The informal sector is an important part of the global economy. It is estimated that over 85% of people in Africa are employed in this sector. In addition, the informal sector contributes around 55% to the gross domestic product of sub-Saharan African countries[i]. In South Africa, the informal sector accounts for a smaller, but still significant, share of total employment. The informal sector has always been regarded as a transient sanctuary for the poor. In South Africa, the formal economy is not inclusive; instead, it has huge inequalities and excludes a considerable number of the black population who are affected by high levels of poverty and unemployment[ii]. This has driven many impoverished individuals to the fringes of society, compelling them to adopt survival strategies, such as engaging in the informal sector as traders (See Figure 2 for the employment structure of the informal sector which shows that retailing averages about 40% of employment). This sector has proven to be persistent and permanent everywhere and continues to grow around the world (See Figure 1 the contributions of informal & formal sectors to South Africa’s employment over ten years).
The Vital Role of the Informal Sector
Figure 1.SA Formal and Informal Sector Employment, 2014-2023
In South Africa, the informal sector encompasses a broad range of activities, including street vending, small-scale manufacturing, informal retail and various personal services. This sector employs approximately 3.2 million people, accounting for around 20% (See Figure 2) of total employment. Globally, approximately two billion individuals are engaged in informal employment[iii], accounting for 60% of the world's workforce and 90% of all small- and medium-sized enterprises[iv]. The informal sector plays a crucial role in providing livelihoods, particularly in regions with high unemployment and limited formal job opportunities. It serves as a critical source of income for millions of households, supporting local commerce and driving economic dynamism. In some instances, it is cited as the main and sustainable supply chain of food[v]. Moreover, the informal sector is a significant source of employment for women and young people[vi], offering a pathway to financial independence and entrepreneurship[vii].
Figure 2. SA Employment in Informal sector by industry 2014-2023
The informal sector is crucial in providing employment and economic opportunities for marginalized populations. While the formal sector drives economic growth, it cannot accommodate all job seekers, especially those with limited education, skills, or access to formal job markets. Acting as a vital safety net, the informal sector absorbs workers who would otherwise be left unemployed due to high entry barriers in the formal sector, such as skill requirements, education, certifications, and strict labour regulations. Given the high unemployment rate and large unskilled workforce, the informal sector serves as a crucial economic outlet. Moreover, the informal sector can absorb workers who lose jobs in the formal sector, but the formal sector cannot do the same, highlighting a one-way dependency between the two.
Challenges Facing the Informal Sector
Despite its importance, the informal sector faces several challenges that hinder its full potential. Because of a lack of collateral and the fact that Informal businesses are not registered, they often struggle to secure loans and financial services, restricting their ability to expand and innovate. Inadequate access to technology and infrastructure can limit productivity and market reach in the informal sector. Informal workers frequently endure low wages, lack of job security, and an absence of social protection. Complex regulatory environments can create obstacles for informal businesses transitioning to the formal sector.
The Potential of AI in the Informal Sector
Integrating AI into the informal sector holds significant promise for overcoming challenges and enhancing its impact. AI can automate repetitive and mundane tasks, allowing informal business owners to focus on more strategic activities. For instance, AI-powered tools can handle inventory management, customer service, and bookkeeping, increasing operational efficiency. Digital platforms powered by AI can connect informal businesses to broader markets. E-commerce platforms, enabled by AI algorithms, can recommend products to potential buyers, facilitating market expansion. This increased visibility can lead to higher sales and revenue for informal entrepreneurs. AI-driven financial technologies, such as mobile banking and microfinance platforms, can provide informal businesses with access to credit and financial services. AI can also help in assessing creditworthiness using alternative data sources, making it easier for informal entrepreneurs to secure loans. AI-powered educational tools can offer personalised training and development programs tailored to the needs of informal workers. This can help improve their skills and increase their income potential. Online platforms can provide access to various resources, from technical skills to business management courses.
