The Catch-22 of Entrepreneurship

Income inequality is the difference between the amount of wealth controlled by the upper class of society compared to the lower class; and South Africa has been recognised as the most unequal country in the world. Our Gini Co-efficient, a measure of income distribution, is sitting at 0.63, which indicates that our country’s wealth is not well distributed amongst its citizens.

The problem with having large income inequality is that it perpetuates itself. Children from low income families struggle to complete basic schooling or are forced to work early in their childhoods in order to support their families. On top of this, factional societies between rich and poor lead to social and political unrest (think strike action) and higher crime rates. If we are to take an objective look at South Africa these issues are glaringly obvious.

Our National Development Plan highlighted poverty and income inequality as South Africa’s two biggest problems. In fact, it has been stated by Trevor Manual that these two issues are so big that they affect everything else in our country. (This is especially concerning considering that our government’s effort to address income inequality for the last 20 years, in the form of Black Economic Empowerment, has not been successful.

It is no surprise then that the 2014 manifestos of the ANC and DA   focus so much on addressing the issue of income inequality (as they have for the last 20 years!). Interestingly, both have highlighted entrepreneurship and the stimulating of small business as a solution to the problem.

I do not know anyone who will disagree that this is what we need, but an Harvard Business Review article from Daniel Isenberg makes one wonder if these two political parties have thought it through. In his article Isenberg discusses a “dirty little secret”about entrepreneurship. That being, that successful entrepreneurship always exacerbates local inequality, at least in the short run.

He makes an interesting case, citing that successful entrepreneurs offer above-market or “unequal”returns to those investors who can stomach the risk. These few become wealthy while the vast majority remain as they are or become worse off as the new rich help drive property prices up as they build penthouses and lead gentrification. Isenberg also speaks of elevated cost of personal services, and long standing businesses being put out of business due to disruptive upstarts. Essentially by being successful and become more wealthy than those around them, entrepreneurs created inequality.

The catch-22 comes in when we understand that entrepreneurship is a recognised engine of economic growth  . The real question then is how do we gain the economic benefits of entrepreneurship while limiting the negative inequality effects? We need entrepreneurs from the Cape Flats and Soweto and not Camps Bay and Sandton. We need poor entrepreneurs to become successful and lift their wealth and the wealth of their neighbourhoods instead of rich entrepreneurs becoming richer. Yes, the previously disadvantaged entrepreneur will now be creating more inequality in his neighbourhood but overall inequality in the country will be going down. One can also presume that the economic benefits of his venture will also reach into his community and create further upliftment. That being the key, that his/her venture also operates within his/her local community.

Thus, a focussed effort on helping underprivileged entrepreneurs will go much further than merely helping black entrepreneurs, as the ANC  plans on doing. Because policies like these leave the gate open for the rich to get richer (see Cyril Ramaphosa ). It’s time for the ANC to redefine previously disadvantage from being black to a more accurate measure of family income and history.

Although the DA did mention in their manifesto that they will provide broadband access to previously disadvantaged entrepreneurs (and communities), more needs to be done. Maybe specific incubators / business training centres for these areas need to be set up as well. For one I’d like to see a more specific plan put in place to help poor entrepreneurs succeed in their local communities.

It doesn’t have to be multi-million rand returns but rather something more practical and material. Such as up-skilling an owner of a corner store so he can open another. Or guiding a small daycare owner in turning her 6 child strong business into a full fledge nursery school.

If you have any ideas on how we can stimulate entrepreneurship opportunities in the poor communities of South Africa let us know and we will pass it on to the ANC and DA and hear what they have to say.



The DA’s poor positioning

The Democratic Alliance

The DA’s priority is to, every 5 years, get as many votes as it can, with an end goal of becoming and staying the leading party.

So what is the best way to get more votes in 2014? Well, to start answering this question, we need to take a little tour of history. In Grade 10 or 11 (2004/2005) one of my class mates managed to, after doing an internship at the DA, get Helen Zille to come and speak to our class.

