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Estimates of the informal economy in South Africa: some macroeconomic policy implications.

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dc.contributor.author Saunders, Stephen Graham
dc.date.accessioned 2008-06-20T13:42:43Z
dc.date.available 2008-06-20T13:42:43Z
dc.date.issued 2008-06-20T13:42:43Z
dc.identifier.uri http://hdl.handle.net/10210/653
dc.description.abstract This study estimates the size of the informal economy in South Africa, evaluates the macroeconomic implications of this, and then concludes with possible effects that all of this might have on policy. The research is conducted as a South African case study, and uses time-series analysis for the period 1966-2002. Recently there has been a revival of interest in the informal economies of a number of countries. The revival has been driven largely by an increase in the size of informal economies, in both absolute and relative terms. South Africa is no exception to this trend: more and more people are entering the informal economy. The rapid urbanization of the black population, the slow pace of economic growth, the decrease in the incidence of formal employment, the promotion of small-, medium- and microenterprises (SMMEs), as well, finally, as the so-called ‘informalization’ of formal businesses are all factors contributing to the recent growth in the South African informal economy. There is not much literature on the South African informal economy, and what there is tends to be narrow, specializing in particular aspects of the informal economy. Moreover, the subject is controversial: there seems to be little agreement on the definition and use of informal economy estimates in both economic analysis and policy-making. In response to this situation, therefore, the present study examines the problem of defining the informal economy and considers the reasons why people might prefer to operate in the informal economy rather than in the formal economy. By III examining the various definitions of the South African informal economy and by looking at the reasons why people are operating in it, it is possible to gain an understanding of the various approaches used in international literature on the subject to measure the economic contribution of informal economies. A critique of the different approaches suggests that the currency demand approach is an appropriate method for measuring the informal economy in a developing country such as South Africa. The results of the analysis indicate that while the size of the informal economy stood at an average of 9.5% of GDP for the period 1966-2002, the size of the informal economy during the period 1966-1993 decreased. After 1993, the size of the informal economy remained relatively constant. These estimates of size are then used to test the nature of the relationships between the informal and formal economies. It was found that the informal economy has effects in, and on, the formal economy. This finding suggests, ultimately, that an increase in the size of the informal economy will ultimately contribute to an increase in the growth of the economy as a whole. These findings are used in the present thesis in the formulation of policy recommendations regarding the regulatory and macroeconomic policies currently in place in South Africa. The recommendations cover many areas: variable bias, monetary policy, fiscal policy and taxation, capital markets, and employment policy. Areas for further research are also indicated. The study concludes that macroeconomic policy which largely ignores or neglects the informal economy in its modelling IV and planning increases the likelihood that such policy may be overly contractionary, or that it may have unintended consequences. As a consequence, the South African informal economy should be included in all macroeconomic models – whether monetary, fiscal, or development models. The due consideration of the informal economy takes on even further significance in the South African context: it consists largely of the formerly disadvantaged and vulnerable groups of society – the very people who have been given priority in the government’s broad medium-term macroeconomic policy (i.e. GEAR). The estimates presented in this study should therefore make a contribution to macroeconomic modelling and planning. en
dc.description.sponsorship Prof. Elsabe Loots en
dc.language.iso en en
dc.subject South Africa en
dc.subject macroeconomics en
dc.subject economic policy en
dc.subject informal sector ( economics ) en
dc.title Estimates of the informal economy in South Africa: some macroeconomic policy implications. en
dc.type Thesis en

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