S van der Merwe: Informal Institutions and Development seminar

11 December 2006

Director Louka Katseli, of the OECD Development Centre,

Secretary General of the OECD Angel Gurria,

Your Excellency, Gonzalo Arenas Valverde, Vice Minister of Planning,
Chile

Your Excellency Mme Ginette-Ursule Yoman Secretary of State for Good Governance
of Cote d'Ivoire

Distinguished Guests

Ladies and Gentlemen

Thank you for the invitation to this Seminar to share thoughts and
experiences on informal institutions and development from South Africa. I am
sure that each of our own country's experiences in this regard will contribute
to a better understanding of the challenges we face.

Each of us will have a different perspective and each of these perspectives
will be based on our particular history and on the decisions and policy choices
that our governments have taken in the past and present.

Therefore each experience will be unique and so for the purposes of our
discussion today I would like to briefly outline where South Africa finds
herself today, our own experience in terms of our history and our policy
choices.

Like many developing countries South Africa has a colonial history, and in
our case, colonial rule followed by the apartheid regime which was
characterised by policies of racial discrimination and exclusion.

The apartheid government deliberately marginalised the majority of the
people from the mainstream through a comprehensive web of discriminatory
legislation and practices. Segregation, marginalisation and discrimination
permeated every aspect of life.

Hilda Bernstein, stalwart anti-apartheid activist eloquently captures the
physical separation and marginalisation of particularly women in South Africa
under apartheid in her book entitled, For their Triumphs and their Tears: Women
in Apartheid South Africa:

"Every person, black or white has to live in an area designated as their
'own area.' For the white minority this means most of the country including the
areas where almost all economic activity is based. For the black majority it
means living either in a Bantustan, or a white-owned farm, or in a black
'township' near a 'white' town. For many black women in domestic work it means
living on the white employer's property in separate accommodation. The
townships are segregated dormitory areas with virtually no commercial or
industrial activity and few opportunities for employment outside what is
sometimes called the informal sector. Most of those who live in the townships
must, if they are employed, travel each day to work in the 'white' areas."

This polarisation of the society along racial lines was as we can see
mirrored in the structure of the economy.

So when we achieved our democracy 12 years ago our government was faced with
the task of not only dismantling the apartheid legislative framework and
creating democratic institutions, but in reversing apartheid social
architecture, while simultaneously reviving an economy in crisis. We have come
some distance towards transforming our society in these past 12 years. Amongst
other things:

* we have adopted a progressive constitution

* scrapped all discriminatory laws and replaced them with democratic ones

* we have a comprehensive social security system in place, targeted at the most
vulnerable people in our society, the elderly, children and the disabled

* we have a vibrant civil society and a free media

* and we have achieved macro-economic stability.

Our economy has grown consecutively for the past 12years, the longest period
of consistent growth ever in our country's history. We experienced 5% growth
last year with projections of a slightly lower rate for this year at around
4,8%. We have a budget deficit of less than 1% and the prospects for the
economy for the next few years are positive.

However, we continue to face serious challenges in our society. The levels
of unemployment and poverty are unacceptably high and our country is divided
still in some respects, along racial lines.

President Mbeki has described the situation in which we now find ourselves
as a dual economy, two economies in one country.

The first economy is characterised as:

* modern

* integrated in the global economy

* producing the bulk of the country's wealth.

The second economy on the other hand is characterised by:

* underdevelopment

* isolation from the first and global economies

* it contains a large percentage of people including the urban and rural
poor

* contributes little to the countries wealth.

It is in this second economy that informal institutions exist.

I am describing this so as to position South African informal institutions
in the context of our history and how this history impacts on our current
development challenges.

It is clear that our apartheid history still affects us. It is still very
evident for example in the geographic distance between where the majority of
the people live, and where businesses and work opportunities exist. This makes
searching for employment difficult and expensive.

Also after decades of institutionalised racial discrimination, remnants of
discrimination still persist and many factors affecting employment
opportunities continue to be related to race. An example is the effect of
historically low investment in education for African people which still impacts
on our society today.

The combined effects of decades of institutionalised discrimination, in the
mismatch between where people live and where work opportunities exist; in
historically poor education offered for black people under apartheid, not
matched with the skills needed in the modern South African society; in fewer
social networks amongst black people that could lead to employment - all
contribute to the present challenges we face with high unemployment and related
poverty.

Significant informal institutions exist in South Africa, despite the fact
that under apartheid, entrepreneurship was actively discouraged and, as a
result compared with our neighbours on the African continent, we have a
relatively small informal sector.

It is in this context of our history that our current challenges must be
assessed and addressed.

Over the years South African people have responded to their predicament and
"devised institutions to control their environment" as described in the input
paper on this seminar. To illustrate this I will describe just two such
institutions in our society.

