Slow-growing small businesses need a shot in the arm
Arecent Tips review of the state of small business points to a paradox. The state and private sector have published many initiatives to boost small business, but there are still fewer formal small businesses now than in 2008 just before the global financial crisis, and small business job creation is slow compared with the rest of the economy.
According to official labour force surveys, in 2016, SA had 690,000 formal small businesses — about 20,000 fewer than in 2008. From 2008 to 2010, 80,000 small enterprises — more than one in 10 — disappeared, while about 60,000 new ones emerged in the next four years. The informal sector lost 3% of its 1.2-million businesses from 2008 to 2010, but then gained 11%.
Most informal enterprise is survivalist, generating low and precarious incomes and few waged jobs. The median informal entrepreneur in 2015 earned R4,000 a month, compared with R10,000 for formal business owners.
Slow growth in small business is worrying because the sector is the largest source of employment in SA. In 2015, small formal businesses employed 4.3-million people, while about 30,000 large companies had 3.6-million employees. The informal sector had 1.2-million self-employed people, 300,000 employers and 1.1-million employees.
The number of waged jobs in small business fell 14% from 2008 to 2010, then climbed 7% from 2010 to 2015. From 2010, the working age population grew 9%, while employment in medium and large companies rose 15%. Informal employment rose only 6% from 2010 to 2015, just enough to make up for losses in the downturn.
The share of self-employed or employers in SA, at about 20%, is about half of its peer economies. In other upper-middle-income countries, about 40% of all employed people have micro and small businesses. As apartheid laws suppressed most of these enterprises, democratic SA started out with an unusually small class of established small businesses. In other countries, entrepreneurs build on long-standing family assets, market connections, experience and customers; in SA, most start without these advantages. SA’s market institutions are not designed to serve emerging entrepreneurs.
Big business and the government mostly rely on large suppliers, while providers of business services and credit focus primarily on long-standing clients, and retail chains largely exclude smaller producers. This system goes hand in hand with a lack of representativity. In 2015, half of small formal employers were white, down from two-thirds in 2002. The number of white-owned formal companies fell from 420,000 in 2008, to 360,000 in 2015.
Given SA’s history of economic exclusion, the lack of representativity necessarily affects state support. Most small formal businesses don’t benefit from efforts to open doors for black entrepreneurs, and may even suffer from them. It’s hard to mobilise government support for entrepreneurs from historically privileged groups.
An even bigger challenge is addressing the systemic challenges for all small businesses. Government programmes have been a patchwork of fairly small programmes centred on funding and skills. The approach ignores the need for a large-scale effort to tackle gaps in market systems and the lack of assets that constrain small business. In the absence of far larger efforts, small business in SA will never catch up with its peers internationally.