Both informal businesses and their owners are getting older
Statistics South Africa (Stats SA) conducts a Survey of Employers and the Self-Employed (SESE) every four years. The latest one is for 2017 and that shows that both informal businesses and their owners are getting older.
In 2001, when the first SESE was undertaken, businesses that were 3 years or younger accounted for 58.0% of the total, but this dropped to only 40.9% by 2017.
Although youth unemployment has increased tremendously since the 2009 recession, the proportion of informal business owners who were 24 years old or younger fell from 9.4% in 2001 to only 4.4% in 2017. This may be because these youngsters have not been able to accumulate any capital, as the vast majority of informal business owners use their own savings to start a business. If the next age cohort of 25 to 34 years old is included, then the portion of young proprietors falls to 29.0% in 2017 from 38.7% in 2001.
The purpose of the survey is to track the development of informal businesses, which for purposes of the survey are those businesses that are not VAT-registered.
The informal sector is a large part of employment in Africa. It provides livelihoods to the most vulnerable individuals such as the urban poor, female heads of households, disabled people, and rural-based families, so an increase in the number is generally speaking a bad thing as it indicates that many people are unable to get jobs in the formal sector.
The number of persons who ran informal businesses declined from 2.3 million in 2001 to 1.1 million in 2009 as GDP growth in those years was near 5% per year, before increasing to 1.8 million in 2017, as GDP growth in recent years has been below the population growth rate of 1.6%.
According to Stats SA, participating in the informal sector enables the marginalised to survive economic downturns when formal sector jobs are in short supply, and where social security systems are inadequate.
Small businesses in the informal sector often do not have links with businesses in the formal sector, as they operate in different markets with different customers. An example is somebody selling food on the side of the street, or out of his or her household premises. Even in situations where these firms may be connected to formal firms as they get their supplies from large firms such as Pepsico, their low bargaining power and fierce cost-cutting competition render them unable to operate like formal sector entities.
Some of the 2017 findings were:
- More than 70% of non-VAT registered businesses did not keep financial records. In 2017, 67.8% of persons running these businesses had less than matric qualification.
- More than 90% of persons who ran informal businesses did so without a licence or permit, and the majority of those who had licences or permits (40.2%) obtained them from a municipality/ provincial authority.
- The majority of informal businesses were in the trade industry, with most of them operated by men.
- Seven in every ten persons running non-VAT registered businesses used their own money to start the business.
- Unemployment was the main reason why most people started their businesses, accounting for more than 60% of the business owners.
- More than nine in every ten businesses had no business debt, credit facility, mortgage loan or asset finance.
- Among the non-VAT registered businesses, the manufacturing industry had a higher proportion of businesses that used raw materials compared to any other industry, while businesses in the trade industry had the highest proportion that used supplies compared to other industries.
- Eight in every ten persons in informal businesses did not have bank accounts. Among those who had bank accounts, more than 60% used them mainly to make business payments.
- In 2017, 88.5% of employees in informal businesses were paid employees compared with 65.3% recorded in 2001.
- The majority of employees in informal businesses were working in the construction industry at 33.3%.
This contribution to Finance Friday was made by
Forecaster Ecosa cc
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