The first is the mini-bus taxi industry. This is a multi million-dollar
industry today. It has developed out of need, as a result, to a large extent of
apartheid spatial planning, a unique development in the transport sector. The
industry has emerged over the past twenty years, and refers to the privately
owned mini-buses, which carry about sixteen passengers at full capacity. It has
developed into a strong economic contender with traditional modes of transport,
namely buses and passenger rail. At peak times, this industry holds 65% of the
commuter market share. It has developed spontaneously as a result of
non-provision of rail and bus services to certain sectors of the community and
over the years, has had a significant impact on the market share of traditional
modes of transport.

Until recently the industry was completely unregulated in the formal sense,
without safety standards and without regulated route allocation, and of course
it was outside the income tax net. The industry has shown huge growth and
because of this fact, combined with no formal regulation, high accident rates
occur, because of overloading and poorly maintained vehicles, and sometimes
violent conflicts have erupted over contested routes. Also as it is a cash
industry, the opportunity cost of uncollected tax revenues for the fiscus is
significant.

After a lengthy and inclusive consultation process government has taken the
first steps in regulating the industry through a taxi recapitalisation
programme. Start-up capital is provided through a scrapping allowance on all
existing taxis. These will be replaced with new vehicles, which will have to
comply with safety standards. Also their operations will be included into
integrated transport planning, taking into account all modes of transport.

The potential benefits for the fiscus in terms of direct tax revenue as well
as the human safety spin off in the reduction in accidents associated with the
condition of the vehicles, are anticipated to be far above the cost of the
scrapping incentive. Therefore the formalisation of the Taxi Industry will, we
believe have significant development gains, advantages both in terms of safety
for commuters and for the fiscus, enabling more to be spent on road
infrastructure for example.

A second and very significant informal institution that was originally
started in the 19th century is what is known as "stokvels." These are community
savings clubs and exist throughout our country. Members club together in their
own neighbourhoods and contribute a specific amount each month to the club. The
system operates on a rotation basis and each member receives all the
contributions when their turn in the rotation arrives. Some work simply as
savings clubs and the payout helps with Christmas or holiday expenses, but many
are funeral clubs, and only pay on the death of the registered member. Funerals
are expensive in South Africa and this acts as an informal insurance scheme to
allow for a decent burial and relieve the family from financial burden.

These clubs emerged as alternatives to traditional banking, which was
previously unavailable to the poor, but also provide very important community
networks as social clubs.

The "stokvel" system in South Africa has grown also into a multi-million
dollar industry, worth an estimated $800 million per year with membership of
around 3,5 million people. In recent years stokvel societies in some instances
have become big investors in the bond market . There is now a National Stokvel
Association of South Africa, forming its own regulation mechanism.

This savings system again, emerged as a response to exclusion from the
mainstream banking system and remains one of the most vibrant savings systems
in the country.

These examples show the response of marginalised communities to the
conditions under which they found themselves in apartheid South Africa. They
emerged in response to exclusion and need and as a means of survival.

The question then is, to the extent that these and other informal
institutions exist in the second economy what has been government's response to
these institutions?

The democratic government was faced with the challenge of having to bring a
large percentage for the population into the mainstream economy without
upsetting the traditional community based informal institutions that are still
critical in providing services from which they were excluded under
apartheid.

In order to address what we call our second economy challenges, our
government has amongst others examined the "Structural Funds" instituted by the
European Union in respect of its regional policy, which is based on financial
solidarity of transferring a portion of the EU's budget to the less prosperous
regions and social groups within the EU. The EU programme is premised on the
reality that "the market cannot be relied on upon to meet the development needs
of the 'less favoured regions' within the EU, guarantee the achievement of the
centrally important objective of social cohesion, and provide the means for the
implementation of 'strategies for catching up'.

Similarly, we have considered that this organisation, the OECD was set up in
1948 to co-ordinate the Marshall Plan for the reconstruction of Europe after
the second world war, supported by significant funds from the United States and
Canada.

In the same spirit, the South African government therefore resolved that the
development of the marginalised economy requires the infusions of capital and
other resources by the democratic state to ensure the integration of this
economy within the developed sector.

This involves, in South Africa's case an active partnership between all
levels of government and other social partners in our society, including trade
unions, political parties and religious organisations. We have developed key
strategies to meet our development challenges including:

* an integrated and sustainable rural development programme

* an Urban renewal programme

* an extended public works programme with an emphasis on infrastructure
development

* the development of small, medium, and micro enterprises with special emphasis
on black economic empowerment

* special programmes for the empowerment of women

* restructuring the education system to be responsive to necessary skills in
our society.

In other words, we decided that in order to bring our people into the first
economy world with all its benefits, many players needed to be mobilised,
including but not restricted to the State.

