The role of small businesses in closing unemployment gaps: Covid-19 and beyond

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Photo by Christina Morillo from Pexels.

The global economic growth was already constrained and the world was experiencing increasing levels of trade wars such as between China and the United States of America. On the other hand, there is a rapid advance in innovation, mobile and converged technologies, artificial intelligence, the partly successive and partly simultaneous 4th and 5th industrial revolutions leading to less reliance on human capital. A development that has, is and will continue to affect many unskilled youth and render them unemployable .

The Covid-19 pandemic further complicated the global situation and led to a forced shutdown of economic activities and more people lost their jobs. Many businesses whose primary mode of production relied on physical contact were the first to shut down and suffer loss on revenues. Those businesses which had hybrid or multiple channels of delivering their products and services, such as digital platforms, managed to continue operating for some period.

However, eventually all the commercial, political and social aspects of our lives got impacted greatly by the forced lockdowns, closure of ports and borders, suspension of air transport, extraction of citizens from foreign countries and all other mitigation measures taken by governments, businesses and the broader society in response to the virus. Businesses and industries that relied on Chinese industrial commodities had to shut down when Beijing closed its ports, countries relying on Africa’s raw materials had to stop production as South Africa and the rest of Africa introduced mitigation measures.

Domestic context

In South Africa we were already experiencing a technical recession and negative ratings and as such we were not spared the devastation as this pandemic happened when the ratio of youth-to-adult unemployment was already at a worrying 1:3, which means for every unemployed adult there were three unemployed youth with one in eight working-age adults under the age of 25 having a job, compared with 40% in most emerging economies similar to South Africa. 

With or without Covid-19, South Africa remains one of the most unequal societies in the world in any case. This is a result of our past unjust laws which led to systemic and structural exclusion of the majority citizens. A reality we must unashamedly continue articulating so that we do not allow an incorrect narrative of where we come from and why we are where we are today.

Of course  some remarkable progress has been recorded since 1994, but there remains high levels of unemployment, poverty and inequality. Over the last few years preceding this pandemic, We were registering slow economic growth and shedding of jobs accompanied by labour unrest. Before Covid-19 hit our shores, the overall unemployment rate in the country stood at 29.1% and it has now reached 30.1 % under the lockdown. The percentage of young persons aged 15–34 years who are not in employment, education or training (NEET) is now 41,7%.  

Potential of SMMEs as key drivers of youth employment

It is widely accepted that entrepreneurship is instrumental in addressing unemployment challenges in South Africa, SADC and the rest of the world. The Small business sector plays an important role in the economy. In South Africa, Small Micro and Medium Enterprises employ between 50 to 60 % of the total labour force and they contribute around 34% towards the gross domestic product. Furthermore, According to a study conducted by the Department of Trade and Industry (2005) Small, Micro and Medium Enterprises comprise about 90% of formalised businesses in South Africa.

But… Here are some of the challenges facing SMMEs in South Africa

While we desperately need the SMME sector to contribute greatly towards reducing unemployment, South Africa is faced with the challenge of limited and poor participation of young people in the economy according to the Youth Enterprise Development Strategy (YEDS 2013-2023) of the DTI. This picture is not very different even at a continental level.

Some of the challenges in the SMME landscape include:

(i) Lack of access to markets – you are in business because you have got to sell products and services, with the barriers to entry created by apartheid legacies, anti-competitive practices monopolistic behaviour, your business will not be viable and you will not stay in business.

(ii) Lack of access to finance-  Many black and youth owned Small businesses do not have access to land and other investable assets to provide as security in order to access finance in the financial markets. Moreover, assistance from government agencies presents bureaucratic and compliance hurdles almost insurmountable by SMMEs. We have seen a new kind of flexibility with how the SMME grant criteria was designed during this pandemic and hopefully we can draw some lessons for permanent application.

(iii) Low skills levels- Most of the entrepreneurs in the informal and micro businesses are either unskilled or have low skills levels. This presents an obstacle, especially in an era where technology is taking a centre stage in how business is conducted.  

