Abstract
Measuring the size of the South African informal economy has received inadequate attention, making it difficult for policy-makers to assess the impact of policy measures to stimulate informal economic activity. This article aims to estimate the size of the informal economy by using the Currency Demand Approach. The empirical results reveal that the informal economy as a percentage of GDP decreased from 1967 to 1993, before levelling off. The growth in the informal econmy has also underperformed in comparison to formal economic growth. There appears to be a causal relationship running from the informal to the formal economy. Macro-economic policies aimed at the formal economy will not necessarily 'trickle down' to the informal, while these polcies aimed at the informal economy may have a profound effect on the formal economy.
Highlights
There has recently been a revival of interest in the nature and characteristics of the informal economy in developing countries
While measuring the size of the informal economy using the Currency Demand Approach is problematic in the sense that the informal economy cannot be measured directly, the time series results are largely confirmed by other studies which use a number of approaches
It is interesting to note that the informal economy as a percentage of GDP decreased during the Apartheid era when government policy actively discouraged blackowned informal enterprises
Summary
There has recently been a revival of interest in the nature and characteristics of the informal economy in developing countries. This has been driven by the increase in the size, in absolute terms, of the informal economy, and by the increasingly important role that informal economic activity can play in the generation of income-earning opportunities in developing countries (Schneider & Enste, 2003). The increase in informal activity should be seen against the background of the declining labour force absorption rate of the formal economy from 82.1 per cent in 1981 to 38.2 per cent in 20022 and the exceptionally high level of unemployment. According to the latest Labour Force Survey (StatsSA, 2004), it is estimated that the unemployment rate ranges between the strict definition estimate of 27.8 per cent and an expanded definition estimate of 41.2 per cent
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