speech, President Mbeki argues that the:

    “…core of our response to all these challenges is the struggle against poverty and underdevelopment, which rests on three pillars. These are: encouraging the growth and development of the first economy, increasing its possibility to create jobs; implementing our programme to address the challenges of the second economy; and, building a social security net to meet the objective of poverty alleviation.”
The governing party elaborated on the notion of a dual economy by characterising the second economy as:

    “The first and second Economies in our country are separated from each other by a structural fault. … Accordingly, what we now have is the reality … of a “mainly informal, marginalised, unskilled economy, populated by the unemployed and those unemployable in the formal sector”. The second economy is caught in a “poverty trap”. It is therefore unable to generate the internal savings that would enable it to achieve the high rates of investment it needs. Accordingly, on its own, it is unable to attain rates of growth that would ultimately end its condition of underdevelopment.”
    (ANC Today, Volume 4, No. 47, 26 November-2 December 2004)
In his 2005 State of the Nation Speech, Mbeki again refers to the concept of the ‘second economy’ arguing that:

    “We must achieve new and decisive advances towards … eradicating poverty and underdevelopment, within the context of a thriving and growing first economy and the successful transformation of the second economy…”
In outlining what government will do about transforming the second economy, the President has this to say:

    “To take the interventions in the second economy forward … additional programmes will be introduced or further strengthened by April 2005, as part of the Expanded Public Works Programme.”
Although the President does not himself refer to the informal economy, the quote from ANC Today above shows that, within the ruling party at least, the informal economy is seen as being located in the second economy. Further, the ANC sees the second economy, and presumably the informal economy, as being structurally disconnected from the mainstream of the economy.

Arguments about dualism and the relationship between the mainstream of the economy and the periphery have characterised much of South African historiography. This is most prominently captured in the debates of the early 1970s about the relationship between apartheid and capitalism in South Africa with liberals arguing that capitalism would ultimately undermine apartheid as more and more of the African periphery came to be incorporated into the mainstream of the economy (see Lipton, 1985 and O’Dowd, 1978) and Marxists arguing that there was in fact a close, but exploitative, relationship between the mainstream and the periphery (see Legassick, 1974 and Wolpe, 1972). The re-emergence of a dualist view of the economy is significant not only because it is being articulated by the President and is at odds with the way in which the ANC has traditionally viewed South African society, but also because it seems to inform much of the policy focus of the ANC. Not having had a definitive statement from the President, we can only speculate on why he chooses to use the terms first and second economy, rather than formal and informal economy. As we shall see, these definitions matter. The President’s view of the second economy includes the unemployed implying he is using a conceptualisation of the economy that moves beyond a simple formal-informal dichotomy.

The articulation of the first and second economy conceptualisation of South Africa by the Presidency coincided, we would argue, with a refocusing of economic policy in South Africa (see Padayachee and Valodia, 2001). This conceptualisation tacitly acknowledges the failure of the trickle down economic growth policies so central to the post-1996 GEAR era and informs much of government’s more recent emphasis on poverty alleviation. However, the dualism suggested by arguments about a ‘structural’ break between the first and second economy allow government to argue that its economic policies have been successful for the first economy (see Naidoo, 2004) and, as a result of these successes, government is now able to address issues of poverty and unemployment in the second economy. As we demonstrate below, there is in fact a close relationship between the first and second economy (although, admittedly, we focus only on the informal economy) and government policy for the second economy is either absent, and where it does exist, it is piecemeal and ineffective.

In the absence of a coherent conceptualisation of and any systematic data on the second economy, we focus, in this paper, on one important element of the second economy – the informal economy. We analyse the nature of the informal economy in South Africa, providing some descriptive statistics and analysis to highlight the nature and extent of the informal economy. Given the present prominence of the ‘second economy’ concept, we provide some analysis of the efficacy of current government support measures to the informal economy, concluding that these are few and far between, patchy and incoherent, and largely ineffective. We then examine linkages between employment in the formal and the informal economy arguing that, contrary to the views of the President and the ANC, there are in fact fairly close linkages between the formal economy and the informal economy. Finally, by way of conclusion, we use the evidence provided in the paper to comment on the accuracy and relevance of the ‘second economy’ concept.

  1. This paper was written for the Human Sciences Research Council 2005-6 edition of the State of the Nation edited by Bulungu, Daniel, Southall and Lutchman. The paper is being published as a DPRU working paper to disseminate the findings among labour market analysts. Feedback is welcomed.

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