Small business: first do no harm

Terence Corrigan | Apr 12, 2019
Despite the support for the growth of small business in South Africa, there has been little take up compared to its peers.

Since before South Africa’s turn to democracy, small business and entrepreneurship have featured prominently in government strategies for economic growth, development and employment. Irrespective of the ideological bent of the incumbent government, this has been a constant. Small businesses would both seize opportunities and provide them, and to this end, reams of policy documents and all manner of state support was proposed.

If this had been achieved, South Africa would probably be a very different, and a much more prosperous, place. 

As it happens, small business in South Africa is something of a disappointment, especially compared to its peers elsewhere. This was recently highlighted at the launch of an ambitious investment fund geared at small business, the SA SME Fund. Bonang Mohale, Chief Executive of Business Leadership South Africa, decried the fact that in South Africa, small businesses contributed only 15% of new jobs, against 80% in the economies of its BRICS counterparts. 

President Ramaphosa, delivering the keynote speech at the event, added – echoing the endorsements heard for decades – that small enterprises, and not ‘mega factories and mining houses’, would create the jobs of the future.

Desirable though this might be, it is debatable, even doubtful. 

The Global Entrepreneurship Monitor – an annual worldwide study of the state of entrepreneurship – has repeatedly drawn attention to the fact that while South Africans seem to have fulsome respect for entrepreneurs, the actual take-up compares poorly with its peers. Just over 10% of South Africans aged between 18 and 64 intended to start a business in the coming three years, as opposed to the global average of over 22% or African average of over 33%. South Africa also underperformed on involvement in early stage (nascent or start-up) entrepreneurship, and was significantly behind the global and continental average for established (enduring and more formalised) entrepreneurial activity.

The failure to grow South Africa’s small business community is a complex matter, although a large body of research gives some valuable insight into it. 

South Africa’s is a tough, uncertain business environment. Some of this is a function of history or geography, such as the relative poverty of much of the society, its high crime rate or its distance from key export markets. It also reflects the failures of policy and administration, as in a heavy and poorly managed regulatory burden or a deficient state bureaucracy.  A further element is the compromised state of the systems that should incubate entrepreneurs and the capabilities that their firms require – notable in this regard is the state of the country’s education system. 

A comment some years ago by business analysts SBP holds true today: ‘The failure of South Africa’s SMEs to drive inclusive growth, unlike their peers elsewhere in the world, is an outgrowth of numerous factors that cumulatively express themselves in diminishing workforces, declining demand, skills shortages, restricted cash-flows, dysfunctions in governance and poor service delivery.’

Small businesses’ success is heavily influenced by the overall economic environment. As the National Development Plan succinctly phrased it: ‘A thriving economy creates more opportunities for entrepreneurs and for the growth of small businesses.’  But lacklustre economic growth has been both a consequence and a cause of the failure to get the small business economy moving. Anaemic economic growth provides meagre pickings for entrepreneurs, which denies them the traction they would need to drive more energetic growth. 

Encouraging entrepreneurship should be a key priority, and perhaps it would be unfair to argue that government (and the private sector, for that matter) have been indifferent to this. Indeed, the recent financing initiative represents a tangible move to do so.

The GEM has identified a trio of ‘critical constraints’ on small business. These are finance, government policy and education and training. Establishing a platform to make funds available to small business – as this most recent initiative does – is a useful contribution.

Useful, but insufficient. The provision of funding – however generously offered – will not be enough to induce the growth of a robust small business community within the country’s current environment. Too much works against successful business, and much of this is the result of government’s own choices.

Warnings about the impact of labour or empowerment laws have gone largely unheeded. Despite acknowledgement of the unproductive burden that red tape placed in small businesses (as then finance minister Pravin Gordhan said some years back, ‘we’ve been pathetic in terms of helping small businesses to become more dynamic’) this remains unaddressed. Delays in tax refunds and the issuing of tax clearance certificates dogged businesses long before South Africa’s tax authorities came under the state capture spotlight. Despite respectable spending on education, sourcing applicable skills – right down to reading and writing – is an ongoing headache.

And despite President Ramaphosa’s appeal last year to treat the business community as allies not enemies, one of the signature policy drives of his administration – expropriation without compensation – cannot help but do just that. It has exacted untold damage on the economy and on the confidence of businesspeople within it. The country’s mining industry has likewise been compromised by counterproductive policy, with no end in sight for it.

A robust small business economy will grow if the conditions – a large complex of conditions – are satisfactory. To deal with what has gone wrong, South Africa would do well to look to the pathologies within its governance, and its failure to take the action that has long been recognised as necessary. Without this, finance, government programmes and all manner of support will be of limited value. Doing no harm, in other words, must come before offering assistance.

Whether government can rouse itself to do this, to focus on the many difficult, unglamorous obstacles that undermine the business environment, is an open question. But if it is serious about growing a strong small business community, it can do nothing less. 

 

Terence Corrigan is a project manager at the Institute of Race Relations

 

 

 


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