Cover of the diagnostic report by the NPC. Will the “little guy” find the links?
A problem well-defined is a problem half solved. The expectations from the diagnostic report of the National Planning Commission (NPC) are that it would define the problems facing our society in a way that stimulates discussion, and through a process unites us in defining the problem and the plan to resolve them. In that spirit,I am arguing that the section on enterprise development in the Diagnostic Report will require a recognition of realities of uneven market power in South Africa as a foundation to define the problem and develop solutions. At the core is that the NPC must take a stance to back the “little guy” in the economy, and all people excluded from the economy. It should do this initially through defining the problem, however it has not yet embedded in the way the NPC approaches the definition of the problems we face.
The NPC provides a useful way of describing the surface manifestations of low levels of entrepreneurial activity in South Africa. It notes in this regard that:
- Small business contributes 40% of GDP and employs 60% of workers in South Africa
- Notes that only 2% of adult population are involved in start-up activity
- Highlights that South Africa has relatively low levels of entrepreneurial activity
It then summarises the policy response as follows:
Factors that hinder the development of Small, medium and micro enterprises (SMMEs) include inappropriate regulation, lack of access to finance and external factors such as crime. Furthermore, because they have supply chains across the country, large firms are able to sell their products at prices smaller companies cannot match. A strategy to promote SMMEs cannot take hold without addressing the challenge of accessing established supply chains.
There is progress in this policy statement, in that shows that it recognises the difficulty of entering existing supply chains. However, the useful start provided is not taken to it’s logical conclusion for related reasons:
- Across the South African economy there are a few dominant forms, with investigations by the Competition Commission providing ample evidence of collusion on pricing in several sectors. Whilst fining these rogue companies is a useful first step, any attempt to foster a thriving small business sector requires addressing the underlying advantages that have arisen through long periods of collusive and anti-competitive factors.
- Additionally, as noted by the NPC notes only 17% of small businesses are registered. There are good reasons for this, especially the regulatory frameworks in South Africa that assume a high level of administrative capacity to run a registered company. Here again, the systems in place support larger players that are able to meet compliance requirements. This has significant implications as all government programmes require registration of businesses to access government support, bu the majority of businesses are not registered. It raises the question, whether requiring registration sets the bar too high, thus limiting the impacts of government programmes. Importantly, this goes beyond dealing with informal trading as is the case in most government policy, but rather beginning to understand the challenges faced by unregistered businesses.
- Importantly, there is a crude distinction at play in South Africa arguing that unregistered businesses are survivalist businesses, sometimes called “necessity-based” businesses. However, within informal businesses there are viable businesses that are simply not registered. The exact number of these businesses – opportunity based but not registered – is difficult to quantify. However, if the NPC is to address the concerns of what it calls the “missing middle” in the small business sector, highlighting the challenges of these businesses is an important area for inclusion in a diagnostic report.
- Government interventions have proven ineffective in industries that are not reliant on government tenders. Lowitt [PDF Link] has, for example, examined government’s policy options to link small agricultural producers to larger retail outlets and found that companies that are not likely to compete for government tenders were less likely to comply to government interventions, such as Black Economic Empowerment. My takeaway from the paper, is that the NPC problem statement should recognise that government’s must change the rule of the games, even where it does not have direct influence.
- Government run agencies support larger firms to a greater extent than smaller firms. In electricity, rail, transport and other logistics provided by government; bigger players are able to access support in moving goods and services. Here again, shifting the role of state owned enterprises from serving only larger companies to support smaller businesses is a crucial element of a problem statement. Taken to its (perhaps) idealistic conclusion it could provide the basis for small businesses to create new value chains, as opposed to integrating into existing ones.
It is important to recognise that the NPC has some fighting talk in this regard when it argues that:
What also stands out is the extent to which small-scale agriculture has been weakened, micro-enterprises undermined and artisanship emasculated. Indeed, in many developing countries it is these activities that provide shock absorbers for extreme poverty and platforms for self-employment, with the potential to serve as rungs on the ladder of economic advancement.
The problem through is that in creating these ladders, it is important to recognise that the underlying reasons for the weakening of agriculture, the undermining of micro-enterprises and artisanship programmes are not merely programmatic, but reflect the fact that government has focussed public policy on larger firms.
However taken together, the core argument is that the NPC document fails to highlight the core of the problem facing small business, which is an unequal playing field, within the market. Obviously, smart entrepreneurs can battle against these conditions and sometimes succeed. Yet, the role of government is to create conditions for more and more entrepreneurs to succeed, especially if small businesses are too play roles in increasing the competitiveness of the economy, employ more people and provide innovative solutions. Philosophically, it is about the NPC taking a stand for the little guy in the economy. Roberto Mangabeira Unger captures this philosophical stance when he says:
The market economy has no inherent form. Contrary to what the conservatives think, the market does not have a natural and necessary form. The market can be reinvented, it can be redesigned – it can be either more concentrated or more participatory. We cannot solve the crucial problems of the informal economy by imitating the forms that the market now takes in the rich countries. We must have a different kind of market economy – one based on a decentralised alliance between the little guy and the government.
Consequently, in diagnosing the problem the underlying stance must be one of supporting the ‘little guy’. The NPC to it’s credit raises questions related to the value chains in the South African economy and through that opens the discussion on the wider context that supports and hinders small business development.Yet, because it fails to take the next step and focus on the underlying power within these value chains, it’s proposals are likely not to tackle the roots of small business success and failure in South Africa. In this respect, it has not defined the problem adequately. It does raise a deeper problem – will the NPC be catalytic in providing a voice for smaller players in the economy, and build a plan with the little guy in mind. Well defined problems thus have a vantage point.
Ed Note – The enterprise section covers Black Economic empowerment which will be covered in a follow up article.