JOHANNESBURG – As Statistics South Africa (StatsSA) released its report last week, I was sitting with Dr Pali Lehohla, the former statistician-general of South Africa, and the question we kept asking ourselves was: “What has gone wrong?” Not "what could go wrong?" as the well-known Santam insurance TV commercial asks.
StatsSA revealed that our unemployment rate increased from 27.1 to 27.6percent while, in parallel, a Time magazine piece earlier this month stated that our society is the most unequal in the world.
So, to try and decipher what exactly went wrong, I compiled a few scenarios of what I think happened – and what we could do to solve this predicament.
To set a back story, South Africa prides itself on having some of the best policies and regulations in the world.
South Africa has a plethora of institutions – estimated at more than 400 – mandated or involved in creating jobs and supporting the growth of businesses, such as the Small Enterprise Finance Agency, the Small Enterprise Development Agency, the Department of Trade and Industry, the Industrial Development Corporation, the National Empowerment Fund, the Technology Innovation Agency, Provincial Local Economic Development Agencies, incubators, accelerators and various other private sector enterprise development initiatives and the list goes on and on.
It is believed that these institutions combined spend in excess of R100 billion a year.
Yet, the fact remains that all these great initiatives have not really addressed the issue of rising youth unemployment, which is now at 55percent and a ticking time-bomb.
The challenges we face are systemic and, hence, have to be handled as such. Though I applaud the solid principles and intentions of the government’s Youth Employment Service programme and the impact it has made thus far, it’s just a quick fix. We must dig deeper and solve some systemic issues first if we are to have a long-term impact.
There are four key areas, which I think when addressed will help accelerate new small businesses and scale existing ones, while creating much-needed jobs in the economy. I believe that over the next five years, South Africa can reduce its unemployment figures to about 20 percent.
Here are my four points:
* Lack of an open economy: Professor Michael Pence from the New York State University described that the word “openness” has two related, but distinct connotations.
It can mean that something is unrestricted, accessible and possibly vulnerable; or it can mean that something, such as a person or institution, is transparent, as opposed to secretive.
The first meaning is often applied to trade, investment and technology, which have always driven structural economic changes, especially with respect to employment.
Structural change can be simultaneously beneficial and disruptive.
Though South Africa operates an open economy in relation to trade with other countries, its internal economic policy has been somewhat closed.
A basic example is an SME that wants to start a cement factory, yet may have to go through a long process of setting up this facility, which includes going through an approval process with a Bureau of Standards, like the SABS, finding capital and a location. This is all expensive and most early stage funders shy away from backing the initial set-up process, resulting in the industry being monopolised. The same goes with access to many of the industries.
At the same time, there’s also all the red tape to deal with and lack of access and capital to key processes that can help to set up.
If the economy was open, then our processes needed to ensure that if the SME was good in what he/she does and has a great business model and plan, they can be supported to access institutions like the Bureau of Standards at an affordable/subsidised cost and receive the needed funds to set up operations.
While visiting the 22 on Sloane start-up campus last year, Minister of Economic Development Ebrahim Patel mentioned that he was working with the competition commissioners to sign an agreement regarding unfair competitive behaviour from businesses in order to enable ways to support more small businesses to compete fairly with them.
This was signed late last year. And hopefully, we monitor this process and support more SMEs and keep the economy more open.
A closed economy creates an unfair and harsh competitive landscape, severely curtailing entrance for new small businesses. Ultimately, SMEs in South Africa stand little chance, because capital and access is king to break into any market.
* Lack of access to strategic resources: By resources I mean skills, mentors, knowledge and finance, which remains the main issue faced by SMEs in South Africa. This is not unique to South Africa.
Recently, we completed a report with the World Bank on the SME Finance Gap and the above was evidenced within it, which will be published within the next few weeks.
Information and data remain critical. Many of the township and rural small businesses simply do not know how and where to access the information – and even if they do, data costs are prohibitively restrictive. This is also sometimes the case for SMEs in the suburbs.
Mentors to nurture the fledglings. Many of our communities live in dream-crushing, isolated silos and it seems most of the knowledgeable individuals either do not have time to mentor them or simply don’t want to get involved. We need to build a mentor-driven capital model.
Imagine if the chief executives from the top 100 JSE-listed firms mentored just one start-up each a year? These are the leaders that can create sustainable jobs. Entrepreneurs also need to network with their peers who have been through the journey and what this means is that an ecosystem, such as conducive co-working spaces or a network needs to be created to engineer such engagements among peers.
* Make start-ups and SMEs a national priority: So much attention and cotton wool care is given to big businesses to ensure that they keep investing in South Africa. Yet, the same level of attention is not given to SMEs, which in fact are the real new job creators.
According to the Organisation for Economic Co-operation and Development (OECD) report in 2016, in the OECD area, SMEs are the predominant form of enterprise, accounting for approximately 99percent of all firms. They provide the main source of employment, accounting for about 70percent of jobs on average and are major contributors to value creation, generating between 50 and 60percent of value added on average.
In emerging economies, SMEs contribute up to 45percent of total employment and 33percent of gross domestic product (GDP).
When taking the contribution of informal businesses into account, SMEs contribute to more than half of employment and GDP in most countries.
We recently did an analysis and picked up that the informal market in South Africa, if supported and equipped, could double its annual revenue from the R350billion to around R700bn. This is a recipe for an inflow of jobs into the economy.
* Clear understanding on consumption and production patterns: This has been one of the topics that Dr Pali Lehohla has been passionate about. China and the US, among a few other nations, have mastered this model. The key challenge we face is that we have not succinctly understood the patterns of what we consume, who consumes it, why and where – and the same applies to what is being produced.
I read a lovely piece over the weekend by Paige Leskin, who analysed how Google is scanning our Gmail inboxes to keep a detailed list of everything we buy and consume. However, regarding the article, a Google spokesperson said this is private and not meant for ad targeting, but I think they have mastered and clearly understood the importance of keeping our production and consumption patterns.
If South Africa can get the entrepreneurial process right, this will assist the SMEs to tap into the opportunity that exists with the Africa Continental Free Trade Area Agreement, which is set to be one of the world’s single largest markets accounting for $4trillion (R57.56trln) in spending and investment across all 54 African nations. It is time to defuse the youth unemployment time-bomb with sustainable solutions.
Kizito Okechukwu is the co-chairperson of the Global Entrepreneurship Network (GEN) Africa; 22 on Sloane is Africa’s largest start-up campus.