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Entrepreneurs in the Informal Economy

In: Business and Management

Submitted By benitalukusa
Words 2121
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Introduction
The father of entrepreneurship, Joseph Schumpeter (1934), defines entrepreneurship as the ability a person to innovate in implementing changes in the market by coming up with new combinations. Cassim (1982) considers the informal sector participation as “a trap associated with impoverishment” and Habib (2005) considers the informal sector participation as “the survivalist response of marginalised persons with no alternatives.” The informal sector is a part of the economy that is not under the government control and therefore any business conducted in the informal sector cannot be regulated. This paper aim is to argue against the above mentioned assertions made by Cassim and Habib.
Is it true that the participation in the informal sector is associated with impoverishment? Is it true that people engage into conducting business in the informal sector because they need to survive as they have no other alternative? These two questions serve as a foundation into developing an argument against the assertions made by Cassim and Habib about the informal sector’s participation. The argument reflects on the entrepreneurial potential and dynamics in the informal sector.
This paper firstly discusses Cassim’s and Habib’s assertions to have a general understanding of what they meant. This is then followed by a brief overview of the South African informal sector and an argument against those assertions will be provided using useful example of informal sector participation’s contribution. Finally, a conclusion is provided summarising the paper. The following lines will brighten this essay.
Cassim’s and Habib’s perspective of the informal sector
Taking into consideration Cassim’s assertion, the informal sector’s participation is associated with impoverishment. This assertion is then reinforced by Habib, stating that informal sector’s participation is done by individuals who need to survive as they have no other alternative to do so. These two assertions from Cassim and Habib provide an identity of informal sector participants as poor and marginalised people seeking to survive. This means that informal entrepreneurs are the ones coming from the poorest arenas of the economy. They start a business just to ‘bring food on the table at the end of the day.’ To have a clear understanding of the informal sector participation, it is important to know the environment’s characteristics informal entrepreneurs are coming from and where they work.
Most informal entrepreneurs come from rural arenas. Their houses mostly do not have electricity or running water (Ikoja-Odongo & Ocholla, 2004). Their level of education is usually very low; the economic activities are low as well. Demographically, the informal sector environment is the most impoverished. Most of the informal entrepreneurs live in shacks. They work as street traders and own spaza shops. (Ikoja-Odongo & Ocholla, 2004).
It is important for this paper to have a brief overview of the South African informal sector as this paper will also be reflecting on the informal sector in the South African context.
The South African informal sector
Due to the lack of common views about the role and content of the informal sector there is an absence of shared views concerning this issue -informal sector- (House, 1984). The role and content of the informal sector have grown more and more complex since it has been firstly described in1972 in an International Labour Office (ILO) on Kenya (Tokman, 2007). The informal sector has been denoted as a generally negative hindrance and realm to progress in western countries for many years (Williams, 2007). But in developing countries, the informal sector is viewed as a contributing force to the economic improvement (Ligthelm, 2013).
Over the past two decades, South Africa went through important economic and political revolution (Peberdy & Rogerson, 2003). This was mainly caused by the revolt against the restriction on migration, entrepreneurship and urban dwelling Morris & Pitt, 1995). The migrants from other parts of the country turned into participating in the informal sector for living. In this perspective, the activities in the informal sector are considered as unregistered and unregulated actions outside the formal sector of the economy (Callaghan & Venter, 2011).
The South African informal sector has a significant contribution in the South African economy (Callaghan & Venter, 2011). It is believed that it takes 25% of the total South African employment and contributes from 5 to 6% in the total GDP (Ligthelm, 2006). The engagement in the informal sector helped the informal sector practitioners to enhance their entrepreneurial and marketing skills (Zulu, 1991).
The attention of this paper will now be given to the argument against Cassim’s and Habib’s assertions about the informal sector participation based on the entrepreneurial potential and dynamics.
Based on the findings of William House in his study “Nairobi’s informal sector: dynamic entrepreneurs or surplus labor” in 1984. Informal entrepreneurs are successful in the expansion and accumulation of capital assets regardless of the public authorities’ negative attitude toward their activities. Entrepreneurs in the informal sector increase the employment opportunities as well as the income potential as stated by the ILO (House, 1984). Their investment made encourages important rise in income that leads to improved job opportunities due to the technology used and the labour intensity (House, 1984).
The informal sector is considered as a dynamic sector able to create jobs and generate profits for reinvestment. The informal sector employment is not only marginally fruitful but is also economically effective while making profits (House, 1984). Because the informal sector is used by the formal sector, which purchases from it at low prices and sell at high prices, the informal sector is unable to expand in a revolutionary way (Leys, 1973). Recent researchers have discovered that certain informal sector’s activities may have potential for economic development (House, 1984).
Rempel and House (1978) have divided the informal sector’s participants into two groups labelled ‘the community of the poor’ and ‘the intermediate sector.’ The informal sector participants in the first group are attached to the city and want to get employed in the formal sector. They consider their current occupation as temporary and hope for a formal participation in the economy. On the other side, the informal sector participants in the intermediate group decide to choose to be permanent entrepreneurs and make their business a mean of living. They are highly motivated into investing in and building their career for the future. As they choose to be entrepreneurs, they are more likely to influence the entire family into the process (Rempel &House, 1978).
Informal entrepreneurs are generating significant incomes for their employees as well as for themselves (House, 1984). House stated that informal entrepreneurs’ work contribute into reducing the level of poverty in the environment in which they operate thus reducing the level of poverty in the national context (House, 1984).
Taking into consideration the statement above, it is clear that the informal sector has great entrepreneurial potential and dynamics that are significantly different from the assertions made by Cassim and Habib. Just because the informal sector is not regulated by the government’s policy, doesn’t mean that it does not contribute in the economy and that the participant does not have any choice concerning their job. While informal entrepreneurs conduct their business, they generate jobs and generate money for their employees and for themselves, this help in the elimination of poverty.
The study conducted by Franklin Allen in 2002 in China, shows that the informal sector has contributed largely in the economic development of China, which is now considered as a powerful economic leading country. “The key to the country success lies in its fast growing informal sector…it’s not so much the banks and stock market that are important, it is the informal sector that’s driving China’s growth” (Allen, 2002).
The ultimate goal of entrepreneurs whether in formal or informal sector is to become independent, this act as the entrepreneurial motivation (Santos & Coetano, 2005). They have the psychological competencies -emotional intelligence, ability to innovate, resilience-, social competencies -ability to communicate and persuade, network-development ability- and management competencies -leadership skills, resource mobilisation ability, vision, entrepreneurial self-efficacy- (Santos & Coetano, 2005).
In the lines above, House’s study has shown that there are two types of entrepreneurs, the one who believe they will get a job in the formal sector in the near future and the ones who choose to be self-employed. The former and the later types of informal entrepreneurs contradict Habib’s assertion stating that the informal sector participants are made of people who have no alternatives.
Based on a study conducted in South Africa by Chris Callaghan & Robert Venter in 2011 concerning the informal sector participation, the entrepreneurial context has an important influence on the entrepreneurial orientation in the informal sector. Entrepreneurship’s learning factors were found to be meaning fully linked with entrepreneurial orientation and innovation (Callaghan & Venter, 2011). Human capital and the learning-related factors contribute in shaping the entrepreneurial orientation in the informal sector. Practitioners in local or national government and others willing to help the participants in the informal sectors may increase the entrepreneurial orientation of informal sector participants through educational opportunities and training courses. High level of entrepreneurial orientation may help the positive development of informal entrepreneurs. The informal sector has positive potentials. The main finding of this study was that the informal entrepreneurs in South Africa are more competitively aggressive and proactive, but are less innovative (Callaghan & Venter, 2011).
Conclusion
Although, many authors such as Cassim and Habib, have stated negative perspective of the informal sector, there are also many researchers and authors such as House, Allen, Callaghan and Venter as stated in the paper who view the informal sector as a powerful economic tool that enhance the economic development of the country. This is done by creating job opportunities that help to lower the country’s level of unemployment and decrease the level of poverty of a nation in contradiction of Cassim’s assertion. It is believed that most informal entrepreneurs start their venture to survive, but they actually have an alternative when choosing their careers. Some consider their present situation as temporary before going in the formal sector while others choose to be self-employed. This means that they have a choice, therefore they are not in a “stuck” position with no alternative as stated by Habib. It is important that formal enterprises and government accept the informal sector, its contribution whether big or small, through the consumers’ expenditure that is taxed, help to enhance any country’s economy.

