Small business growth is key to curbing unemployment

South Africa is caught in a flatgrowth trap. The government must stop paying lip service to the urgent need of growing small businesses and creating jobs.

The country’s unemployment rate has hit a new high, with 36.4% of working-age people out of work or no longer looking for a job.

In the National Development Plan’s (NDP’s) scenario, 90% of the 11-million new jobs we need by 2030 will come from small business. The NDP, now five years old, was written at a time when SA’s economy was growing at an annualised rate of about 3%.

Unfortunately, we are currently faced with growth that is less than 1% and a further ratings downgrade in December (or earlier) would undoubtedly keep it there, or worse. Growth will eventually return and, when it does, more businesses will be created and with them new jobs.

We have to consider the big gulf that exists between two of the most influential indices of small business and entrepreneurship – the Global Entrepreneurship Monitor (GEM) and the Global Entrepreneurship Index (GEI).

The GEM, in measuring the health of a country’s entrepreneurial ecosystem, examines the Total Early-Stage Entrepreneurial Activity rate, (TEA-rate) as the main indicator. This is a measure of the rate at which an economy is producing start-up businesses. The higher the rate, supposedly, the healthier the ecosystem.

GEI, on the other hand, measures the rate at which new businesses are growing, suggesting that an economy with more fast-growing businesses will show up positively in other measures of a country’s economy, such as GDP growth.

The GEI is highly critical of a fixation on the TEA-rate for two main reasons. First, newly created businesses, especially in subSahara Africa, tend to be in the informal economy and contribute little to economic growth or job creation. And secondly, the high failure rate of small businesses means new business creation per se does not lead to growth.

To measure the health of our entrepreneurial ecosystem we need to measure three things: the number of start-ups, the survival rate of these start-ups, and the number of fast-growing businesses emanating from these start-ups.

Statistics from the Department of Trade and Industry show that only two out of 10 new businesses survive three years after forming.

The DA-led City of Johannesburg has recognised this key statistic and has set a target of increasing the surviv al rate to five out of 10.

If we assume a new business, within three years, employs an average of five people, achieving a survival rate of five out of 10 means the number of new jobs created will increase by two and a half times over three years.

If we then focus on stimulating the number of start-ups, and increase South Africa’s TEA-rate from its 2016 rating of 6.9% to 20% within three years, then compound that with the improved survival rate over 10 years, we begin to shift the dial on new jobs created. Unemployment will fall dramatically.

Finally, if we can take 10% of the surviving businesses after three years and grow them at 30% a year, the potential exists to massively increase employment as we begin to see more and more businesses employing 100, 500, 5 000 people.

Government should be setting targets on all three measures. Without targets, it’s impossible to get to grips with policy measures that are likely to boost the numbers on any of the measures.

Chance is a DA MP

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