A critical mechanism behind the unusually deep inequality in South Africa is the very small number, by international standards, of small businesses in the country. On the one hand, far fewer people earn livelihoods from their own businesses than in other upper middle-income countries. That fact largely explains South Africa’s extraordinarily high level of joblessness. On the other hand, income from productive assets and financial savings is even more unequal than wages and salaries.
It follows that an industrial policy aimed at inclusive industrialisation needs to step up the number of small businesses. This Working Paper analyses the current state of small business, and the systemic obstacles to its expansion, in order to identify strategies to achieve that aim.
Small businesses are the engines of a fair and green economy. But they lack access to the finance they need to grow. A new report from the Green Economy Coalition (GEC) looks at the barriers that small business face. These include risky and informal money lending arrangements, high bars for accessing credit, regulatory hurdles, and a lack of information on how to access finance. The report includes case studies from countries such as India, Peru, Senegal, Uganda and South Africa. The South African case study looks at the Seeds for Life Farm Primary Cooperative.
The report draws on research and work conducted by GEC members: Caribbean Natural Resources Institute (Trinidad and Tobago), Advocates Coalition for Development and Environment (Uganda), Development Alternatives (India), Trade & Industrial Policy Strategies (South Africa), Libélula (Peru), Foro Nacional Internacional (Peru), Innovations Environnement Développement Afrique (Senegal), the International Union for Conservation of Nature (Senegal) and the Economic Policy and Competitiveness Research Center (Mongolia).
Download the report or read online:
Main Report: Small is powerful
Case Study: South Africa
This policy brief identifies the benefits of implementing a comprehensive credit guarantee scheme that would move the needle in small business support and improve liquidity. Three possible measures that could be used are proposed: a credit card that is guaranteed by the government; a guarantee for trade credit providers; and a credit guarantee for bank SME portfolios. These are by no means the only measures needed, with multiple others required which could include grants, venture capital finance, and improving demand through general stimulus measures.
Download a copy or read the policy brief online.
To assist in improving the regulatory environment for small business, the Department of Performance, Monitoring and Evaluation and Department of Small Business Development requested the Employment Promotion Programme contract Trade and Industrial Policy Strategies to conduct a study on the national regulatory burdens on small business. The broad objectives of the research project are to identify practical and viable ways to reduce the effective costs of legislation and regulations for small businesses; and to understand broader stakeholder and departmental positions on relevant laws and regulations.
Specifically, TIPS was tasked:
The report was produced with support fom the University of Cape Town Employment Promotion Programme.
14:00 - 14:10 Opening and welcome by chairperson: Tshediso Matona
14:10 - 15:30 Presentations and discussion:
15:30 - 16:00 Open Discussion
16:00 Closure and light snacks
Small Business has been put forward as an important contributor towards economic growth, job creation and redress but faces many headwinds in South Africa that have hampered their development. Access to finance and more recently challenges around climate change are key barriers.
This Development Dialogue will provide an overview of recent trends in small business in South Africa, and present research undertaken on credit guarantees and climate change adaptation, with discussion on some of the options and proposals to strengthen the SME eco-system.
About the Speakers
Tshediso Matona is the Secretary of Planning in the National Planning Commission
Saul Levin is the executive director of TIPS and has experience in industrial finance and small business development.
Neva Makgetla is a senior economist at TIPS. Makgetla has published widely on the South African economy and worked for many years in government.
Gabriel Davel is the CEO for the Centre for Credit Market Development and was previously the CEO of the National Credit Regulator.
Shakespear Mudombi and Muhammed Patel are researchers at TIPS in the field of sustainable growth and green economy.
ADDITIONAL PRESENTATIONS BY GABRIEL DAVEL
This edition of The Real Economy Bulletin is the third edition of the State of Small Business published by TIPS. It reviews trends in small business post COVID-19, looking at small business by the numbers and the pace of recovery; employment and earnings; contribution to the GDP; small business by sector; profitability and earnings; assets and liabilities; education levels; ownership by race and gender; and the geography of small business
Download a copy of read online
One of the major international economic developments in recent years has been the growth in regional trade agreements (RTAs). However, with the exception of a few, there are criticisms that RTAs have not yielded the expected benefits. The focus of this paper is to determine the impact of engaging in regional initiatives for two groupings comprising of developing and least developed countries from two different continents, namely MERCOSUR and SADC.
This research report was produced under the TIPS small grant scheme.
