SA’s new unity government, which has brought new capacity, ideas and energy to the heart of the executive, must pursue growth led by small and medium-sized enterprises to at least halve the country’s depression-era levels of unemployment, mass poverty and inequality.
For the past 30 years, the strategy wrongly prioritised growth led by a big state and big business, counting on the state and the business establishment to create growth and jobs. Clearly, this was flawed. SMEs are estimated to provide close to 90% of all employment globally. This means both government and established business in SA must focus on growing SMEs.
It is wishful thinking for ANC leaders to insist that policies can remain the same under the government of national unity (GNU), including that the National Development Plan will guide its programmes despite the fact that the ANC’s share of the vote dropped to about 40% in the May 29 elections. That SA experienced the second-lowest economic growth in Africa over the past decade, the highest unemployment among emerging markets and the collapse of parts of the state surely indicate that existing policies have failed and that there has to be an overhaul of key policies.
Neglect of its SMEs for the past 30 years is one of the key reasons for SA’s low-growth trajectory. SMEs are now estimated to contribute less than 40% of GDP. To make a dent in the rates of unemployment, poverty and inequality this contribution must expand to more than 80% of GDP.
In the wake of World War 2, in the East Asian developmental states — the so-called economic miracle economies such as South Korea, Japan and Taiwan — SMEs provided more than 80% of employment. Even in more recent examples of “economic miracle” countries, such as Ireland and Poland, SMEs have provided the bulk of new businesses, economic growth and employment.
Many supporters of the ANC, and the left-leaning parties that have splintered from it over the years, including the EFF and MK, are ideologically opposed to private sector-led growth and businesses being allowed to initiate policies, deliver public services and create jobs. Sadly, an anti-entrepreneurial culture has developed among groups in the ANC, with a knee-jerk frostiness towards the private sector if it is not linked in some way to the party. This is despite overwhelming evidence that entrepreneurs generate value by establishing new businesses, creating jobs and income.
Meanwhile, “tenderpreneurs” who make money off the state are celebrated, even when it is demonstrated that they reduce value by decimating public services, and reduce opportunities for genuine entrepreneurs.
Sadly, an anti-entrepreneurial culture has developed among groups in the ANC, with a knee-jerk frostiness towards the private sector if it is not linked in some way to the party.
Even in established business circles many do not appear to see the mission-critical importance of SMEs to tackle poverty, unemployment and inequality. In fact, many wrongly believe that to emphasise SMEs as a vehicle for economic growth is a World Bank/IMF neoliberal conspiracy. This is why the small business cabinet portfolio has mostly been kept on the margins rather than being placed at the centre of economic growth strategy.
The GNU urgently requires integrated interventions to kick-start economic growth. To achieve SME-led growth these interventions must be linked to turning around collapsing infrastructure, particularly in the areas of water, power and transport; restoring the rule of law, order and policing; building homes for the poor; and making the public service and state-owned entities more professional, effective and honest. SMEs must be integrated into the value chains of all of these interventions if growth is to be lifted, jobs created en masse and poverty reduced in a sustainable manner.
Regulations, administrative burdens and red tape for SMEs will have to be eased — small businesses are currently forced spend up to 10% of their turnovers complying with overbearing regulations. Burdensome, slow and costly imports and exports of goods also make it almost impossible for SA’s SMEs to be competitive, which directly contradicts the situation in nations that have undergone economic turnarounds, whether the post-World War 2 Asian developmental states or more recent fast-growing economies.
The Covid-19 lockdown broke the backs of many SMEs in SA, with close to 1-million being forced to close their doors, according to the Small Business Institute. The country’s collapsing infrastructure — manifesting in power outages, water shortages, rail inefficiency and port congestion — has also hobbled many small businesses, which are especially vulnerable to infrastructure that does not work.
Labour laws are also too restrictive, making it difficult for SMEs to hire or fire employees. The GNU will have to come up with a special dispensation for small businesses with fewer labour laws and other restrictive regulations. The government still takes too long to pay SMEs for services, despite its stated commitment to settle accounts to suppliers within 30 days of receipt.
In its 2023/24 financial year report, the small business development ministry indicated that late payment by provincial departments to SMEs was chronic. For example, the Eastern Cape and Gauteng owed R4.5bn and R2.7bn, respectively, to suppliers who were not paid within the stipulated 30-day period. Software solutions company Sage found in a study that SA SMEs typically lose about 20 days a year running after payments, compared with just four days a year in Australia.
Big business must also become more SME friendly. Instead of giving away shares to politically connected individuals as part of their BEE commitments, large corporations should prioritise bringing in more SMEs as suppliers. SA’s economic policies have failed because the government has insisted that it alone can come up with workable policies. Yet most government officials have no experience working in the non-state sectors they preside over. Policies produced this way are all too often predictably inappropriate.
Involve the SME sector
The GNU must involve the SME sector in policy formulation. In fact, rather than government-initiated policies that the SME sector has to lobby to amend, the SME sector should be invited to come up with appropriate policies for the government to review. Government departments must give contracts to genuine SMEs based on merit, not because of their political connections or contributions to the ANC.
Many large companies also do not pay SMEs timeously. They too are inclined to ride roughshod over small suppliers because they do not have the finances or capacity to fight back. The small business development ministry’s planned small enterprise ombud service to deal with contract disputes between SMEs and big government and big business must therefore be fast-tracked. But it can’t be staffed by political appointees and controlled by the government, as so many other such institutions have been in the past.
The reality is that any new economic turnaround strategy for SA that is developed by the GNU cabinet will fail if it does not have SMEs as a central pillar.
• Prof Gumede is based at the school of governance at the Wits University; this is an extract from his address to the recent SME indaba in Johannesburg co-hosted by Business Partners and Small Business Institute.
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