Just as the Gini coefficient for individuals shows SA is one of the world’s most unequal countries, a Gini of sorts can also be computed for companies. And there, too, the inequality gap is huge and probably widening. It’s a phenomenon Citi economist Gina Schoeman pointed to in a presentation this week, in which she argued that corporate profitability in SA had fallen through the floor in the eight quarters to the end of 2016. However, while small and medium-sized firms were still struggling to weather the storm, the "super giants" were now doing even better.
They are large enough to have economies of scale, which, for example, enable them to cut operating costs rather than hike prices to survive, in a way smaller companies cannot.
Those super giants, as Schoeman calls them, make up a fraction of South African companies: tax data show that only 0.9% of the companies that submit tax returns have an annual profit exceeding R100m, while almost two-thirds earn R1m or less. Schoeman says highly profitable large companies have to be the target for tax hikes.
But her corporate Gini notion touches on an issue highlighted in studies by Business Unity SA (Busa), the IMF and others, which is that SA simply has far too few small and medium enterprises (SMEs). That is one of the main reasons for the economy’s failure to create jobs or growth, and a key reason for genuine economic inclusion being so elusive.
Busa’s recent document on the approach by business to economic transformation notes that smaller businesses contribute only 65% to employment in SA against a global average of 95%. It calls for focus on developing sustainable black enterprises as an enabler of inclusive growth and a commitment by the businesses in Busa, large and small, to make this happen.
The IMF’s recent annual report on SA urges expanding access to credit — "with proper supervision" — for firms and households in order to boost growth, support job creation and reduce income inequality.
In emerging markets, SMEs account for most formal jobs and the creation of four out of five new formal positions, says the IMF, but about 70% of emerging market SMEs lack access to credit. Studies have found that lifting financial constraints leads to higher growth.
Opening up financial services to support smaller businesses is one of the structural reforms on the IMF’s list of priorities. It doesn’t explain, however, why it sees the financial constraints on smaller firms in SA as the key issue.
Clearly SA’s economy is far too concentrated. Large, often oligopolistic, firms dominate some key sectors, making it difficult for smaller firms to enter or compete. As Schoeman says, tough economic times tend to be much harder on smaller firms, widening the gap between large and small and often entrenching larger firms.
But the challenges for SMEs are not just about lack of access to finance.
They are also about education levels and SA’s extra-poor education outcomes, which constrain entrepreneurship. And they are about the state itself. SA’s ever more regulatory state arguably constitutes one of the highest barriers to entry for genuinely entrepreneurial and sustainable SMEs.
Large, strong companies can manage and afford regulatory compliance with multiple rules and regulations, from empowerment to environment. They can also survive the high input costs imposed by public sector monopolies. Smaller firms, however, tend to be crushed by all this.
It is the plethora of one-size-fits-all government regulation that has to go if SA wants a less concentrated economy to provide for the SMEs that create jobs and drive growth.
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