Anaïs Dangeot holds a First Class in her undergraduate studies in Banking and Finance at the University of Mauritius. She has recently completed her Masters in Social Protection Financing at the University of Mauritius with a distinction. During her Master's tenure, Anais has participated in a joint research project between the University of Mauritius and the University of Botswana. Miss Dangeot has also been working with the Economic Policy Research Institute (EPRI), in Cape Town. Finally, her research interests centres on areas which include public policy, poverty, deprivation analysis and broader social development issues.
This paper looks at the strengths and weaknesses of current methodologies in capturing the kinds of local economic development impacts from the CWP. It aims to fill the gap of methodologies available for measuring economic multipliers in a local economy. (The Employment Promotion Programme (EPP) Research)
For South Africa, the promotion of small businesses remains key to creating jobs and a more equitable economy. Evidence from Chile and Malaysia – both countries with similar emerging economies as South Africa – reveals that by partnering to provide finance and business support, the government and the private sector can boost support to small businesses. This report builds on key findings by this author in other emerging countries in a 2011 TIPS report, by the same author, titled “How South Africa can boost support to SMEs: Lessons from Brazil and India”.
Patrick Sathorar acts as a marketing consultant for a group of 25-30 HIV-positive women in Nyanga, Cape Town. They produce textile and beaded products and Patrick facilitates their participation in the formal market by sourcing and negotiating contracts for them. Patrick’s role comprises the following: first, he meets with a client (typically a conference organiser) to discuss the items required (such as beaded lanyards or conference bags) and to negotiate the quantity. Then Patrick sources the raw materials. Often he needs to source fabric from various and geographically dispersed suppliers. Thereafter, Patrick commissions a designer to make up a sample, which is costed and presented to the client. If the client is satisfied, the parties negotiate terms of the contract, including the price per item.
If the client rejects aspects of the design, it is back to the drawing board for Patrick and his producers, who must produce new samples. Often, conference organisers require several samples to send to clients overseas. The negotiation process can last up to three months. Once the parties have contracted, the producers learn to reproduce the sample. Patrick is responsible for quality control; the women for the packaging; and Patrick for delivery of the products to the client. In between, Patrick sources contracts from small retailers.
Patrick generates contracts that produce a turnover of approximately R40 000 per month and each woman earns between R1 000 and R2 000, depending on how much work is available, and how many units she has made. Although this amount does not represent a decent wage, it does make a critical contribution to the women’s livelihoods. It also fulfils another important social goal – that is, to facilitate their economic agency. Without Patrick’s intermediary role, these women, who are functionally illiterate, have a poor command of English, have no formal sector experience and limited numeracy, and would be unable to manage the complex communications and networking necessary to sell products to the formal economy. They would be unable to do this because they do not have the skill set necessary to manage the negotiation process, and because they do not have the necessary resources - such as transport, design expertise, or the ability to manage bulk orders.
Improving small, marginalised producers access to modern markets has increasingly been accepted as an important element in South African policy debates on improving the employment, income and livelihood opportunities for such producers. The importance of market access arises because in the absence of such access, these producers are restricted to servicing proximate, local community markets which are traditionally thin and do not support: increased output volumes, product diversification and value addition, increased employment, increased income generation or increased returns. To date programming in this field has been characterised by two traits. First the majority of programmes have been project based, unsustainable, un-scalable, un-replicable and have impacted a limited number of direct beneficiaries. This project based approach has resulted in market based employment creating programming achieving substantially less penetration, coverage and success than social delivery programming. Second, the majority of programming has largely bought into the orthodox economic view that the “fault” for market exclusion lies largely with producers – their personal characteristics, production methods and location – resulting in a supply side dominated intervention approach. By this logic if small producers improve the quality and consistency of their production then they will almost certainly be included in modern markets. This chapter argues that even if supply constraints are fully relieved, the modus operandi of lead firms (which dominate the South African economy), create a sufficiently hostile and infertile environment, that even if market access can be achieved, the threat of adverse inclusion remains high – making the idea of improving livelihood and employment opportunities by linking small marginalised producers to modern markets an extremely difficult task. Despite these challenges, the chapter offers three system based policy options to address the issues of small producer exclusion, as well as, briefly touching on the idea that alternatives to linkage strategies need to be considered.
The research is based on value chain analysis as it is viewed as the most powerful and relevant tool in understanding the drivers behind the erection and administration of the barriers to entry which prevent small, marginalised producers from accessing modern markets. Understanding market power and governance and the exercise of this power allows economists to understand who the gatekeepers of value chains are, why and how they erect barriers to entry, how they influence the distribution of incomes and rents along a chain and how supply criteria are endogenised into chains via product and process upgrading and critical success factors. As such understanding lead firm behaviour in modern markets not only frames the opportunities and risks facing linkage programme initiatives, but it assists in designing interventions which are realistic and deal with the realities of how lead firms behave and organise their productive networks.
