Estimating the size of the informal economy in South Africa: |
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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:
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In a 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 R446,581,000,000 (that's right. Thats 446,5 Billion Rand). The overall use in the economy amounted to R5,461,575,000,000. Yes that is 5.46 Trillion Rand. Thus the size of the non-measured, informal and non profit household category as percentage of the total is (R446.5billion/R5.46trillion) 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.
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 R446,581,000,000 (that's right. Thats 446,5 Billion Rand). The overall use in the economy amounted to R5,461,575,000,000. Yes that is 5.46 Trillion Rand. Thus the size of the non-measured, informal and non profit household category as percentage of the total is (R446.5billion/R5.46trillion) 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 R1 000 000, the overall income for this group is R100 000 000).Based on the reported household income per month the total household income for 2014, based on the GHS 2014 was estimated at R1,829,940,590,759 (or R1.83trillion).
Expenditure:
Total household final consumption expenditure for 2014, as reported by the South African Reserve Bank amounted to R2,299,426,000,000 (or R2.3trillion). 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 R258,643,000,000 (or R258billion). This leaves us with a final expenditure value for households at R2,040,783,000,000 (R2,3trillion-R258billion).
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%
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 R1 000 000, the overall income for this group is R100 000 000).Based on the reported household income per month the total household income for 2014, based on the GHS 2014 was estimated at R1,829,940,590,759 (or R1.83trillion).
Expenditure:
Total household final consumption expenditure for 2014, as reported by the South African Reserve Bank amounted to R2,299,426,000,000 (or R2.3trillion). 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 R258,643,000,000 (or R258billion). This leaves us with a final expenditure value for households at R2,040,783,000,000 (R2,3trillion-R258billion).
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 of the size of the informal economy, it is in line with other estimates of the informal economy of South Africa, with our estimates ranging between 8.18% and 11.52% (and reported research estimates ranging between 7% and 13%).
While the two methods we used to estimate the informal economy is extremely crude and very broad assumptions were made in calculating our estimate of the size of the informal economy, it is in line with other estimates of the informal economy of South Africa, with our estimates ranging between 8.18% and 11.52% (and reported research estimates ranging between 7% and 13%).
Data Disclaimer:
The 2010 Supply and Use Tables (as published on 12 April 2016 by Statistics South Africa)
General Household Survey (2014) from Statistics South Africa
Final Consumption Expenditure by Households from South African Reserve Bank
Value of Credit Card Transactions from South African Reserve Bank
Source: Statistics South Africa and South African Reserve Bank
The 2010 Supply and Use Tables (as published on 12 April 2016 by Statistics South Africa)
General Household Survey (2014) from Statistics South Africa
Final Consumption Expenditure by Households from South African Reserve Bank
Value of Credit Card Transactions from South African Reserve Bank
Source: Statistics South Africa and South African Reserve Bank