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The ANC and the DA not barking up the right tree

SMEs no silver bullet for growth and jobs .

The promotion of small business in the belief that it will solve persistent high unemployment levels is on the agenda of both the ANC and the DA. Despite a difference in emphasis between the two approaches, both approaches lack an understanding of the reality of the enterprise world.

Since 2007 the ANC Government has embarked on a well-intended but impact-futile drive to promote and support the creation of tens of thousands of formal Cooperatives (backed up also by a Cooperative Incentive Scheme Grant of up to R375 00 per cooperative). It also launched a restructured SEFA and SEDA as well as a dedicated Department for Small Business Development. In several provinces there were grant initiatives to assist new small black enterprises, for instance  the Micro Business Grants of the Department of Economic Affairs, Tourism and Environmental Affairs in the Free State Province.

Add the investigation scope of the Competition Board to consider how the opening of township branches by large grocery chains impact on informal traders and one can almost believe Government is at least earnestly pursuing one of the paths suggested in the National Development Plan (NDP): “SMEs will generate the majority of new jobs”.

The DA’s Mmusi Maimane is on a crusade with his Gospel of Entrepreneurial Salvation: he wants to launch a million entrepreneurs rather than creating jobs. He is convinced adherence to Four Commandments will yield the Promised Land:

  • Small Business Incubators where start-ups can share free basic office resources
  • Creating Opportunity Centres where entrepreneurs can access support services from government more easily
  • Pioneering Opportunity Cards for entrepreneurs as a means to access credit from government as well as discounted business advisory services like accounting, training and insurance and
  • Establishing Academies for Entrepreneurs.

The DA narrative differs only from the ANC in shifting the emphasis from jobs to entrepreneurs: in reality it is a turbo-charged ANC plan. Maimane has given no indication why the one million entrepreneurs that he wants to launch will fare better than the 50 000 cooperative “entrepreneurs” the ANC had set up for failure. There is no assessment in the DA plan of sector opportunities or an assessment of strategic exploitation of international trade opportunities.

On growing the economy both the ANC and Maimane are prophets of hope, rather than well-informed strategists. Maimane is basically posturing that he will implement the NDP successfully. Neither in the ANC’s nor in Maimane’s speeches is there any indication of an understanding of how the system of enterprises operates. Both look at supply side stimulus (what can the people produce or deliver) ignoring the demands of what Trevor Manuel once called “the amorphous market”. Recent research into the manifestation of enterprises in size and sectors brings perspectives that seriously question the belief that the creation of small businesses will be beneficial to both growing the economy and thus creating jobs in the process.

The World Development Report (2012) tracked the employment creation of one person start-ups over 34 years in the US, Mexico and India. It proves that the policy and institutional environment rather than firm size determine whether start-ups that survive 34 years can create jobs (Figure 1):

Screen Shot 2015-07-17 at 11.18.03 AM

 

In India the surviving firms on average do not support a full-time owner, in Mexico apart from the owner there is a job for one extra person, but in the US the owner employs on average 8 other people: surviving small firms only create jobs in a certain policy and market context.

OECD data on firm size in 20 countries plotted on a radar graph (Figure 2) clusters the stronger economies of the UK , Germany, Sweden, France, Denmark & Switzerland (all dominated by firms employing more than 50 employees) together with Greece, Italy, Portugal & Spain (the PIGS) all dominated by firms employing less than 10 people in another cluster.

Screen Shot 2015-07-17 at 11.22.07 AM

Given the Government’s dedication to place numerous burdens on large enterprises and a Santa Claus approach of grants and unsecured loans to micro start-ups (among cooperatives in the Free State a success rate of less than 0.5% has been achieved) the ANC policy boils down to pursuing the enterprise model of Greece rather than that of Germany. Maimane appears to be blowing the same undifferentiated vuvuzela tone.  

For economic growth (without which job creation cannot be achieved) it is important to understand the tapestry of the business fabric. Research by Dr Daan Toerien and myself, mapping the Enterprise Architecture of places, makes it clear enterprise creation that does not bring in funds from outside the locality (at national basis therefore from other countries) will either result in new enterprises failing or enterprise churn with older firms being pressured out.

Our research is based on data from 200 SA towns and cities in 6 provinces (ranging from the size of Bloemfontein to hamlets like Rosendal) and the more than 35 000 formal businesses operating in these cities and towns. There are very significantly high correlations between the number of enterprises in several sectors in a town and the total number of enterprises in that town. Figure 3 shows the sector occupation of entrepreneurial space based on our data.

Screen Shot 2015-07-17 at 11.24.17 AM

Enterprises that are less dependent on the local circulation of money are those in the sectors of factories, processing, tourism & hospitality, mining and agricultural products and services. If there are to be entrepreneurial incentive schemes and support these should be aimed at these five sectors but in a context that commences with windows of export opportunity, for instance what are the US market demands that open thanks to AGOA or which opportunities would emerge should the Trans Pacific Trade Deal be concluded?  

That calls for Strategies of Common Sense rather than Strategies of Hope. It requires policies to support export-led growth rather than consumer-led growth. Greece is a text-book example of a country (locality) that operated predominantly on consumer-led rather than export-led enterprises. That shortfall was propped up by loans that reached a level of unsustainable debt.

Stimulating small non-exporting enterprises that rely in the main on consumer spending is effectively an attempt to pursue growth through local money: in poor communities it boils down to pursuing growth through recycling poverty. And introducing tourism-terminating travel arrangements demonstrates an anti-export bias in the ANC Government.

Neither the ANC with their emphasis on jobs and redistribution through a poorly implemented NDP nor the DA’s Maimane promoting micro-entrepreneurs through a beefed-up NDP version have as yet demonstrated an understanding of the need to move from consumer-led growth to export-led growth. That shift requires not entrepreneurship, but a special kind of entrepreneurship: an ability to render products and services of such quality that will convince consumers in other countries to swipe their credit cards to access these. Whether policy makers and implementing bureaucrats who are driven more by political preferences than an understanding of how markets work can make that switch is highly debatable.

The evidence suggests that creating small businesses of any kind is no silver bullet for achieving growth and reversing unemployment and poverty, but supporting enterprises – small or large – of the right kind will be a step in the right direction.

Johannes Wessels is CEO of Rural Urban Integration Consultants and a director of the Enterprise Observatory of South Africa

 

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Absolutely brilliant article. Small businesses in SA appear to be generally (not exclusively) amateurish & inefficient with close to zero ability to be much more than subsistence employment. Fully agree with comments on Maimane . His entrepeneur comments were embarrasing and he will eventually destroy trhe DA as the intelligent voters will simply go to the Freedom Front +.

Quite possibly so, but it could even be as simple as replacing imports by locally manufactured goods. It should achieve exactly the same result as concentrating on the much more difficult export led focus.

Interesting article but I wonder whether the authors considered the findings of the Kaufmann Foundation in the USA where it was found that old well established firms are generally job losers over the longer term. Both net and gross job creation come from young innovative companies not just small companies. I also believe that this matter is serious and we put hard facts on the table rather than pushing political parties into defence. At the same time how is the matter of specialisation across towns and regions which may result in robust inter provincial trade and intra- Africa trade addressed? Foreign investment into young companies may prove to be far fetched. Chris Hart has argued persuasively that domestic savings and investment are a sound basis for promoting entrepreneurial growth

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