Although traditional value chain analysis is empirically driven and highly specific in terms of product or sector, this chapter discusses generic value chain characteristics and attributes, as a survey of hundreds of case studies across countries, sectors and products revealed that the same constraints arise consistently in the interaction between small producers and lead firm value chains (Lowitt, 2009)
In its efforts to craft a new economic growth path and assist small businesses, South Africa could do well to look to emerging economies such as Brazil and India, which have attracted much attention in their recent efforts to create greater and more equitable economic growth. The aim of this study is to inform policymakers and government on key learnings from fellow emerging nations India and Brazil when it comes to improving business support, market access and access to finance for small businesses. To date there has been no reported studies on small business schemes in India and Brazil. This study aims to bring to light what may possibly be the best emerging countries against which South Africa can compare itself to.
The focus of the report is on those business owners in the formal sector starting out as well as those that employ between 10 and 50 employees. The focus is defined by the fact that these have been shown to make the most significant contribution to employment.
Session 6B: Taxation and Trade Quotas
Street trading is the most common type of informal self-employment activity in South Africa. Traders sell a range of products such as fruits and vegetables, cooked food, new and used clothing, cosmetics, footwear, dvds, “public” telephone services and mobile phone accessories. Most traders operate from stalls or tables in market areas or on sidewalks. Some of these traders are licensed and rent their business space from the municipality.
The aim of this project is to understand whether the macroeconomic environment and other barriers to entry into the informal street trading sector offer insight into the relatively small size of the South African informal economy. The paper explores macroeconomic linkages and other barriers that traders encounter when entering street trading and while sustaining their businesses. The motivation for this research question is the paradox of South Africa's very high rate of open unemployment, estimated to be at least 40 percent using a broad measure (Cichello et al. 2006), but low level of participation in the informal economy. Because street trading is thought to be among the sectors in the informal economy with the lowest barriers to entry, identifying the barriers that traders do confront may offer some clues to the reasons so many of the unemployed do not enter trading.
The paper is divided into seven sections. The first provides an overview of the South African informal economy and unemployment. The second section contains an assessment of statistics on street trading in South Africa and the role of trading in the South African economy. Section three describes the fieldwork that was conducted to gather information about the barriers that traders confront. Section four explores linkages between the formal and informal economies and suggests that rather than operating as distinct “sectors,” there are concrete ways that they are tied together and mutually reliant. Section five offers a comprehensive analysis of trader-identified barriers to starting and maintaining their business. The sixth section connects macroeconomic policies to traders' experiences. The report concludes with a brief summary of the report and policy implications.
Within the ambit of the Accelerated and Shared Growth Initiative of South Africa, government is leading a process to define a Second Economy Strategy. One of the opportunities that has been identified is the agricultural sector, in particular fostering a larger number of smallholder agriculturalists. The study seeks to identify the key elements of an implementable programme to support the smallholder sector. The core of the exercise entailed identifying successful South African smallholders active in different settings, and examining the factors that contribute to their success, whether these are personal, contextual, institutional, etc. Although the study was not designed as an evaluation of interventions as such, in the process of conducting the smallholder case studies (and in combination with an extensive literature review), the efficacy and relevance of different intervention and support strategies also came into focus.
For purposes of the study, we assumed a broad definition of agricultural smallholders, including those who operate independently, those who farm in groups, those for whom farming is mainly for subsistence purposes and those whose orientation is mainly or purely commercial. (We therefore employ the flawed but useful distinction between ‘subsistence’ and ‘commercial’ smallholders.)
Ultimately, we conceptualise ‘supporting the smallholder sector’ as consisting of four distinct strands, namely the prospects and measures for:
TIPS was commissioned by FABCOS (The Foundation for African Business and Consumer Services) to undertake a study on the impact of fuel and food price increases on small business. As FABCOS has a large constituency of informal or previously informal businesses, a strong emphasis was placed on the impacts for informal businesses. Some key outcomes are highlighted below:
The main effects of high fuel prices can be observed within the macro-economic framework. The first impact reflects the role of transportation in determining the price of goods: South Africa is a large country, and highly dependent on the transportation of goods by road (given the currently very poor state of the rail network). Most micro enterprises are dependent on hired transport to fetch items from wholesalers and/or manufacturers. Although the cost of these services increases as the fuel price increases, there is good evidence to suggest that these prices are both downwardly "sticky" (i.e. that they do not go down when the petrol price declines) and that transport service providers take advantage of general perceptions about rapidly rising fuel prices to increase their margins. The result is that small business owners who are dependant on these forms of transport probably face disproportionate transport costs increases, compared to bigger businesses that control their own logistics. This reduces the competitiveness of the smaller businesses.