Appreciation of the dynamic interplay between the informal and formal
institutions has been revealed in the recently published government document
entitled: A Nation in the Making: A Discussion Document on Macro-Social Trends
in South Africa. According to this study:

"The fact that some macro-social developments play themselves out
irrespective of public policy does emphasise the need to understand (both the
capacities and limitations of the State. In part, this underlines the
importance of partnerships across all sectors of society. But it can also
reflect omissions on the part of public policy, or unintended consequences of a
particular programme or a combination of programmes."

The report goes on to say that, twelve years into our democracy, the State
can count amongst its achievements the attainment of "macro-economic stability
and using the fiscus and other instruments at its disposal to distribute
wealth. The economy has grown at rate higher than that of the population
growth, though far below the country's requirements and potential."

"However, the exclusion of the majority from the first economy continues to
expresses itself starkly in the high unemployment rates."

In 2005, government took a further step to speed up the implementation of
the strategies to meet our development challenges by initiating the Accelerated
and Shared Growth Initiative for South Africa (AsgiSA), whose objectives
includes eliminating the second economy. The emphasis in this initiative is on
the shared nature of the approach. The government recognises that "without
interventions directly addressed at reducing South Africa's historical
inequalities, growth is unsustainable. Conversely, successful measures to
reduce inequalities will add impetus to growth." This also recognises that
growth of the economy is not in itself sufficient to address our unemployment
problems.

I should emphasise that the AsgiSA initiative is not a new set of policies
but rather a co-ordinated and targeted approach to implementation of programmes
that seek to provide greater focus in key areas of growth and potential growth,
and it intends to leverage the mainstream economy resources to address the
second economy issues.

There are numerous examples of how informal institutions have been
regularised and brought into the mainstream economy with positive results. For
example, in the financial sector, informal institutions, ranging from community
funeral schemes, money pooling and informal saving schemes, as well as informal
loan schemes are being evolved and developed towards inclusion in the
regulative regime.

This is one area where interventions to formalise financial activity in the
form of providing appropriate access to financial services for the poorest
members of society has recently been undertaken. Through the Financial Services
Empowerment Charter, which is an agreement between Business, Civil Society,
Labour and Government, business has agreed to provide products which are within
reach of the previously "unbankable" sectors of the population. This
undertaking is already providing positive results as it offers opportunities
for basic savings for individuals.

Opportunities for earning returns on investment for micro-investors now
exist as well as access to credit at realistic rates. This as opposed to being
at the mercy of unscrupulous money lenders. There is scope for more development
in this sector, and we realise that access to financial services is one
necessary step to alleviating poverty. A comprehensive set of undertaking and
ensuring the marginalised economic population is brought into the mainstream is
the overall objective.

While access to finance is important, even vital, along side this we also
need to consider the efficacy of fair and equitable tax regime in developing
economies, and the development of effective institutions that contribute to the
broader development agenda of the country. This is of course a reciprocal
process. Government alone cannot achieve effective institutions if the
citizenry do not co-operate with government by contributing to
revenue-generation by paying their taxes.

According to the 2006 World Development Report:

"It follows that the same institutions that influence the quality and
breadth of service delivery also affect the overall tax effort. Revenues, like
spending, increase with a country's level of income, but the quality of
institutions - notably voice and accountability can strengthen the tax effort,
as the services provided become a reflection of the desires of the broader
electorate rather than a privileged few."

We must recognise that the better the revenue collection and thus the
increase of resources available for public spending, the less countries will be
reliant on foreign aid. However, for this to happen there needs to be
confidence in the governance structures and in democratic political
processes.

In summary and in recognition of the huge potential that the collective
energies of our people can contribute towards the economic agenda of the
post-apartheid era, the South African government has sought to regularise this
informal sector and bring those people who are still in the second economy into
the mainstream economy. This project has sought to run parallel to the
dismantling of the apartheid state machinery and legislation to create a
conducive environment wherein this informal sector, as it is known, can be
brought from the margins to improve economic efficiency and support
inclusion.

I have attempted here to give a South African perspective on the challenges
that face us a country, many challenges that we share with other developing
countries. Various informal institutions have played a key role in creating the
new South Africa. I have described two here, the Stokvels or savings clubs and
the taxi industry which have become a significant economic players.

Ladies and gentlemen,

I would like to conclude with a reference to an argument by Karl Polanyi, an
exponent of economic sociology. He argues that economic transactions cannot be
understood outside their social relations. Thus key components of social
relations which influence the dynamics of informal institutions range from
relations of kinship, religion, and gender; which constitute social customs and
norms of actors.

As economies evolve and develop, these informal institutions underpinning
social arrangements and constituting informal institutions reach a point where
they become part of the mainstream, regulated, part of the tax base, part of
the democratic process.

I thank you.

Issued by: Department of Foreign Affairs

11 December 2006

Source: Department of Foreign Affairs (http://www.dfa.gov.za/)