In South Africa, the phrase “no quick fix” is often associated with the black box phenomena we accept when mulling unemployment — labour market inflexibility, competitiveness and regulatory reform are but a few. Small business development is another such a cure for unemployment for which there is — you guessed it — no quick fix. It is important that we address it, though, and here’s why.
Globally, South Africa lags in terms of total entrepreneurial activity. In comparison to peers such as Brazil and Chile where the corresponding rate is 17%, only 4.7% of South Africans between 18 and 64 are involved in “nascent entrepreneurship” (the first three and a half years of small and medium enterprise (SME) development in which job creation occurs most). Although challenging, SME-development has the rare power to steadily address structural or (lasting, ingrained) unemployment.
At the millennium’s turn, the narrow unemployment rate in South Africa would still surge towards 30% before strong growth in the middle of the last decade made an impact. Retrenchments were commonplace. In the Eastern Cape, large sections of the population already gave up looking for work, meaning that even among non-agricultural households, more than 65% found themselves gripped in grinding poverty.
Struggling to support myself through university in Port Elizabeth at the time, a recently retrenched family member suggested we set up shop specialising in fresh cut vegetables for restaurants. There were worse ideas around. Tightening employment regulations meant restaurant chains outsourced more. Fired up by enthusiasm more than know-how, we got cheap premises in a run-down industrial area and prodded around for business.
Soon we were doing pre-packed salads for a major restaurant chain — business we only got by offering ready-cut potato chips at a low margin. To cope, we employed three workers from my partner’s former frozen foods employer, which by then had folded.
Strategically, our approach was flawed. The value-add on the pre-packed salads were insufficient to sustain healthy margins. When floods hit important potato-growing areas in Mpumalanga a couple of months later, it forced up costs and we battled to keep afloat.
A former employee of our main client, the restaurant chain, offered to buy us out at our initial capital investment. She successfully negotiated herself out of having to supply potato chips, moved to smaller and more accessible premises and diversified into margin-boosting cooked dishes for delicatessens and home parties.
More than a decade later, the business still provides goods to the community, livelihoods to its owner, three permanent employees and some casuals — none of which would have be happening had my former partner and I not rushed in and gave it a shot. So, thousands of other small businesses alleviate unemployment in the rest of the country and around the world. The challenge, as the total entrepreneurial activity measure shows, is obviously to get many more of these stories to emerge, possibly with greater success.
We need an environment that enables more South Africans to try, to encourage creating opportunities instead of awaiting opportunities. We need friendlier regulation, better SME-funding, more pro-entrepreneurship education and on-the-job training opportunities. It would also help much if large corporates who control 82% of the economy, such as the major restaurant chain referred to above, employed procurement practices more friendly to the development of SMEs, which provide nearly 43% of all private sector jobs in South Africa.
Better adherence to procurement-related enterprise development provisions in the broad-based black economic empowerment scorecards hold low risks, particularly in tourism, hospitality and retail. So too would shinning more sunlight on government tender decisions. Generally, though, current employment demographics suggest economic transformation would be best-served with an entrepreneurial support regime that targeted job creation single-mindedly.
Getting private-sector enterprise incubators on-sides with policy and regulatory reform would be a great place to start — they know what’s cooking and what’s not. If they were, I’m guessing we’d see measures to support better cash flow, such as amending VAT legislation to allow SMEs to pay VAT on a cash receipts basis and better adherence to the 30-day payment standard for government and large corporates. Incentives for angel investors would also be boosted by a seriously-needed rewrite of Section 12J of the Income Tax Act.
Organised labour needs to get on-side too. Small businesses only flourish by employing workers but rarely at costs that the decent work aspiration entails. If this is to be an absolute requirement, it will be left to government and large corporations to provide employment. But no government can provide jobs sustainably without a flourishing, revenue-generating private sector. Large corporates for their part lose their job-creating punch the more their operations and their sectors mature.
No quick fix indeed, but if there is to be any fix, we have to try. Given our national goals and the human tragedy unemployment causes, not agreeing to do so without offering alternatives would be downright unsympathetic to the poor and unemployed.