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OPINION: Asian tigers earn SME stripes while SA policies make only fat cats purr

Business Day / 02 OCTOBER 2017 - 06:06 / WILLIAM GUMEDE

Black economic empowerment policies have enriched a minority and failed to create growth and value

SA’s black economic empowerment (BEE) model, which focuses on fostering black industrialists and has degenerated into making political capitalists with connections to the ANC leadership fabulously rich, is simply wrong.

Such narrow BEE empowers only a handful of people, creates little value and has no multiplier effect on development, job creation or poverty reduction. It also makes it easy for BEE policy to be captured by corrupt elements for self-enrichment – as is the case now.

The aim of BEE should be to change the structure of the economy, business and society. Enriching only a few well-connected sham business people will not do this.

BEE should shift towards empowering as many black people as possible, create new products, services and technologies the country needs, foster new skills the economy needs and stimulate new kinds of industries.

To make BEE genuinely broad-based, create real value and multiply its development effect, small and medium enterprises (SMEs) should become the new pillar of BEE. For SMEs to play this role as the BEE anchor, the sector’s policies should be overhauled.

But first there needs to be the political will to make SMEs the centre of a new BEE approach, given that BEE policy has been captured by corrupt interests who are likely to block any effort to overhaul policy. Too many ANC-aligned policy makers, civil society activists and researchers have not taken SMEs seriously as a job spinner, industrialisation tool and antipoverty mechanism. There is often also an ideological opposition to SMEs, with those who are lukewarm to small business saying it is a "neoliberal" concept that is World Bank-, or IMF-and western-donor driven.

A new SME policy must rest on three pillars. First, the enterprises should manufacture new products and offer services and technologies the country needs, and stimulate new kinds of industries. Second, SMEs must be integrated into the supply chains of public and private corporates. Third, SME strategy should focus on exports, perhaps initially exporting to other African countries and new unexplored emerging markets.

It is trendy in the government to talk about establishing a South African developmental state, but there are lessons to be learnt from the East Asian "tiger" economies, such as South Korea, Taiwan and Singapore, on how SMEs can drive economic growth, empower society more broadly, and create mass jobs.

The great post-Second World War export manufacturing revolution in East Asian developmental states took place on the backs of SMEs. Many of the large conglomerates in East Asia today started as SMEs, including Taiwan’s Ace Computers and LG in South Korea.

East Asian developmental states used industrial policy to focus on building export-oriented manufacturing SMEs. These were either part of the supply chains of larger export-oriented private and public companies or SMEs directly focused on export manufacturing. SMEs provided the bulk of the value-add manufacturing, process and services.

These countries analysed global demand, tailored their exports to meet it and then diversified their output and upgraded their technology as demand changed. They constructed their industrial, trade and development policies to support SME-based export-led growth based on changing demand.

As these countries successfully upgraded their economies and increased their skills levels, their SMEs shifted to producing more technology-intensive, value-added products. In many East Asian developmental states, SMEs often provide 80% or more of the country’s jobs. In South Korea, SMEs account for 99.9% of all companies and 90% of all employees. A third of all of South Korea’s manufacturing is produced by SMEs.

In Japan, SMEs account for 99.7% of all companies, 70% of all employees and more than 50% of the manufacturing sector. In Singapore, SMEs make up 99% of all firms and employ 72% of all workers; in Taiwan the percentages are 98% of companies and 78% of the workforce.

South Korea’s postwar industrialisation was led by big business and its chaebols (conglomerates) in combination with state-owned enterprises (SOEs) and focused initially on building heavy industry for export. SMEs were encouraged by linking them to the supply chains of large private firms and SOEs.

During its rapid export-led growth, South Korean industrial policy purposefully identified manufacturing areas for SMEs to specialise in and compelled chaebols to bring SMEs into their supply chains to produce the inputs, services and products.

