Address By South African Deputy Minister of Foreign Affairs, Ms Sue Van der Merwe on the occasion of the International Seminar on "Informal Institutions And Development: What Do We Know And What Can We Do?" OECD Development Center, Paris, 11 December 2006

Director Louka Katseli, of the OECD Development Center,
Secretary General of the OECD Ángel Gurría,
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 marginalized 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 pas12years, the longest period of consistent growth ever in our country's history. We experienced 5% growth last year with projections of 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 and
• 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 and
• 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 spacial planning, a unique development in the transport sector. The industry has emerged over the past twenty years, and refers to the privately owned mini-busses, which carry about sixteen passengers at full capacity. It has developed into a strong economic contender with traditional modes of transport, namely busses 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 $800m 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 marginalized 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 marginalized 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 coordinated 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 marginalized 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.