Informal Sector (Unit 26)

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Define the informal sector.

The informal sector is the unregistered and unregulated part of the economy in which individuals earn an income through small-scale economic activities. Businesses are not formally registered with the government and generally do not pay income tax.

Define informal sector employment.

Informal sector employment refers to work in unregistered businesses where people earn an income without formal employment contracts, legal protection or employee benefits.

Define entrepreneurship.

Entrepreneurship is the process of creating, organising and managing a business to make a profit while taking financial risks.

Define an entrepreneur.

An entrepreneur is a person who starts, owns and manages a business to earn a profit.

Define a credit facility.

A credit facility is a loan or financial arrangement that allows a business to borrow money over a period of time.

Define income tax.

Income tax is a tax imposed by government on the income or profits earned by individuals or businesses.

Define VAT (Value Added Tax).

VAT is a tax added to the selling price of most goods and services. Although informal traders generally do not pay income tax, they still pay VAT when purchasing goods from formal businesses.

Define the formal sector.

The formal sector consists of registered businesses that operate legally, pay income tax, comply with government regulations and provide formal employment.

What is a street vendor?

A street vendor is an informal trader who sells goods in public places such as pavements, taxi ranks or roadsides.

What is hawking?

Hawking is the selling of goods or services in public places without operating from a formal registered business.

What is a small-scale business?

A small-scale business is a business that operates with limited capital, few employees and relatively low production or sales.

What is labour intensive?

Labour intensive refers to production or services that rely mainly on human labour rather than machinery or advanced technology.

What does capital mean?

Capital is the money and resources needed to start or operate a business.

What is collateral?

Collateral is an asset offered as security when applying for a loan.

Why do informal traders often struggle to obtain loans?

They usually lack collateral, proof of income and registered businesses, making banks unwilling to lend money.

What is mechanisation?

Mechanisation is the use of machines to perform work that was previously done by people.

How does mechanisation contribute to informal sector growth?

Mechanisation reduces the need for manual labour, causing job losses that push many people into informal employment.

What is casual labour?

Casual labour is temporary or irregular work that usually has no permanent contract or employee benefits.

What is self-employment?

Self-employment is earning an income by working for yourself rather than being employed by someone else.

What is the tertiary sector?

The tertiary sector consists of businesses that provide services and sell goods to consumers.

Give examples of tertiary sector activities.

Retail shops, supermarkets, banks, restaurants, transport services, doctors, hairdressers, internet cafés and repair services.

Which economic sector does the informal sector mainly belong to?

The tertiary sector.

Name four examples of informal sector employment.

• Hawkers • Street vendors • Parking attendants/parking guards • Casual labourers (painters, gardeners, cleaners, tilers)

Name four examples of formal sector employment.

• Teachers • Doctors • Bank employees • Factory workers

State four differences between the formal and informal sectors.

• Formal businesses are registered; informal businesses are not. • Formal businesses pay income tax; informal businesses generally do not. • Formal businesses comply with government regulations; informal businesses operate outside many regulations. • Formal workers receive benefits such as UIF, pensions and medical aid; informal workers usually do not.

Why is it incorrect to simply say informal traders 'pay no tax'?

They generally do not pay income tax, but they still pay indirect taxes such as VAT when purchasing goods.

Why is the informal sector sometimes called the unregistered sector?

Because businesses are generally not officially registered with government authorities.

Why is the informal sector sometimes called the unregulated sector?

Because many businesses operate outside formal government regulations and monitoring.

Is the informal sector legal?

Most informal trading is legal, although businesses may not be formally registered. Illegal trading (such as selling stolen or counterfeit goods) is not part of the definition of the informal sector.

What is the main purpose of the informal sector?

To provide people with an opportunity to earn an income when formal employment is unavailable or difficult to obtain.

Which groups are commonly represented in the informal sector?

• Self-employed individuals • Family-run businesses • Women • Youth • Semi-skilled and unskilled workers • Some immigrants who cannot access formal employment

Which common Geography examination mistake must be avoided?

Do not confuse the informal sector (economic activities/businesses) with informal settlements (places where people live). The informal sector is part of Economic Geography, while informal settlements are studied under Urban Settlements.

