Informality and Inclusive Growth in Sub-Saharan Africa

In the last decade, developing economies have recorded relatively high growth rates, yet in a number of instances, there is a limited impact on poverty and inequality, suggesting that economic growth is not inclusive. In part, this relates to the fact that a large number of individuals are not participating in the formal economy and are informally employed or are unemployed, a phenomenon observed in both Africa and Latin America. The informal sector provides a range of heterogeneous employment opportunities. However, with many adults isolated from the formal economy, the inclusiveness of economic growth in these regions has arguably been constrained. This research seeks to better understand the relationship between informality and inclusive growth in Africa, with a particular focus on South Africa. South Africa stands out in the region for having relatively high levels of unemployment and low levels of informal employment. As a result, one of two opposing views is typically held by South Africans: the first is that the informal sector is an under-utilised source of new employment and it should be promoted since ‘any employment is better than unemployment’; the second view is that informality should be discouraged given its inferior quality, and that the focus should be on creating decent jobs in the formal sector.The central research question is therefore: “Do informal labour markets promote or constrain inclusive growth?” We investigate three hypotheses in terms of the central research question: i. Informality may promote inclusive growth by acting as a buffer to unemployment and creating opportunities for vulnerable populations ii. Informality may constrain inclusive growth by negatively impacting growth and jobs in the formal sector iii. Facilitating transitions from unemployment to informal employment and from informality to formality through public policy promotes inclusive growth. In order to examine the hypotheses, we use three different methodologies. Firstly, we undertake a regional evidence synthesis examining literature and case studies that lend themselves to the hypotheses within the sub-Saharan Africa region. Secondly, we expand on the South African case study and examine the nature of transitions within the labour market. This includes the transition into the informal labour market from a state of unemployment as well as transitions from the informal to the formal labour market. In the South African case, where unemployment is significant, transitioning into the labour market is likely to improve an individual’s earnings and welfare thereby promoting inclusivity within with economy. Thirdly, we examine to what extent income shocks may impact the likelihood of engagement within the informal sector. In the case of South Africa, we examine whether household receipt of non-contributory state pensions, by relaxing household-level resource constraints, impacts the level of engagement in the informal sector at the household level.