There is a growing voice of disagreement on the methodology, findings and policy implications of the GEM report versus the Global Entrepreneurship Index. The former focuses on the Total Entrepreneurial Activity Rate which equates a high number with positive economic activity while the latter prefers to look at the relationship between fast-growing businesses and a country's prosperity.
This is an important discussion which raises very big issues around priorities for boosting economic growth. I will be examining this in the months to come.
South Africa is under-achieving but can do better if we follow lessons from pockets of success.
Among South Africa’s great paradoxes is that we have by far the most advanced economy on the continent of Africa yet one of the lowest rates of entrepreneurial activity. We have been bumping along the bottom of country rankings ever since GEM started in 2001. Hence the question posed in this report: can the small business sector in South Africa be saved?
In short, yes, with the right policies and the right interventions by government and the private sector, then South Africa’s small business sector can be the catalyst for growth in our country.
The GEM statistics depict aspirations giving way to despair. As South Africans we perceive fewer opportunities, have a lower regard for our own capabilities and have a higher fear of failure than our northern neighbours. People living in Burkina Faso and Egypt are six times more likely to start a business than South Africans.
South Africa’s Total early-stage Entrepreneurial Activity (TEA) rate of 6,9 compares to Burkina Faso’s 33,5 and Cameroon’s 27,6. It ranks 63rd out of 66 countries surveyed in the government entrepreneurship programmes index; 59th in government policies (tax and bureaucracy); 57th in post-school entrepreneurship education; and 62nd in internal market burdens or entry regulation.
We are in the bottom half in three quarters of the GEM Report data tables, ranking responses from the 66 countries surveyed.
The informal economy makes up a larger percentage of most African economies than South Africa’s. This is where much of their entrepreneurial activity occurs. Our dual economy, with its sophisticated largely urban formal sector connected to global markets and concentrated around a few major players, sits apart from our township and rural-based informal economy where most people live.
Our dilemma is that the formal sector is not creating enough jobs or fast-growing new businesses, while the informal sector is not creating enough micro businesses. Big business is more focused on protecting entrenched market positions than on stimulating innovation and competitiveness by developing their supply chains. Government, meanwhile, through policy uncertainty and its anti-business narrative is deterring investment. Entrepreneurial activity is absent and the economy is not reaching its potential to grow.
As a consequence, South Africa has one of the highest unemployment rates on the continent -70% among black youth and 35% nationally across all demographics. Rather than start a business or find employment, South Africans are more likely to find themselves without work of any kind. The sense of hopelessness for the large number of our citizens without education, employment or skills is almost palpable.
Analysing all these statistics and discerning the underlying causes is a huge challenge for policy-makers. What has more of an effect on our low TEA rate – South Africans’ low regard for their entrepreneurial capabilities or a hostile regulatory environment? Are there pockets of excellence where we can draw lessons from and apply more broadly?
At the heart of the issue are the attitudes or mind-sets South Africans grow up with, and the circumstances they find themselves in when looking for work or starting a business.
Research into the concept of mind-sets by psychologist Carol Dweck of the University of Stanford is illuminating. Investigating the causes of achievement and success she found a distinction between people with fixed mind-sets, who believe they are born with a set of traits they cannot change, and those with growth mind-sets, who believe their basic talents can be developed through dedication and hard work.
Despite being 23 years into our constitutional democracy, South Africa still has many characteristics which encourage under-achievement. To pass matric you only have to score 30-40% in most subjects. 50% of kids entering grade one drop out before they reach matric. Aspirations are numbed before they have a chance to blossom. Too many young adults enter the workforce with great expectations, only to have them dashed by lack of opportunities, corruption and an economy which seems to block them at every turn – evidenced by the statistics quoted above.
Faced with these challenges, do we adopt a can-do attitude, or are we prone to blame our circumstances for our lot in life? Do we seize incentives and opportunities or fall back into dependency and fate?
Entrepreneurs are can-do people brimming with ingenuity. They almost certainly have growth mind-sets. Our challenge is first, to increase the number of people with growth mind-sets to raise the levels of entrepreneurial activity in South Africa. And second, to create a true partnership between government, civil society and the private sector, essential for increasing our emerging entrepreneurs’ chances of success once they embark on that journey.
Pioneering work by Dr Robin Stead of Skillwise shows a possible way forward. In his computer training courses run mainly in rural areas in South Africa, he has witnessed some remarkable turnarounds in the attitudes of students. Entering the courses believing computers and information technology are beyond their capabilities, after a week or so many of the learners experience a kind of existential awakening when they discover they can overcome their fears and low sense of their capabilities.
The training is learner-driven, and key to the success appears to be a low-key, non-invasive facilitation style, which builds a growing sense of self-belief in students. Early indicators of what happens to graduates of the courses, invariably unemployed youth, point to a high proportion finding productive work in the economy, while the centres themselves are driven by young entrepreneurs who develop their business skills while providing a service to the community.
Dr Stead’s programmes and research demonstrate the impact that this kind of transformative experience can have on rural youth who have been socialised into believing they cannot escape their perceived destiny of under-achievement.
This is exacerbated by the fact that 30% of our population live in rural areas where their economic rights are virtually zero and opportunities for entrepreneurial activity are limited. Many residents of townships do not have title to their properties so cannot access this potential capital to fund a start-up business. A process of land reform and restoring economic freedoms to millions of our citizens are essential first steps to creating an entrepreneurial culture.
South Africans’ lived realities have arguably contributed to our low TEA rate, but these have been further trampled on by our highly regulated and closed economy. This points to two sets of policy measures to address the problem: foster growth mind-sets in our people, and unleash their entrepreneurial talents by removing barriers and obstacles in the economy.
The DA-led Western Cape government is showing the way in many measures of development pertinent to this issue. It attracts approximately 70% of South Africa’s venture capital investment – a sure sign of a thriving entrepreneurial ecosystem. It has the lowest rate of unemployment in the country, the lowest school drop-out rate and the highest governance ratings by the Auditor General and Department of Planning Monitoring and Evaluation. It also attracts the largest number of tourists and receives the most in-migrants from other provinces.