Maynard: Estimating SA’s informal economy – a hefty contribution

How big is South Africa’s informal economy, a pertinent question asked by Biznews community member Herald Thiele – “This is where it’s all happening”.

Independent economist John Maynard put his thinking cap on to find an answer, because as Thiele said, government doesn’t have an accurate answer. Punching the numbers using complicated spreadsheets, Maynard reckons the informal economy is around 8% to 12% of the total. Which is in line with other theorists. An interesting read. – Stuart Lowman

By John Maynard*

To try and answer this question one has to define what the informal economy is. It can be defined as the variety of economic activities, businesses, jobs and employees that is not government regulated.

While its easy to define, it is notoriously difficult to measure or estimate. Over the years, numerous methods have been used to try and estimate the size of the informal economy.

Some of them include:

• Use of Supply and Use Tables: The part of the overall USE table that cannot be measured by administrative data sources or statistical surveys is assigned to the non-measured, informal and non profit household category. The size of this out of total can be used as a guide to the size of the informal economy.

• Currency Demand Approach: A ratio of cash over M2 money supply (Cash and savings deposits, money market funds etc). This ratio is a function of various variables, including the tax burden of the population, proportion of salaries and wages to overall income in a country, interest rate on cash holding deposits, and per capita income

• Income vs expenditure: All income from households vs what is being spent by households. If they spending more than they earn, they have to get that money somewhere. That difference is assumed to be gained from the informal economy.

• Labour Market Approach: Reported earnings from informal sector employees, informal employment in the formal sector, earnings from unregulated businesses (street hawkers, spaza shops etc). Best measured by a household survey such as the General Household Survey from Statistics South Africa.

In a Thesis paper by Stephan Saunders  that was published in the South African Journal of Economic and Management Sciences, he estimated the size of the informal economy to be 7.2% (in 2002), using the currency demand approach.

A regression model to estimate the informal economy was used in this study. Other estimates for the size of the South African informal economy includes an estimate from Loots who estimated the size of the informal economy (using the labour market approach) to be 12.6% in 1989.

Martins and Ligthelm estimated the size of the informal economy using Household Survey data and estimated the size of the informal economy to be 9.2% in 1993.

Its clear from the above that the estimated range of the informal economy is pretty varied, but most estimates coming in between 7% and 13%.

We will be taking a look at two of the methods mentioned above in order to get a point estimate (even if its a crude one) of the size of the informal economy in South Africa, they are the Use of the Supply and Use Tables and the Income vs Expenditure approach.

Use of the supply and use tables:

The Supply and Use table shows all goods and services supplied and used in the economy. Its essentially a massive matrix showing which industries supplies goods and services and which industries consumes (use) these goods and services.

As mentioned above, the goods and services that are used, that cannot be assigned to survey data or administrative data is assigned to the non-measured, informal and non profit household category. The latest Supply and Use Tables were published on 12 April 2016 (these tables show supply and use for the economy for the year 2010).

Based on the information in this table the value of the non-measured, informal and non profit household category is R446bn.

The overall use in the economy amounted to R5.46trn. Thus the size of the non-measured, informal and non profit household category as percentage of the total is (R446.5bn/R5.46trn) x 100 = 8.18%. So based on the 2010 Supply and Use tables the size of the informal economy according to our proxy estimate is 8.18% in 2010.

Income vs expenditure:

This method involves estimating the overall income earned by households in South Africa and comparing that to overall spending by households over the same period. If spending is more than reported income, the assumption is made that that money was earned in the informal economy.

Income:

An overall estimate for total household income is based income earned by households in a month as reported in the General Household Survey (GHS). The household income per month was multiplied by 12 to obtain an annual estimate.

This estimate was then multiplied by the number/frequency of households that reported that annual income (for example if 100 households reported an annual income of R1m, the overall income for this group is R100m. Based on the reported household income per month the total household income for 2014, based on the GHS 2014 was estimated at R1.83trn.

Expenditure:

Total household final consumption expenditure for 2014, as reported by the South African Reserve Bank amounted to R2.3trn. In order to improve this estimate a bit, we will remove the value of credit card purchases for 2014, as this contributes to household spending but is not actually spending of actual money earned.

The value of credit card purchases for 2014, as obtained from the Reserve Bank amounted to R258bn. This leaves us with a final expenditure value for households at R2.3trn to R258bn).

Ratio:

The ratio is calculated as expenditure over income. A ratio of more than 1 shows more was spent than what was earned and visa versa. The ratio works out as R2 040 783 000 000/R1 829 940 590 759 = 1.115218172. Essentially this works out as 11.52%.

Thus based on the Income vs Expenditure approach for estimating the size of the informal economy the estimate of the informal economy for 2014 comes in at 11.52%.

Summary:

While the two methods we used to estimate the informal economy is extremely crude and very broad assumptions were made in calculating our estimate, it is in line with other estimates of the informal economy of South Africa. Our estimates ranging between 8.18% and 11.52% (and reported research estimates ranging between 7% and 13%).

• John Maynard is the nom de plume of an independent economist who is obsessed with official statistics – and uses these facts to blast through misleading narrative and propaganda. For more of his unique insights click here.

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