As Statistics South Africa (Stats SA) released its report last week, I was sitting with Dr Pali Lehohla, the former Statistician General of South Africa and the question we kept asking ourselves was, ‘what has gone wrong?’ Not ‘what could go wrong?’ as the well-known Santam insurance TV commercial asks.
Stats SA revealed that our unemployment rate increased from 27.1% to 27.6%, while, in parallel, a TIME magazine piece earlier this month stated that our society is the most unequal in the world. So, to try and decipher what exactly went wrong, I compiled a few scenarios of what I think happened – and what we could do to solve this rather pressing predicament.
To set a backstory, South Africa prides itself on having some of the best policies and regulations in the world. But whether the lack of implementation of these policies inhibits job creation is something we must pay serious mind to. Yes, South Africa has a plethora of institutions (estimated at over 400) mandated or involved in creating jobs and supporting the growth of businesses, such as the Small Enterprise Finance Agency, the Small Enterprise Development Agency, the Department of Trade and Industry, the Industrial Development Corporation, the National Empowerment Fund, the Technology Innovation Agency, Provincial Local Economic Development Agencies, incubators, accelerators and various other private sector Enterprise Development initiatives and the list goes on and on. It is believed that these institutions combined, spend in excess of R100bn per annum.
Yet, the fact remains that all these great programmes, resources and initiatives have not really addressed the issue of rising youth unemployment, which is now at 55% and a ticking time-bomb. The challenges we face are systemic and hence have to be handled as such. Though I applaud the solid principles and intentions of the Government’s Youth Employment Service (YES) programme, and the impact it has made thus far, it’s just a quick fix. We must dig deeper and solve some systemic issues first if we are to have a long-term impact.
I’m obliged to keep to my weekly word-count quota, so I’ve identified four key areas which I think when addressed will help accelerate new small businesses and scale existing ones, while creating much-needed jobs in the economy. I believe that over the next five years, South Africa can reduce its unemployment figures to about 20%.
Here are my four points:
1. Lack of an open economy: Professor Michael Pence from the New York State University described that the word “openness” has two related but distinct connotations. It can mean that something is unrestricted, accessible, and possibly vulnerable; or it can mean that something, such as a person or institution, is transparent, as opposed to secretive. The first meaning is often applied to trade, investment and technology (though most definitions do not match opportunity with vulnerability), which have always driven structural economic changes, especially with respect to employment. Structural change can be simultaneously beneficial and disruptive. And policymakers have long had to strike a balance between the abstract principle of openness and concrete measures to limit the worst effects of change. Though South Africa operates an open economy in relation to trade with other countries, its internal economic policy has been somewhat closed.
A basic example is an SME that wants to start a cement factory, yet may have to go through a long process of setting up this facility, which includes going through an approval process with a Bureau of Standards (like the SABS), finding capital and a location. This is all expensive and most early stage funders shy away from backing the
initial set-up process, resulting in the industry being monopolized. Same goes with access to many of the industries.
At the same time, there’s also all the red tape to deal with and lack of access (capital) to key processes that can help to set up. If the economy was open, then our processes needed to ensure that if the SME was good in what he/she does and has a great business model and plan, they can be supported to access institutions like the Bureau of Standards (at an affordable/subsidized cost) and receive the needed funds to set up operations.
Lack of an open economy limits the involvement of young firms making it into the formal economy and contributing to the needed jobs and growth of the economy. While visiting the 22 on Sloane startup campus last year, Minister Ebrahim Patel mentioned that he was working with the competition commissioners to sign an agreement regarding unfair competitive behaviour from businesses in order to enable ways to support more small businesses to compete fairly with them. This, I believe was signed late last year. And hopefully, if we monitor this process and support more SMEs and keep the economy more open, we can see signs of mushrooming new businesses and job growth. A closed economy creates an unfair and harsh competitive landscape, severely curtailing entrance for new small businesses. Ultimately, SMEs in South Africa stand little chance because capital and access is king to break into any market.
2. Lack of access to strategic resources: By resources I mean skills, mentors, knowledge and finance, which remains the main issue faced by SMEs in South Africa. This is not unique to South Africa. This is a challenge faced by many SMEs globally, especially on the African continent. This may be because although the money is there, but the people (often qualified, but with no business experience to vet applicants) tasked to deploy it fail dismally, or perhaps the SME is unable to get the requisite support needed to access the capital.
Recently, we completed a report with the World Bank on the SME Finance Gap and the above was evidenced within it. Unfortunately, I am not at liberty to share the key findings yet till it’s published within the next few weeks, but I’m sure they will be an eye-opener for ecosystem stakeholders to understand how funds are being deployed and who gets access to it and who are the under-served group in the startup/SME space.
Information and data remain critical. Many of the township and rural small businesses simply do not know how and where to access the information – and even if they do, data costs are prohibitively restrictive. This is also sometimes the case for SMEs in the suburbs.
