The informal economy: just a means of survival?

As youth unemployment rises and student debt mounts, could the informal sector be a lucrative market for the youth to tap into?

For many students, the university is a crucial step in the path toward success. The years of stress, mental anguish, and probable debt are embraced with the hope of attaining the golden ticket into the promised land of wealth known as a degree. After all, the formal sector is where opportunity lies. But youth unemployment has just risen to 44.2% as of June 2024 according to Stats SA. This means that almost half of South Africa’s youth are jobless. Even in universities, students face the ever-present obstacle of debt and the fear of exclusion. But while the gate to the formal sector may shut on some, the informal sector could be a refuge worth exploring. 

StatsSA defines the informal sector of the economy as any small business that employs fewer than five people (and does not deduct income tax from their salaries); and entrepreneurs who are not registered for income tax or value-added tax.

As of the second quarter of 2024, the informal sector comprises 18.8% of the total labour force in South Africa- the second largest employment sector in the country behind the formal. But while the size of the formal sector (68.9% of total employment) dwarfs that of the informal sector, this statistic does not paint the full picture in determining the desirability to work in the latter.

Graph depicting how the labour force is comprised by sector as of June 2024 (stats taken from StatsSA). Graph: Kabir Jugram

Over the past ten years, the formal sector has grown by 6.5% whilst the informal sector’s growth dwarfs this, having grown by 30%. So, while the formal sector holds more of the labour force than the informal, the latter has grown at a much faster rate over the past ten years.

Graph depicting how each sector of the labour force has grown over the past ten years (Stats taken from StatsSA). Graph: Kabir Jugram

One could argue that this is simply down to South Africa’s notoriously high unemployment rate of 33.5% (the second highest in the world as of 2023), driving many people to the informal economy to earn a living as formal opportunities dwindle. And of course, there is a degree of truth to this. From selling sweets on sidewalks to collecting refuse for recycling, the informal sector has long offered opportunities for those boxed out of the formal economy to eke out a living. But the idea that the informal sector provides means for survival alone only tells half the story.

In some cases, the informal economy can be quite lucrative. This becomes evident when looking at the spaza shop industry.

Graph depicting how each sector of the labour force has grown as a percentage. Graph: Kabir Jugram

Spaza shops - or informal grocery stores - are a staple for millions of South Africans. According to Trader Intelligence, one of South Africa’s largest retail research groups, spaza shops are frequented by an overwhelming majority of 80% of the population. Considering that four in every five people frequent spaza shops, it is not surprising that Trader Intelligence estimates that the spaza shop industry generates R184 billion in revenue per year.  Pick n Pay, South Africa’s second-biggest retailer in 2023 in terms of revenue, generated only R102.7 billion in total revenue in 2023. 

Of course, there is room for scepticism when looking at those numbers. After all, the value attached to the spaza shop industry is an estimate since informal traders do not pay taxes or declare their earnings to the government, hence they cannot be accounted for accurately.  However, heavyweights in the retail industry such as Tiger Brands and Shoprite do not seem to share such scepticism.

In August 2023, Tiger Brands invested in the spaza shop industry due to its growth potential, aiming to expand its reach to 130,000, spaza shops within five years. The investment included advertising Tiger Brands in spaza shops (such as painting murals of Tiger goods on spaza shop walls) and offering traders reward programs for purchasing Tiger Brand stock. 

“With the local informal market remaining largely untapped and statistics showing that it is growing at a faster rate than the modern trade, we see exponential room for growth in this segment and are engaging closely to support our traders and better present our brands to consumers at the point-of-purchase” said Chief Customer Officer of Tiger Brands Luigi Ferrini in a press release issued last year. 

Sharing similar sentiments, Shoprite has also tapped into the potential of the spaza economy through ‘usave ekasi’, an initiative where small, container stores were opened by Shoprite in townships to penetrate into the lower-income market. These stores essentially mirror spaza shops and adopt their business approaches to attract customers. 

But while industry heavyweights try to capitalize on the growth potential of spaza shops, what is it that gives the spaza shop industry such lucrative potential? According to chartered accountant and CEO of Thelo Rolling Stock Leasing, Para Naidoo, it boils down to accessibility and convenience: “They [spaza shops] are making products available at a location that’s easily accessible for people because those people cannot travel [long] distances… If you want to buy a loaf of bread for example, you can’t take an Uber that costs R30 to R40, buy bread for R20 [at a mall], and take another Uber back. That loaf of bread’s going to cost you R100!”. 

While goods like bread might be sold at a slight premium at spaza shops, they are still more affordable for people in eliminating transport costs, he says.

However, Naidoo also airs caution at the idea of overreliance on the informal economy to make a living. The problem with having too many people operate in the informal sector is that since informal traders do not pay taxes, the country’s tax base will dwindle if too many people work in the informal sector. This means that fewer people have to pay increasing levels of tax to sustain the economy. 

Moreover, government grants and subsidies will crumble since fewer people contribute towards them as more people in the informal sector rely on them. “Grants and SASSA funding only come about by people in the formal sector paying taxes. So, if the number of people in the formal sector is reducing because the informal sector is growing, there’s a bigger demand on the tax base to service grants” explains Naidoo.

With that in mind, the potential of the informal sector does not mean a university degree holds no value. The economy needs taxpayers in the formal sector to support it. Moreover, a degree still offers relative assurance of finding employment with only 9.8% of graduates being unemployed compared to 35.8% of those who only hold a matric certificate according to Stats SA. However, the informal economy could prove a lucrative means for students to sustain themselves- and some students have already realized this.

Nneka Amechi, a third-year anthropology major at Wits, runs a start-up from her res, selling cookies. Since childhood, she has loved baking for those around her. When her support system’s business ran into difficulties, she saw that as a chance to pounce on her childhood dream and earn some extra income. So far, her ambition has reaped the reward. “Financially, selling these cookies has made a significant impact on my life. The profit margins are pretty good; just last month I saved up enough money to buy myself new glasses!” she says. 

Nneka Amechi sells two flavours of cookies from her residence but plans to one day sell much more. Photo: Kabir Jugram

But she is not simply looking to make a quick buck. She has high hopes for the future of her business, aiming to eventually own her own café: “The dream is to expand from selling just two flavours of cookies to offering a larger variety of baked goods. From there, I envision growing from a dessert caterer to owning a cute little café- something with the vibe of Tasha’s or Mugg and Bean”. 

Nneka, like Tiger Brands and Shoprite, sees the informal economy as not just a means for survival but a potentially lucrative market that can jumpstart a path toward success. While a university degree and formal employment still hold value for both individuals and the economy, a fuller understanding of the informal economy tells students that if that avenue closes, the alternative path can still reap reward.