Other issues in the SMME Sector

Around 70% of start-ups in South Africa do not survive beyond the first two years. According to a report by World Bank and South Africa’s Treasury, the early-stage entrepreneurship rate in South Africa should be 3 times more than what we currently have- just based on the GDP size. Furthermore, a significant size of South African small businesses are survivalist, resulting in no scalability, growth and opportunities for employment.

The racial, gender and spatial inequality is reflected in the patterns of ownership across the micro, small and medium-sized spectrum. Black people are concentrated in the informal and micro enterprises, with their numbers decreasing as the enterprise size increases. They only account for about a third of the medium sized businesses. A direct opposite trend applies for white ownership, which increases as the size of the enterprise increases.

The current white ownership in the medium-sized sub-category is about 46% . Women are even more excluded. A disproportionate amount of them is in the informal sector and the medium-sized enterprises consist only around 27% of women with 73 % of males. According to the same report, about half or more of SMMEs are in one province- Gauteng- an indication of our spatial inequality. There is very low entrepreneurial activity in the rural areas.

Policy and regulatory constraints

In order to properly plan better, there is a need for reliable data on the size and characteristics of the SMMEs in South Africa, especially the informal sector, which is currently lacking. Even the data I am sharing in this discussion is subject to contestation. In addition, there is lack of coordination of government support through multiple agencies.

Recommendations

(i) Consolidate data sets from SARS, Treasury, CIPC, banks and other government agencies to create a reliable of information about the SMMEs, information that can help government closely study trends like employment created by the sector.

(ii) Create better coordination of the SMME policy by making the Department of Small Business Development the key coordinator of all the SMME policies and programmes.

(iii)  While the informal sector is undoubtedly important for subsistence entrepreneurship, it is equally true that formalisation will help unlock growth and scaling opportunities. But in order for Small businesses to formalise, there has to be incentives in the form of a tax regime suitable for small business development, a reduced red tape and more efficient registration and compliance systems.

(iv)  The financial markets should become more friendlier to the SMME sector by expanding their risk appetite and exploring alternative assets to be considered as sufficient collateral. And the role of government in this regard should be through policy making, regulating the sector, providing guarantees and adapting laws like FICA to the SMME environment.

(v) Government should lead in setting more definite and common thresholds on what constitutes a micro enterprise, a small enterprise or a medium-sized enterprise. Currently the thresholds are set differently by SARS, the banks and by government agencies such as the NYDA. This has created a situation where most finance goes to the predominantly white and male owned medium sized organisations high up the continuum.

(vi)  Government should use its position as a major purchaser of good and services to open access to markets for SMMEs. It is an anomaly that in a country with so much youth unemployment, the same big companies continue to benefit from state procurement, even in areas where small businesses have capacity to deliver.

(vii)  Not only must the state buy from SMMEs, but they should pay them and on time. If any of you are active entrepreneurs here, it will not be new to your ears that even after so much directives on the 30 day payment policy – many small businesses still have to pay someone in the municipality to get their money. This level of corruption and selfishness is disgusting and totally unpatriotic.

(viii) We should also develop, recruit and retain the right people. It is very frustrating for entrepreneurs to have to explain concepts and ideas to people who have never written even 1 invoice or put together a business plan. If we are to transform the state agencies, we need to hire people with an entrepreneurial flare. You would actually think that this would be a common practice.

Conclusion

Small businesses play a very important role in growing the economy and creating employment. Their size, flexibility and agility allows them to be more innovative and creative. If embraced fully, these natural attributes can help many small businesses to survive disruptive moments like the current Corona Virus pandemic and also succeed in the new normal.

 Without the deep reserves and infrastructure at the disposal of larger businesses, the small enterprise owner has to mostly rely on creativity, innovation and agility to succeed. However, with sufficient support from government and all other stakeholders, we the SMME sector can reach its potential and contribute more to the country’s employment targets and growth.

Tony Tan Keng Yam, former President of Singapore once said that the three key elements in building an entrepreneurial society were, First, the role of the government as the enabler. Second was the role of the private sector as a partner. Third was the role of society in inspiring its youth. All these and other recommendations to support the SMMEs may not work if the prevailing culture does not support entrepreneurship after all.

Kgotso Maja is a member of the Gauteng ANC Economic Transformation Subcommittee, an MBA Candidate and socio-economic development activist. He writes here in personal capacity.