There were two things that are still top of mind;

  1.  How the DA had become the Official Opposition in the 1999 Elections
  2. The DA had a strategy to win in the 2009 General Elections

Zille explained how, after the 1994 elections, the DA focused on its goal of becoming the official opposition. She explained how they achieved it by displaying signs that they were the official opposition. This boiled down to imagery of them making a lot of noise wherever they could, until the ANC started to respond to their noise in the media. She explained how this helped position the DA (aka DP pre 1999 election) as the official opposition, as in the media, the leading party was responding the their opposition. This was of course not the only reason they achieved their goal, but it is significant that positioning was a major contributor to their success. Then on the second point, about the DA winning the 2009 elections, well that was significant, because as you all know, the DA didn’t win the 2009 General Elections.

But this is a piece about strategy rather than politics, so let us start discussing strategy. The DA needs more votes, or written in a different way, the DA needs more South Africans to believe that they will do the best job of running the country.

So how do individuals decide who will do the best job of running the country? A very complex marriage of your experience of the different political parties, as well as your political influencers (family, friends, Gareth Cliff, etc.), stated, implied and assumed experiences of the political parties. This decision is largely emotional, as are most decisions, and not as logical as all the party communications would imply.

So what is the problem with DA’s strategy you ask?

Well they still seem stuck on the pre-1999 methodology of publicly criticizing the majority of what the ANC does which was noted by Mandela in his 1997 farewell speech as ANC president. This is important because, as a voter, I would like to vote for the party whom I think would do the best for the country, but the vast majority of my experiences of the DA has been them criticizing the ANC. Why not rather focus on becoming objective, i.e. congratulate and support the Government when they do something well, as loud in the media as when you disagree with them. And when you do disagree with the Government or the ANC, suggest an alternative, or improvements.

This kind of objectivity is what would emotionally connect with me, not necessarily the majority of South Africans, so it is just an idea, a thought to disregard if it doesn’t hold. But what is clear is that this change of tact will enforce the imagery that the DA isn’t exclusively in opposition of the ANC, but rather a political party that is exclusively focused on the best for South Africa, and I would like to believe that I live in a country where the majority of people find a stronger emotional pull from a party that shows it has the best interest of the country at its core, rather than an emotional pull from legacy.

We would love to hear your thoughts, so feel free to comment below.

If you would like to read more about positioning, read a summary of Ries and Trout’s famous book on Positioning.


Inflation “CPI | PPI”

The Consumer Price Index (CPI) is a yardstick used to measure the rate at which prices increase for a basket of goods for the average South African consumer. Essentially, the rate at which our cost of living increases. The South African Reserve Bank’s mandate is to maintain price stability (or the CPI) within the 3% to 6% band.

Over the past two years CPI has been fairly stable at the upper part of the band and there have only been a couple of occasions when it went over the 6% mark (See below). Which is quite something in light of the price increases of water, electricity and petrol over the past years. The question of course, is why has CPI not been higher?

CPI Long Time Trend
Data Source: Stats SA

Apart from the efforts of the Reserve Bank, one other factor that has helped stablilise the CPI is the manufacturing sector. They have been absorbing the cost of the increases mentioned above. So let’s take a look at the other side of the inflation coin, the Producer Price Index (PPI). This is essentially the rate at which the cost of doing business increases, or prices from the seller’s perspective.

Since August 2013 PPI has pulled away from the CPI (see below), a clear indication that manufacturers are not passing on all their cost increases onto consumers. But, as indicated by Neren Rau, the CEO of South African Chamber of Commerce and Industry, this cannot go on forever. He says that we should expect to see the prices of our goods and services increase again in the near future as manufacturers start passing on their increasing costs. This of course is not good news for consumers, but let’s be grateful for the business sector holding out for as long as they did.

Data Source: Stats SA

On a side note, as mentioned in my previous post, averages tend to hide the truth. Use this tool provided by Stats SA to calculate your personal inflation rate. Mine was 6.0%, slightly ahead of the national figure of 5.8%. Additionally, the Labour Research Service puts out a monthly publication on the inflation rate that breaks out inflation into its various parts and splits it out by household expenditure and province. Interestingly, the trend for this month being the higher your household expenditure, the higher your rate of inflation. Check it out here.