References

Allen, F. (2002). KNOWLEDGE@WHARTON. Retrieved May 2, 2002, from http://knowledge.wharton.upenn.edu/article/informal-entrepreneurship-is-the-key-to-chinas-success/

Callaghan, C., & Venter, R. (2011). An investigation of the entrepreneurial orientation, context and entrepreneurial performance of inner-city Johannesburg street traders. Southern African Business Review, 15(1), 28-48.

Cassim. F. (1982). Labour market segmentation: the theoretical case. South African Journal of Economics, 50 (4), 240-247.

Habib, A. (2005). State-civil society relations in post-apartheid South Africa. Social Research: An International Quarterly, 72(3), 671-692.

House, W. J. (1984). Nairobi's informal sector: dynamic entrepreneurs or surplus labor?. Economic Development and Cultural Change, 32(2), 277-302.

Ikoja-Odongo, R., & Ocholla, D. N. (2004). Information seeking behavior of the informal sector entrepreneurs: the Uganda experience. Libri, 54(1), 54-66.

Interpreting African underdevelopment: reflections on the ILO Report on Employment, Incomes and Equality in Kenya. African Affairs, 419-429.

Leys, C. (1973). Schumpeter, J. A. (1934). The theory of economic development: An inquiry into profits, capital, credit, interest, and the business cycle (Vol. 55). Transaction Publishers.

Ligthelm, A. A. (2006). Size estimate of the informal sector in South Africa. Southern African Business Review, 10(2), 32-52

Ligthelm, A. A. (2013). Confusion about entrepreneurship? Formal versus informal small businesses. Southern African Business Review, 17(3), 57-75.

Morris, M. H., & Pitt, L. F. (1995). INFORMAL SECTOR ACTIVITY AS ENTREPRENEURSHIP-INSIGHTS FROM A SOUTH-AFRICAN TOWNSHIP. Journal of Small Business Management, 33(1), 78-86.

Peberdy, S. and Rogerson, C. M., 2003. South Africa: creating new spaces? In: R. Kloosterman and J. Rath, eds. Immigrant Entrepreneurs. Venturing Abroad in the Age of Globalisation. New York: Berg. pp. 79–99.

Rempel, H., & House, W. J. (1978). The Kenya Employment Problem: An Analysis of the Modern Sector Labour Market: a Study. Oxford University Press.

Santos. S. C & Coetano. A (2011). The entrepreneurial potential model. Lisbon University, 1-15.

Tokman, V. E. (2007). Modernizing the informal sector. UN/DESA Working Paper, (42), 1-13.

Williams, C. C. (2007). Entrepreneurs operating in the informal economy: necessity or opportunity driven?. Journal of Small Business & Entrepreneurship, 20(3), 309-319.

Zulu, P., 1991. Legitimating the culture of survival. In: E. Preston-Whyte and C. Rogerson, eds. South Africa’s Informal Economy. Oxford University Press: Cape Town. pp. 115–123.…...

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