South Korean SMEs were focused on producing for export. The Korean Credit Guarantee Fund provided cheap finance by guaranteeing loans provided by the private sector. Its Small and Medium Industry Corporation promoted SME innovation, technology and efficiency, while the government offered tax exemptions to SMEs.

In the late 1970s, many former employees of large South Korean corporations started their own SMEs to supply the inputs, products and services to their former employers. This trend was encouraged by the large corporations, which provided financial support, access to technology and long-term supply contracts.

One example to illustrate the contribution of SMEs to manufacturing in South Korea is its burgeoning motor vehicle, electronics and machinery industries. According to South Korean government figures, in 1988, SME-driven manufacturing contributed 60% to production in the motor vehicle industry, 40% in electronics and 38% in machinery.

In Japan, SMEs have been leading the creation of new industries, value-add manufacturing and job creation. About 25% of Japanese SMEs are global exporters, most as subcontractors to large corporates. Japan’s Small and Medium Enterprise Agency calls the country’s SMEs the "hidden strength" of the post-Second World War economic miracle. Most of Japan’s provincial and rural towns are economically supported by SMEs in the retail, construction and service industries.

The state-owned Japan Finance Corporation provides support loans for SME start-ups and overseas expansion, and safety-net loans for SMEs suffering downturns. It also provides unsecured low-interest loans throughout the lives of SMEs. Japan’s state-owned credit guarantee corporations provide guarantees to private banks for the debt obligations of SMEs, and they get tax exemptions.

Singapore’s growth path following independence was led by a combination of state-led development and incentives to attract multinational companies, which were carefully selected to build up specific industrial sectors in return. They received generous tax concessions but had to use SMEs in their supply chains and transfer technology and know-how.

SMEs provided the inputs, products and services to SOEs and multinational firms. Singapore experienced a recession in 1985 and the government set up an economic committee to propose a new industrial path. It proposed focusing on fostering entrepreneurship broadly, but using SMEs more specifically as a vehicle to bring about innovation, adapt technology and spearhead growth. The focus was on indigenous SMEs engaged in exports.

The government set up the Singapore Productivity and Standards Board (PSB) to support an export-oriented SME strategy. The PSB supports SMEs to access finance, quality personnel, new technology and new markets. The government also introduced reforms to reduce administrative hurdles, improve the business environment and increase financial assistance to them.

In 2000, the Singapore government, in consultation with SMEs and development finance institutions, proposed the 1989 SME Master Plan be upgraded to a new plan called SME 21: Preparing SMEs for the 21st Century. The plan improved technology learning by linking SMEs with research institutions and providing market intelligence about technology trends and venture capital funds.

The Local Enterprise Technical Assistance Scheme funds up to 70% of the costs incurred by SMEs in partnering with local experts over a designated period.

Taiwan’s industrialisation focused on export-led growth using state-owned entities and SMEs to drive development. Initially, in the 1950s, the government pursued an import-substitution strategy, but changed to export promotion in the 1960s.

It then emphasised SMEs focused on export under the slogan "the living room as the factory", promoting labour-intensive export manufacturing done by SMEs and home workers. Export SMEs received subsidised export loans and regulations were deliberately flexible to allow exporters to thrive. The government introduced tariff rebates for exporters, cut custom duties and made it cheaper to buy inputs abroad.

Taiwan has a famed phenomenon whereby SMEs link informally as part of a network that provides inputs and manufactured and process goods to large companies. Taiwan’s bicycle export industry is driven by SMEs and was started from scratch in the 1970s with the government promoting the sector as a new labour-intensive manufacturing sector.

As these examples from East Asia show, a strategy based on SMEs is not going to develop by magic. It needs to be carefully nurtured through industrial policy, supporting institutions and accessible finance and training, especially vocational and technical training.

Finally, the government will have to ensure policies, be they aimed at BEE, SME promotion or industrial development, are not captured by corrupt elements.

• Gumede is an associate professor in the School of Governance at Wits University. His latest book is Restless Nation: Making Sense of Troubled Times.



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