Mentors to nurture the fledglings. Many of our communities live in dream-crushing, isolated silos and it seems most of the knowledgeable individuals either do not have time to mentor them or simply don’t want to get involved. We need to build a mentor-driven capital model. There are many wealthy South African business people who can put on their philanthropic hats (or delegate an associate to do so) and commit to mentor one startup a year and report on the success/failure, lessons learnt and how best to drive development. Imagine if the CEO’s from the top 100 JSE-listed firms mentored just one startup each a year? These are the leaders that can create sustainable jobs. Entrepreneurs also need to network with their peers who have been through the
journey and what this means is that an ecosystem, such as conducive co-working spaces or a network needs to be created to engineer such engagements amongst peers. Obviously, these initiatives need proper design, thought-out processes and systems.
Innovative SMEs are largely influenced by knowledge spill-overs, access to networks and opportunities to partner with other players, including larger enterprises. Globalisation has increased the importance of cross-border collaboration in innovation – both in obtaining inputs for innovation (ideas, finance, skills, technologies) from abroad and in exploiting its outputs (products and services, patents, licenses, etc.) in foreign markets. How do we ensure that our SMEs think beyond borders? By this I simply mean, even thinking outside of one’s city/province and ensuring that various programmes run by private sectors within the Enterprise/Supplier Development (ESD) space are targeted and sustainable and that the SMEs connect with their peers outside of their provinces and find better ways to grow their businesses and, most importantly, become part of some local/global network that they can leverage for market access.
3. Make startups and SMEs a national priority: So much attention and cotton-wool care is given to big businesses to ensure that they keep investing in South Africa. Yet, the same level of attention is not given to SMEs, which in fact are the real new job creators. According to the Organisation for Economic Cooperation and Development (OECD) report in 2016, in the OECD area, SMEs are the predominant form of enterprise, accounting for approximately 99% of all firms. They provide the main source of employment, accounting for about 70% of jobs on average and are major contributors to value creation, generating between 50% and 60% of value added on average.
In emerging economies, SMEs contribute up to 45% of total employment and 33% of GDP. When taking the contribution of informal businesses into account, SMEs contribute to more than half of employment and GDP in most countries, irrespective of income levels. We recently did an analysis and picked up that the informal market in South Africa, if supported and equipped, could double its annual revenue from the R350bn that it is currently at to around R700bn. This is a recipe for an inflow of jobs into the economy. Even the formal SME market can also grow in the same proportion, if proper targeted support and nurturing is provided.
In addition, SME development can contribute to economic diversification and resilience. This is especially relevant for resource-rich countries that are particularly vulnerable to commodity price fluctuations. SMEs play an important role in the wider ecosystem of firms. Start-ups and young firms, which are generally small or micro firms, are the primary source of net job creation in many countries.
The OECD report also highlighted that stronger participation by SMEs in global markets can help to strengthen their contributions to economic development and social well-being, by creating opportunities to scale up, accelerating innovation, facilitating spill-overs of technology and managerial know-how, broadening and deepening the skill-set and enhancing productivity.
What’s more, greater flexibility and capacity to customise and differentiate products can give SMEs a competitive advantage in global markets relative to larger firms, as they are able to respond rapidly to changing market conditions and increasingly shorter
product life cycles. Some niche international markets are dominated by SMEs and innovative small enterprises are often key partners of larger multinationals in developing new products or serving new markets. We need to encourage and find ways to coerce more big businesses to partner with small businesses. The sustainability of big businesses critically depends on partnering with small ones to grow – or else even they face extinction.
At the same time, closer global integration increases competition for SMEs in local markets, in some cases with disruptive effects, demanding enhanced market knowledge and increased competitiveness for small businesses that do not operate internationally.
4. Clear understanding on consumption and production patterns: This has been one of the topics that Dr Pali Lehohla has been passionate about. China and the US, among a few other nations, have mastered this model. The key challenge we face is that we have not succinctly understood the patterns of what we consume, who consumes it, why and where – and the same applies to what is being produced.
I read a lovely piece over the weekend on Business Insider Online, written by Paige Leskin, who analysed how Google is scanning our Gmail inboxes to keep a detailed list of everything we buy and consume. However, regarding the article, a Google spokesperson said this is private and not meant for ad targeting, but I think they have mastered and clearly understood the importance of keeping our production and consumption patterns. Any country that also masters this is a winner. So we must find ways to analyse what we’re doing and also what our neighbouring countries are, in order to use this as a competitive advantage to get more SMEs into the marketplace and create more much-needed jobs in the country.
Other points I would have liked to cover include issues such as reforms in our education and skills system, which will incorporate instilling the entrepreneurial mind-set, government possibly creating labour-intensive jobs for the unskilled though this will be short term given the technology revolution that is upon us, equipping young people with digital skills and the impact of digital technology on our everyday lives and businesses. I hope time will allow me to share my analyses on these and others in the near future!
As Mr Jabu Mabuza (Chair of Telkom and Eskom) said in his opinion piece for Financial Mail last week, “the stakes couldn’t be higher. Everyone must take a hard look at themselves and see whether they are part of the solution or the problem. It is no time for bystanders”.
In closing, I must mention that getting this process right, will also assist the SMEs to tap into the opportunity that exists with the Africa Continental Free Trade Area Agreement (AfTCTA), which is set to be one of the world’s single largest markets accounting for US$4tn in spending and investment across all 54 African nations. The production and consumption patterns of Africans is also key to making this continental agreement a success.
Kizito Okechukwu is the co-Chair of the Global Entrepreneurship Network (GEN) Africa – 22 on Sloane is Africa’s largest startup campus.