Monday, 2 October 2017

Opinion piece in Sowetan newspaper 5th September - how to reduce unemployment through growth of small businesses

South Africa’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 current environment of flat or no growth, with large firms slashing jobs and small firms just hanging on, any talk of new jobs may seem wishful thinking. A negative attitude towards the future is self-fulfilling, so we must craft a future of positive outcomes based on realistic scenarios.

In the NDP’s scenario, 90% of the 11 million new jobs we need by 2030 will come from small business. The NDP is already 5 years old, written at a time when SA’s economy was growing at around 3%. Now growth is less than 1% and a further ratings downgrade in December (or earlier) would undoubtedly keep it there, or worse. So is it realistic to expect small businesses to hire people in such depressed conditions?

Growth will eventually return, and when it does more businesses will be created and with them new jobs will come. As a policy-maker, I am constantly thinking about ways of stimulating small businesses and entrepreneurship, and what interventions are likely to have the biggest impact.

Should we be aiming to increase the number of start-ups in the economy or rather direct our efforts at assisting fast-growing businesses to grow even faster?

In this respect, there is a big gulf 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 sub-Sahara Africa, tend to be in the informal economy and contribute little to economic growth or job creatio. And secondly, the high failure rate of small businesses means new business creation per se does not lead to growth.

In my view, both the GEM and GEI contain valuable insights which can be helpful for policy-making. 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.

We need to do this both in the formal and informal sector and using longitudinal measures, in other words tracking individual firms over time so we can see how they perform on all three metrics.

Perhaps the most important measure is the survival rate. Currently, according to statistics from the DTI, only two out ten 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 survival rate to five out of ten. If achieved, this will have a massive impact on the economy.

If we assume a new business, within three years, employs an average or five people, achieving a survival rate of five out of ten 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 ten 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 by 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. The Department of Small Business Development, when questioned on this, does not have any answers. While its programmes supposedly support start-ups (the Seda incubator programme) and fast-growing businesses (the National Gazelles Programme) it cannot give us any national statistics beyond its own very meagre efforts.

Measures of impact and longitudinal performance are seemingly alien to this Department. Until it begins to think in these terms it will never be able to identify and massively replicate its programmes because it won’t have any measures of long-term performance.

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