What are the main characteristics of the informal sector?

• Small-scale businesses • Self-employment is common • Low start-up costs • Labour intensive • Low use of technology • Unregistered businesses • Generally do not pay income tax • Family ownership is common • Limited access to credit • Irregular working hours and income

Why are informal sector businesses usually small-scale?

They operate with limited capital, employ few workers and produce or sell relatively small quantities of goods or services.

Why are start-up costs in the informal sector usually low?

Businesses require little capital, simple equipment and often operate from roadsides, homes or temporary structures.

Why is the informal sector labour intensive?

Most work is done by people rather than machines because traders cannot afford expensive technology.

Why is technology use generally low in the informal sector?

Businesses often lack the capital needed to purchase machinery, computers or specialised equipment.

Why is family ownership common in the informal sector?

Family members often help run the business because it reduces labour costs and provides employment for relatives.

Why are many informal workers self-employed?

They create their own employment because formal jobs are limited or unavailable.

Why are profits in the informal sector generally small?

Businesses operate on a small scale, face strong competition and usually sell low-value goods.

Why is income often irregular in the informal sector?

Income depends on customer demand, weather conditions, competition and daily sales.

Why are working hours often irregular in the informal sector?

Traders work when customers are available and often work long or unpredictable hours to maximise income.

Why is job security generally low in the informal sector?

Income depends on daily trading, and there are usually no employment contracts or legal protection.

Why do informal workers usually receive no employee benefits?

They are self-employed or work in unregistered businesses that do not provide benefits such as pensions, UIF, paid leave or medical aid.

What employee benefits are generally unavailable in the informal sector?

• Pension • UIF • Medical aid • Paid leave • Paid sick leave • Formal employment contracts

Why do informal businesses usually have limited access to credit?

Banks often require collateral, proof of income and business registration, which many informal traders do not have.

Why do informal businesses often struggle to expand?

They have limited capital, poor access to loans, low profits and inadequate business support.

Why are informal traders often vulnerable to theft?

They usually operate in open public spaces with limited security and storage facilities.

Name five examples of informal sector activities commonly found in South Africa.

• Selling fruit and vegetables • Hawking food • Car guarding • Gardening • House cleaning

Give five more examples of informal sector activities.

• Painting • Tiling • Shoe repairs • Hairdressing • Home-based tailoring

State the main reason for the growth of the informal sector in South Africa.

High unemployment in the formal sector.

Besides unemployment, what other factors have contributed to the growth of the informal sector?

• Poverty • Mechanisation • Lack of education and skills • Immigration • Formal sector job losses

Why does unemployment increase informal sector employment?

People who cannot find formal jobs create their own employment to earn an income.

How does poverty contribute to the growth of the informal sector?

People start small businesses to generate income and meet their basic needs.

How does lack of education contribute to informal sector growth?

Many people without qualifications cannot obtain formal employment and therefore work in the informal sector.

How do skills shortages contribute to informal sector growth?

People without specialised skills often rely on simple informal businesses to earn a living.

How does mechanisation contribute to informal sector growth?

Machines replace workers in farms and factories, forcing many unemployed people into informal work.

How do formal sector job losses contribute to informal sector growth?

Workers retrenched from formal employment often start informal businesses to survive.

How does immigration contribute to informal sector growth?

Some immigrants who cannot easily access formal employment start small informal businesses.

Which personal circumstances may lead someone to enter the informal sector?

• Caring for children • Pregnancy • Returning from studies • Retirement • Changing residence • Inability to obtain formal employment

Why is the informal sector regarded as an important source of employment?

It creates jobs for people who cannot find work in the formal economy.

Why does the informal sector continue to grow in developing countries?

High unemployment, rapid urbanisation, poverty and limited formal employment opportunities increase reliance on informal work.

Which reasons for informal sector growth are most commonly examined in IEB Geography?

• High unemployment • Poverty • Mechanisation • Lack of education and skills • Retrenchments in the formal sector • Immigration • Limited formal employment opportunities

State four reasons why the informal sector is important to South Africa.

