GG Alcock: SA needs new economic ideas – based on reality, not outdated dogma

In the battle of ideas, the truth is often the first casualty. But in the Internet Age, everything said is open to being challenged. Including ideas that sit uncomfortably with the accepted narrative. GG Alcock, who has spent a lifetime exposed to the informal sector, is clearly frustrated that what is blindingly obvious to him gets continuously ignored by the mainstream. So last week he shared why he believes SA’s true unemployment rate is closer to 12% rather than the widely quoted 29%. As you would have heard in this week’s episode of The Editor’s Desk (audio below), I’m very much in GG’s camp. But former DA shadow minister of small business, Toby Chance, took issue with much of what Alcock said. And in the piece below, the son of anti-Apartheid activists who relocated to poverty-stricken Msinga in rural KZN, comes back fighting, urging for a shift in mindset by Pretoria which can usher in more appropriate economic policy decisions. – Alec Hogg

By GG Alcock*

I should ignore Toby Chance’s article critiquing my position on the informal economy but the problem is that a large proportion of government, cities and decision makers have this completely mistaken view of the informal economy and so will continue to ignore it and fail to make any meaningful change to our economy. Like Mr Chance, they will let their perceptions and misconceptions guide their policies and economic plans as if they were fact. Which “facts” are in short supply in this sector. Something I have tried to address in my books with information gathered in the sector while doing business there. I am not an academic or a researcher. I have built and done substantial business in the township and urban informal sectors. The business I founded, Minanawe Marketing was successful because we spent large amounts of time and money understanding how the informal sector businesses worked, and built very large databases of spazas, kasi kos outlets, stokvels, hawker hotspots and many more.

Chances’ arguments display a huge misconception of the dynamics of this sector, which I will try to address as concisely as possible.

I must point out before moving forward that the informal economy is not the township economy, it is the informal economy everywhere in our country from a food truck in Sandton to a kota outlet in Kanyamazane.

The starting point of Mr Chance’s problem with the informal sector is an argument which says – these guys aren’t paying tax and so are not contributing to the economy and are undermining formal businesses ability to make profits and pay these profits to the government which will then spend the money on improving its citizens lives.

I won’t dwell on the multitude of reasons the above argument makes no sense. I would rather suggest to Chance and people with this mindset that the argument should be this – in the face of our formal economy not growing and providing jobs (and in the face of a similar trend worldwide) how can we support and grow the informal economy as part of the total economy and in the process get them into the PAYE & tax on profits net (as they already pay VAT) generating money for the fiscus and an inclusive and growing economy.

Toby Chance says “informal businesses generally take away trade from formal businesses, producing minimal gain. They may grow township economies but hardly the national economy.” This in turn reduces total tax receipts, an opportunity cost to the Treasury which relies on taxes to increase social and infrastructure spending. Under-pricing formal sector vendors through regulatory arbitrage (such as not paying taxes) adds little value and is not a model for creating a successful economy of 57 million people.”

Read also: Unemployment stats not fit for purpose in SA

Let’s just say 29% unemployment is true, then how is 1/3rd of our society eating and drinking let alone putting lotion on the bodies? A large portion of the national economy is being fed by incomes from jobs in the informal economy. How many people who would otherwise be indigent or engaged in crime are surviving and making honest livings because of the informal economy? Because Mr Chance does not have any measures of the scale of this employment he cannot start to see the scale of this contribution to the informal economy.

How much VAT is being paid by the informal economy in sourcing goods that they resell or prepare and sell? Is that not a contribution to the national economy?

The formal FMCG retail sector turns over roughly R350bn, the formal wholesaler sector turns over more than R150-R200bn. Let’s use R150bn, that spend is all from the informal sector supplying food, resold by spaza businesses, hair salons, hawkers etc. Assuming that the wholesalers are paying tax and VAT on that then that is a massive contribution! Or no Mr Chance?

How many formal businesses are being supported by the informal economy – those Parmalat cheese slices and Eskort polony slices and Supreme flower bags for kotas and vetkoek and branded goods like Knorr, Benny, Nola, Koo, Rajah, Ace etc are bought by the informal economy? How many farmers are supported by the huge business of vegetable hawkers buying from farmers or from city fruit and vegetable markets? If informal sector businesses stopped buying the products of Tiger, Pioneer, Unilever, Parmalat, RCL, city fruit and vegetable markets among many others these formal sectors would lose a large proportion of their turnover, and their tax into the national fiscus. Go along now go ask each of those businesses I mention above how much of their business and their profits and and and come from informal economies or consumers whose incomes come from informal sources?

But wait I actually said that tax would be increased if the informal economy was recognised and supported, cities could generate rental etc. So whether they are directly taxed for profits or incomes above the minimum tax threshold or not the kasinomic sector is taxed and contributing to the fiscus. But they could contribute a lot more…

Chance calls into question my numbers, I am assuming because he has more accurate ones? He says “Clearly, his (Alcock’s) 12% estimate is a thumb suck.” And he continues “Everyone will agree that opinions and policies should be evidence-based, i.e. rely on reliable data. In Alcock’s case, he rejects the available data as unreliable and instead relies mainly on his own experience to inform his data and opinions. He extrapolates from this experience to come up with estimates of scale, for example the township convenience food sector being worth R85bn per annum. That’s 40% of the total annual turnover of SA’s franchised fast food and restaurant sector as measured by the Broll Qtr 3 2018 retail snapshot survey. Can Alcock’s data be verified?”