The second impact is through the regulatory response to inflation. Higher interest rates reduce the disposable income of consumers, by raising debt service costs. As consumers spend more of their disposable income on servicing debt, so they have less to spend on other items.
The third issue for small businesses arising from higher inflation is that, generally, they are not in a position either to negotiate price concessions from manufacturers or wholesalers or to pass inflationary costs on to their consumers. While it is, of course, true that lower consumer expenditure affects all business; small businesses are generally in a much weaker position to ride out periods of reduced consumer spending. The smaller the business, the more vulnerable it is to this.
To date, the ability of many small retail enterprises to survive has been based in large part on their proximity to their clients (convenience), and the (rising) cost of travelling to shop at a large retail centre. However, the official development policy of most Metros in South Africa is to encourage large retailers to penetrate enter the townships, and this is having a considerable impact on the ability of small traders to survive. These small businesses are not opposed to anti development in the townships per se, but they do feel a certain level of resentment towards economic planners who trumpet the necessity of encouraging small business development on the one hand, whilst but on the other hand encouraging development that puts those enterprises at considerable risk.
According to Statistics South Africa, food's weight in the Consumer Price Index (CPI) is just under 21%. As such, an increase in food prices will have an impact on general price levels. However, we should not confuse the official weighting of food in the CPI with the actual role of food in monthly household expenditure for many South Africans. Given that South Africa has one of the world's worst distributions of income, there is really no such thing as an "average" consumer. In general terms, the poorer a person, the greater the share of their income that they will spend on food, and the greater the impact on their disposable income of food price inflation that exceeds the rate at which their wages are increasing. Data indicate that the very poorest South Africans spend as much as 80% of their income on food.
Whilst general prices have increased steadily over the past five years, the data show that food inflation (CPI-F) generally increased faster than general inflation, but has done so in particular since the end of 2005. Except for the periods between August-October 2005 and the same period in 2006, food inflation has tended to be higher than the general price level (CPI) of all items. In particular, for the period between September 2007 and 2008, the gap between the two has been widening, implying that more price pressure is being observed in food than for other items.
Another key issue is that for the period between November 2005 and 2006, price increases in rural and urban areas were similar. However, since early 2007, rural prices have tended to grow faster than urban prices. The fact that rural populations spend roughly double (IES, 2006) on food compared to urban groups leaves rural populations at a disadvantage since generally have less disposable income than urban populations.
The two main impacts of rising food prices on micro enterprises are a direct impact (through the erosion of purchasing power of their clients) and an indirect impact (through the erosion of the businesses own purchasing power).
In terms of the direct impact on business through the erosion of their clients' purchasing power, the first point to be made is that the small enterprises that we are considering tend to have lower-income people as their main clients. When food prices are rising more rapidly than the "official" rate of inflation (which sets wage and social grant increases) then these people will have less non-food disposable income and may be forced into actually purchasing less food. Both of these are bad news for small business.
The indirect impact of rising food prices on small businesses comes via the reduction in the disposable income of the business owner. Most of the small businesses under consideration are owned by people who do not fall into the high-income category. Therefore, they tend to spend a relatively high portion of their income on food, and higher food prices mean less income available for other items. The reason why this is important is because most of these small businesses finance their expansion and cash flow requirements from their own savings, and are not able to source other types of finance. Therefore, a reduction in disposable income means less money is available for investing in the business or helping to ride out adverse business periods. This makes small businesses relatively more vulnerable than other type of businesses to adverse price changes.
This paper will review the attempts at fostering resource poor small-scale agricultural development in South Africa from 1994 to the present. Based on the lack of a concerted policy for support and development of this group of farmers and given the incomplete datasets about this group a number an attempt will be made to define them and their circumstances. By use of case material and observations over the past 15 years a number of suggestions will be illustrated for a way forward. The purpose of the suggestions is to illustrate why and how resource-poor farmers need to be placed more specifically on the agenda of government agricultural and poverty alleviation strategies. The primary focus will be on food security needs of this group and how this can be enhanced.