• Creates employment opportunities. • Provides an income for unemployed people. • Supplies affordable goods and services. • Contributes to economic activity.

How does the informal sector reduce unemployment?

It provides self-employment and creates jobs for people who cannot find work in the formal sector.

How does the informal sector improve people's quality of life?

It provides an income that enables people to buy food, clothing, shelter and other basic necessities.

How does the informal sector help reduce poverty?

It allows people to earn an income instead of having no source of income.

How does the informal sector contribute to the economy?

It increases economic activity through the buying and selling of goods and services.

How does the informal sector support the formal sector?

Informal traders buy stock from formal businesses, increasing sales in the formal economy.

Why do informal traders still contribute to government revenue?

They pay VAT when purchasing goods from registered businesses, even though they generally do not pay income tax.

How does the informal sector encourage entrepreneurship?

It allows people to start and manage their own businesses with relatively little capital.

Why are informal traders often more accessible to customers?

They operate close to where people live, work and travel, making goods and services convenient to access.

Why are prices in the informal sector often lower than in the formal sector?

Operating costs are generally lower, allowing traders to sell goods at lower prices.

Why can informal traders meet the needs of low-income consumers?

They often sell goods in small quantities at affordable prices.

Why is the informal sector particularly important in developing countries?

It provides employment and income where formal employment opportunities are limited.

State five challenges facing the informal sector.

• Limited access to finance • Lack of government support • Limited storage facilities • Crime and theft • Low and irregular income

Why is limited access to finance a major challenge?

Informal traders often cannot obtain loans because they lack collateral, business registration and proof of income.

Why is low income a challenge?

Low profits make it difficult to expand businesses and support families.

Why is irregular income a challenge?

Daily earnings vary depending on customer demand, competition and weather conditions.

Why is crime a challenge for informal traders?

Traders may lose money, stock or equipment through theft and vandalism.

Why are storage facilities important?

Secure storage protects stock from theft, spoilage and weather damage.

Why is the lack of storage facilities a challenge?

Traders often have to transport stock every day, limiting how much they can sell and increasing costs.

Why is lack of government support a challenge?

Traders often receive limited financial assistance, infrastructure or business support.

Why is a lack of education and business skills a challenge?

Poor business knowledge makes it difficult to manage finances, grow businesses and increase profits.

Why is poor infrastructure a challenge?

Many traders lack access to electricity, water, sanitation, shelter and proper trading facilities.

Why is weather a challenge for informal traders?

Rain, wind and extreme temperatures reduce customers, damage goods and interrupt trading.

Why is harassment by local authorities a challenge?

Traders may be fined, moved or have goods confiscated when trading in unauthorised areas.

Why is competition a challenge?

Many traders sell similar products in the same area, reducing profits.

Why do informal traders often struggle to expand their businesses?

Limited finance, poor infrastructure, low profits and lack of business support restrict growth.

Why is government funding sometimes insufficient?

Limited financial resources reduce the government's ability to support informal traders through infrastructure and development programmes.

Give six strategies to strengthen the informal sector.

• Provide designated trading sites. • Improve infrastructure. • Improve access to finance. • Offer entrepreneurship training. • Provide skills development programmes. • Increase government support.

Why should government provide designated trading areas?

They provide safe, organised and accessible places for informal traders to operate legally.

What infrastructure should government provide for informal traders?

• Hawker stalls • Shelters • Water • Electricity • Public toilets • Storage facilities • Waste removal

Why should government improve access to finance?

Loans and financial assistance help traders expand businesses and increase profits.

Why is entrepreneurship training important?

It improves business management, financial planning and marketing skills.

Why are skills development programmes important?

They improve traders' knowledge, increase productivity and create opportunities to enter the formal sector.

Why should government provide support services?

Support services improve business success through training, advice and financial assistance.

Why should trading sites be located close to customers?

High customer accessibility increases sales and business success.

Why should informal traders be encouraged to register their businesses?

Registration improves access to finance, government support and opportunities for business growth.

Explain the relationship between the formal and informal sectors.

The two sectors are interdependent. Informal traders buy goods from formal businesses, while formal businesses benefit from increased sales. Together they contribute to employment and economic growth.