Challenges in Implementing AI in the Informal Sector
While the potential benefits of AI are clear, several challenges need to be addressed to facilitate its adoption in the informal sector. Limited access to digital technology and the internet remains a significant hurdle. Many informal business owners may lack the necessary infrastructure to leverage AI tools effectively. The success of AI adoption hinges on the digital literacy of informal workers. Without adequate training, they may struggle to use AI technologies to their advantage. The cost of AI technologies can be prohibitive for small informal businesses. Many may not have the financial resources to invest in these tools. Informal businesses may not have the necessary measures in place to ensure data privacy and security, making them vulnerable to cyber threats.
The Role of Government in Supporting AI Adoption
To harness the potential of AI in the informal sector, government intervention and support are crucial. Investing in expanding internet connectivity and providing affordable access to technology can support the digital transformation of the informal sector. Implementing programs to enhance digital literacy and provide training on AI technologies tailored to the needs of the informal sector is essential. This can help bridge the skills gap and empower informal workers to use AI effectively. Offering grants, subsidies, and low-interest loans can help informal businesses invest in AI technologies. Facilitating access to microfinancing and mobile banking solutions can also improve financial inclusion. Developing policies and regulations that promote the safe and ethical use of AI while protecting the interests of informal businesses is necessary. This can help build trust and encourage the adoption of AI. Encouraging collaboration between government, private sector, and non-governmental organisations can provide resources, expertise, and support for the adoption of AI in the informal sector.
The informal sector could be a saviour for the South African economy, providing essential employment and sustaining livelihoods for millions[viii]. The integration of AI has the potential to amplify its impact, driving productivity, market expansion, and financial inclusion. However, addressing the challenges of technological access, digital literacy, financial constraints, and data security is crucial for realising this potential. With concerted efforts from the government, private sector, and civil society, the informal sector can leverage AI to enhance its contribution to the economy and improve the standards of living for millions of South Africans.
List of Sources
[i] Masuku, B., & Nzewi, O. (2021). The South African informal sector's socio-economic exclusion from basic service provisions: A critique of Buffalo C7ity Metropolitan Municipality's approach to the informal sector. Journal of Energy in Southern Africa, 32(2), 59-71. https://dx.doi.org/10.17159/2413-3051/2021/v32i2a5856
[ii] Hausmann, R., O’Brien, T., Fortunato, A., Lochmann, A., Shah, K., Venturi, L., Enciso-Valdivia, S., Vashkinskaya, E., Ahuja, K., Klinger, B., Sturzenegger, F., & Tokman, M. (2023, November 15). Growth Through Inclusion in South Africa: A Report by The Growth Lab at Harvard University. The Growth Lab.
[iii] International Labour Organization (ILO) (3rd ed.), International Labour Organization, Geneva, Switzerland (2018)
[iv] International Labour Organization (ILO) (2018). Informal Economy: More than 60 per cent of the World’s Employed Population Are in the Informal Economy. International Labour Organization. Ilo.org. https://www.ilo.org/resource/news/more-60-cent-worlds-employed-population-are-informal-economy-ilo
[v] Tawodzera, G. (2023). The Role of the Informal Sector in Epworth’s Food System, Zimbabwe. In: Riley, L., Crush, J. (eds) Transforming Urban Food Systems in Secondary Cities in Africa. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-93072-1_5
[vi] Stats SA (Statistics South Africa). (2024). Unemployment in South Africa: A Youth Perspective: June 2024. (Statistical release P17266) https://www.statssa.gov.za/?p=17266. Date of access: 28 June. 2024.
[vii] Makoma, M., 2018. Women in the informal economy: Precarious labour in South Africa. Thesis presented in fulfilment of the requirements of the degree of Master of Arts (Political Science) in the Faculty of Arts and Social Sciences at Stellenbosch University
[viii]Etim, E. & Daramola. O, (2020). The Informal Sector and Economic Growth of South Africa and Nigeria: A Comparative Systematic Review, Journal of Open Innovation: Technology, Market, and Complexity, Volume 6, Issue 4. https://doi.org/10.3390/joitmc6040134.
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