South Africa's economy has struggled to grow, with many citizens living in poverty. The informal sector, comprising hundreds of thousands of small businesses and entrepreneurs, has been largely ignored. This has resulted in 23.2 million South Africans living on less than R1,400 per person per month, with over 18 million having to borrow for their next meal. According to recent reports, this neglect has severe consequences for the country's economic growth and poverty alleviation.
Experts, including former World Bank economist Justin Yifu Lin, stress that economic development and growth must be premised on a country's natural endowments, including the human element. Lin's statement is reflected in the success stories of countries like China, India, Brazil, and Argentina, which have integrated small businesses, including the informal sector, into their main economies. China's "sharing economy" concept is cited as an innovative way to fight poverty through collaboration initiatives.
In contrast, Africa has ignored its huge informal sector and tried to spring into the global economy through various development strategies, often based on developed world frameworks or Bretton Woods dogma. These efforts have failed due to corruption, institutional misalignment, and weak institutions. According to Phuthuma Nhleko's book, "The Missing People," Africa accounts for only 3% of global GDP, despite making up 18% of the global population.
South Africa's new democracy has failed to create a new economy, instead adopting a "cut and paste" approach that ignored Lin's basic lesson. As a result, the majority of people remain outside the economy decades after 1994. The country has not grown the informal sector into a major economy, instead viewing it as a separate entity with its own forms of support.
In 2010, the then Minister of Trade and Industry, Rob Davies, appointed a team to review government support for small businesses. They recommended creating a separate department of small business, housed in the Presidency, to oversee and coordinate small business initiatives across government departments. However, President Jacob Zuma created the Department of Small Business Development as a new ministry with limited power.
Despite efforts to grow the small business sector through various policies and the enterprise and supplier development (ESD) leg of broad-based BEE, results have been disappointing. Institutional misalignment, entitlement and dependency syndromes, protection fee rackets, and a tick-box mentality have contributed to high levels of small business unsustainability. The ESD leg has been particularly ineffective, with deep and non-racial corruption.
To address these challenges, the government has stepped in with a transformation fund aimed at ensuring ESD funds achieve their goal of growing the black small business sector. Yifu Lin's words must be taken seriously, as the human element he refers to includes the millions of informal entities, which are a vital source of human power in entrepreneurship and must be at the heart of government economic policies. Integrating the informal sector into the mainstream economy could help alleviate poverty and unemployment.