Churchill said that: “Statistics are like a drunk with a lamp post: used more for support than illumination”.

Can Alcock’s data based on 20 years of business in this sector be challenged? My figures are based on best practice case studies and township business data bases built over 20 years in the townships and informal economies of our cities. I’d say they provide lots of “illumination” Mr Churchill. But that’s not the point, Chance should be rather asking “how do we get better data on this sector?” Policy makers should have this data. Do they? Isn’t this my point in my article about the unemployment figures, that the data is wrong. When you define a job differently (which is my argument) and you measure incomes from informal businesses and other sources (like backroom rental) then your employment research will measure this sector and might reach the same 12% conclusion. My argument is that there are thousands and thousands of jobs and incomes that are not currently measured in the statistics. Mr Chance should be directing his article to Stats SA among others. How can Mr Chance or indeed Mr Ramaphosa make any “opinions and policies” or “evidence-based” meaningful decisions on the economy without accurate and importantly complete data? It’s a disgrace that the data is not there and ignores a massive part of our economy and society. Can I assume Mr Chance you will lobby for more meaningful data to be collected before questioning mine or to use to challenge mine?

Chance speaks of an informal sector of low margins and low profit of survivalist businesses. He says “Poverty alleviation doesn’t happen when margins are cut to the bone. Upward income mobility requires low-income workers add value to products” and “Business activities in townships can be described as a shadow economy but this should not be confused with an economy which is good at providing upliftment paths.”

Really Mr Chance so a huge economy of micro businesses which is not supported, or financed or recognised is not a basis for achieving scale and upliftment and your solution is what instead? Besides how many people in this country mainly black, went to school because their gogo or auntie or school mama or baba or mkhulu helped from their tabletop, their little bakkie, their spaza, their backroom rental!  How many went because of this informal sector to a college or to a model C school. And that’s not upliftment?  

Chance goes on to say “Township entrepreneurs are rarely able to achieve the scale required to be sufficiently competitive that they can be profitable while complying with regulations.”

Chances argument here based on – these are low margin businesses which do not add value and offer lowest cost unbranded options to poor township consumers. This is a tragic and common perception, but it’s incorrect, ignorant and based on no facts. I assume Mr Chance who says we should be driven by data has data to substantiate his statement? Let’s just use the fast food sector – a kota (burger of the township) sells for around R15, a plate of food sells for R35 (look out your window and you’ll see this for yourself). They can sell up to 300 amaplati and 2,000 kotas a day. Shoprite sells a plate of food for R16 at their deli and a Mac burger sells for R9.99. The consumer is not buying the kota or iplati because it’s cheaper or low value, and the seller is making a lot more money than if they had a job at Shoprite or McDonalds. These are not low margin low profit businesses, neither are they subsistence of survivalist businesses. Most people in these businesses are not looking for a job to replace their business. They are proud of their businesses and they work for themselves. A sizeable proportion and I claim the majority are high margin sustainable businesses which have been operating for years. I profiled many businesses like this in my books.

The problem that many kasinomic businesses face is they do not have security of tenure, so their livelihoods could be compromised when they lose their trading space, this limits their investment into equipment and stock. They cannot raise funding to grow their businesses improve their cashflow etc. There are simple interventions and policy changes which could transform this sector.

Chance ends with this lovely advice “Poor people selling to poor people cannot spur meaningful upliftment and will never create high rates of economic growth. Township businesses should aim to sell into high-income markets, both consumer and business.” 

Why then Mr Chance are the formal retailers, the fast food sector, the banks, the micro lenders, the building industry all falling over themselves to get into the townships? The poorest of the poor the social grant recipients are targeted for business by retailers, banks, lenders and many more. Mr Chance is saying “Mr Kasi man you go and sell to the suburbs don’t sell to the kasi people around you.” Mind boggling and certainly will make the formal sector happy, don’t compete with us don’t follow our models of turnover and wealth creation. Just look at what Shoprite Checkers is doing, not growing their footprint in Constantia or Bryanston…?

No they are emulating the spaza sector, because the spaza sector is giving them a run for their money and disrupting formal retail. As it is the South African owned spaza sector was decimated by the formal retailer’s entry into the townships, not by immigrants. What would you suggest to those South African spaza owners? Go open a spaza in Sandton, leave the township to Pick ‘n Pay?

No Mr Chance the opportunity is for township businesses to continue to compete with the formal sector in their backyard and ensure that more of the pie goes to Mrs Dlamini not Whitey Basson. And when it goes to Ibrahim from Somalia we should build in my proposed BEE style model which generates a benefit to the fiscus and pays rental at a reasonable rate vs looting and stealing.

To quote Andrew Charman of the Sustainable Livelihoods Foundation “Accepting the informal economy as part of the solution to the problem of unemployment would enable us to take a giant step towards a more inclusive discussion about the form and function that informal micro-enterprises should constitute”

The Kasinomic Revolution will continue. We do not need to go and look elsewhere in the world for economic solutions, we South Africans are very good at innovating and doing things differently. Time to do the same with our economy and our response to unemployment and the informal economy. Ignorant and perception-based opinions are dangerous and limit our economic potential.

• GG Alcock has been at times a shebeen owner, political activist, community worker and African adventurer, and more recently the founder of Minanawe Marketing, a leading marketing agency in the mass market.