Daan Steenkamp | 2 December 2024
The private sector needs to be unleashed to deal with the country’s many societal challenges.
SA stands out among major economies for how few businesses are started and how hard it is to keep a business alive. There is growing optimism that the government of national unity (GNU) will initiate some economic reforms that might address this. But there is a lot of misunderstanding about what the underlying causes of these challenges are and therefore what to prioritise. It is worth looking at the data for guidance.
SA is ranked near the bottom globally in terms of our entrepreneurship rate, according to the Global Entrepreneurship Monitor. The Organisation for Economic Co-operation & Development benchmarks of regulatory best practice puts SA’s regulatory frameworks as one of the least conducive to global competitiveness.
By its assessment SA stands out among major developed and emerging markets for regulations that create barriers to market entry, expansion, and the difficulty of obtaining licences and permits. It is not just that our regulations are not aligned with our peers: the stringency of SA regulations has also tightened over the past decade.
Business owners know exactly what the obstacles are that make things difficult for local entrepreneurs and foreign investors. Yet somehow our problems are still not well defined. This means we cannot quantify the relative importance of factors that are throttling private enterprise in SA.
We have no statistics on things such as business failure rates, the number of compliance officers at large enterprises, how many documents and emails are required for the average foreign currency transaction, the proportion of government certification institutions that do not respond to client queries, or how much it costs to achieve higher broad-based BEE scores.
This undermines efforts to galvanise public support for reforms. It took 17 years for the government to allow private participation in electricity generation because the causes of Eskom’s problems were poorly understood, and private sector involvement ideologically opposed.
The same is true of SA’s labour market. The country stands out globally for its high rate of unemployment. Apart from apartheid policies, this is a symptom of labour market regulations that increase the cost of employment and incentivise firms to avoid formalisation. Yet there is little political momentum pushing for reforms to address jobless growth.
SA’s underlying problem is government insistence on intervening in many parts of the economy. The government’s share of the economy, measured as tax revenues to GDP, has been higher than in other major Brics economy since 2010 and continues to rise.
Another good example is SA’s trade policy. The country stands out for its high levels of tariff protection, the extent of government support, and our woeful export performance. For example, export volumes have been flat over more than two decades. Import-substituting policies have not only failed to promote competitiveness or raise the sophistication of exports, they have also made it difficult for new firms to compete with well-supported competitors and created a lobby that opposes trade reform.
The government’s poor provision of services also makes it challenging to run a business. About 70% of SA firms had generators in 2020, with as many as 50% of manufacturing firms’ electricity being generated by generator, according to the World Bank. The Reserve Bank estimates that load-shedding reduced economic growth in 2023 by almost two percentage points.
The SA Reserve Bank’s load-shedding growth impact estimates do not incorporate the contributions from other service-delivery-related challenges, such as SA’s failing water infrastructure, declining rail and port capability or crime. Regarding the latter, the World Bank estimates that crime costs SA 10% of GDP annually. That is huge. For 2023, this cost is almost three times the government’s total expenditure on healthcare. It is more than implementing a basic income grant would cost.
Policy uncertainty is another important reason for SA’s anaemic investment and low business start-up rates. Exchange controls and approval requirements for cross-border transfer of intellectual property (IP) make it difficult for start-ups to raise capital from foreign investors and discourage even small cross-border transactions. This limits integration with the global economy and creation of networks to other economies.
The SA Startup Act movement argues that uncertainty about the treatment of IP and exchange controls is behind an increase in emigration by SA entrepreneurs.
The Employment Equity Amendment Act of April 2023 implies that entities with more than 50 employees will in future need to meet sectoral ministerial equity targets and require detailed annual reporting. Substantial fines for noncompliance are also being considered. These regulations not only create large compliance costs but incentivise firms to stay small. Discouraging growth weighs on productivity and efficiency by reducing economies of scale and inhibiting job creation.
Small and medium-sized businesses account for more than two thirds of employment, so the growth of small business is crucial to raising welfare and dealing with SA’s socioeconomic challenges. The National Development Plan recognises this but has been short on tangible reforms to cut red tape.
Operation Vulindlela is a praiseworthy initiative between the presidency and National Treasury that is seeking to improve regulatory efficiency and reduce compliance costs. Its focus is on addressing electricity supply constraints, fixing water and rail infrastructure improvements, improving our visa system and accelerating licence processing. There are signs of progress in many of these areas. But this is still focused on treating the symptoms of SA’s antigrowth disease. A more ambitious set of structural reforms is needed to align SA with global regulatory best practice.
The lifting of restrictions on private sector participation in electricity production has been tremendously successful in helping to resolve our electricity crisis. It is time that the GNU unleashes the private sector to deal with other societal challenges.
At the same time, it is time to leash the parts of government and state-owned enterprises that are making things actively worse. Nonperforming state institutions need to be restructured and wages tied to productivity. Last year’s Harvard Growth Lab report argued that a shift to merit-based employment in the public sector and relaxation of preferential procurement rules, were key to removing barriers to growth. Something else that is well overdue is a comprehensive set of regulatory impact assessments across the areas where SA ranks poorly globally. Policy decisions and prioritisation of structural reform plans must be empirically based.
The underlying reason for SA’s poor growth and high unemployment is interventionism. Many businesses that are recipients of state largesse are complicit in perpetuating this. The government needs to shift to evidence-based regulations and commit to getting the basics right.
‘Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER’.