Small business

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.

 

Open the Funnel

In his State of the Nation address (SONA) ), Jacob Zuma said that the economy had been growing at an average rate of 3.2% per year between 1994 and 2012. But the problem with averages is that they hide the full story. Post-recession, South Africa’s GDP growth rate peaked at 4.8% Q/Q (or 3.7% Y/Y) in Q1 2011; which was fairly decent considering we averaged 5% growth between 2004 and 2007. However, since that brief peak, our GDP has gradually slowed down to 0.7% Q/Q (or 1.8% Y/Y) for Q4 2013. Much lower than the average. Take a look at the downward trend below.

SA GDP Growth

But slowed growth was to be expected in face of strike action, talk of nationalisation and general government mismanagement from the fishery industry to education. Ultimately, it leaves us sitting with an unemployment rate of 24% which just happens to be about the same unemployment that existed in 2010 when the New Growth Path (NGP) was unveiled by Ebrahim Patel. The NGP was to produce 5 million additional jobs by 2020. Then in the 2011 the National Development Plan was introduced, its aim is to create an additional 11 million jobs by 2030. See how the two tie into each other here.

In order for this to happen the economy has to grow at a rate of over 5% per year. One of the key growth drivers to help us achieve this will be development of the small business sector and the government thinks so too or at least they did. Back in 2011’s SONA Jacob Zuma said, “The small business sector is a critical component of the job creation drive.”

Since then work has been done, such as the the formation of The Small Enterprise Finance Agency to centralize funding, the reduction of documents required for exporting and important, the easing of the tax burden and simplifying the legislative requirements for registering a company. Go here for more detail on these.

It’s that last one though that I would like to make my final comments about; registering a company. Despite having simplified the process there is still room for improvement. According to the World Bank, the shortest possible period in which you can register a company in South Africa is around 19 days at a cost of R175 and after completing 5 procedures but that’s if everything goes your way.

All three of these elements, time, cost and the five separate procedures create a barrier to register. In fact our DB Rank for ease of registering a company dropped from 56 to 64 between 2013 and 2014 despite the simplification of legislative requirements. I propose that we look towards the likes of Rwanda and New Zealand who lead Africa and the World respectively.

Each makes use of an online registration process that combine several procedures in one. In New Zealand you can register a company in under a day at a cost of NZD160.22. But in Rwanda the cost of registering is wavered if done online and it will only take a day. This was a part of the reforms they implemented that resulted in them being acknowledged as a top global reformer in the World Bank Doing Business Survey 2010. The result of all their reforms was an average growth rate of 7% per year between 2003 and 2010. Read more about Rwanda’s performance here.

Now, I am not saying that making it easier to start a company is solely responsible for this growth but it is definitely one of the the first steps. If we need to develop the small business sector let’s not turn people away at the first step. After all, only a subset of small businesses actually drive growth. Finding and developing these high growth potential businesses is a numbers game and opening the size of the funnel is a smart move. It’ll be interesting to see if those delivering the post election State of the Nation address agree. Here’s holding thumbs that they do.