Towards the end of 2016, something remarkable happened in the relationship between the private sector and state in South Africa. In an effort to keep the big three rating agencies from downgrading the country’s the sovereign credit rating to “junk status” the CEO Initiative was convened at the request of the President and his Deputy and led by the then Minister of Finance. The initiative’s initial goals were to prevent a sovereign rating downgrade and to stimulate inclusive and sustainable growth. To achieve this, three work streams were established: a fund for small and medium sized enterprises (SME), a youth employment scheme, and an investment intervention team. This post critically assesses the theoretical basis for SME development as a tool for inclusive growth.
Development policy and practice have been characterised by many silver bullet fashions over the years. One that immediately comes to mind is the micro-finance revolution that was supposed to help the poorest escape poverty by allowing them to borrow and invest in productive assets. After years of attracting donor funding and a Nobel Peace Prize, we now know that we may have been overly optimistic at best about the promise of microfinance. In microfinance’s wake, unconditional cash transfers seem to be the next fashionable cure for global poverty. Several experiments are now underway to establish the effect that giving cash to the poor has on their livelihoods.
In South Africa, the biggest development trend appears to be SME development. As a country trying to undo the economic legacy of Apartheid and colonialism, anything that looks as though it will bring more people into the economic mainstream is welcome. SME development claims a position of privilege in South African economic policy debates. It is one of few policies that the state and private sector agree on. An example of the state’s commitment is the establishment of a Department of Small Business Development after the general election in 2014. The private sector’s support is shown by its R1.5 Billion (USD 11.8 million) commitment to supporting SMEs as part of the CEO Initiative. Both policy makers and capitalists hope that SMEs will stimulate growth and employment, while also changing the racial distribution of economic power by supporting emerging black entrepreneurs . On the first two goals, the existing evidence doesn’t support these objectives. The third is a conversation for another time.
Cross-country evidence on the relationship between growth and SMEs provides more questions than answers. While there is a positive relationship between SME employment share and growth, it is not enough to support a conclusion that SMEs lead to growth. It is also possible that SMEs simply emerge as a response to rising incomes and demand when economies do well. The growth experiences of East Asia show that growth can come from processes where large conglomerates (chaebols) are the dominant firm type such as in South Korea or where smaller firms are dominant such as in Taiwan.
On employment, cross-country evidence also finds no support for the idea that SMEs are better job creators than large firms. SMEs are also not found to be any more labour intensive or better for job creation than larger ones. The firm-level evidence for South Africa supports this finding. SMEs in South Africa may create more jobs than large firms, but they also destroy more jobs. The net effect of this creation and destruction dynamic is that large firms are better at keeping people in employment than SMEs. Once again, the evidence doesn’t support the fervour. While firm surveys tend to undercount informal economic activity, there is little reason to believe that its inclusion would make a difference in the South African context, given the size of the informal sector.
The persistence of low growth and unemployment while a Small-Enterprise-Support Complex emerges in South Africa is quite telling. A combination of economic empowerment laws, preferential government procurement, a government department, corporate social responsibility funds, and the rise of social innovation means that small businesses have never been more supported than they are now. Yet the economy is as exclusive as ever, it is producing record unemployment numbers, and contracting for the first time since 2009. Perhaps it is the support offered to entrepreneurs that is failing. What’s more likely is that SME development is a case of Hamlet without the Prince of Denmark.
What we know about the world’s developed countries is that they have gotten to where they are through structural transformation and upgrading of their technological capabilities. Indeed, individual enterprises are often the mechanism by which transformation and upgrading happen, but the SME discourse is deafeningly silent on this. The Department of Small Business Development does not mention technological capacity in their mission or vision or as an outcome of their programs. There is nothing in their goals or mandates about supporting infant industries, and by extension, the SMEs within them, to facilitate their technological learning. Private sector initiatives such as the CEO Initiative’s SA SME Fund aren’t any better. They too do not have an appreciation of the importance of structural transformation and technological upgrading in growth and development. Instead, they mostly offer access to finance, mentorship, and markets, since these are ostensibly the market failures that constrain SMEs.
The SME development discourse has been reduced to survival and numbers, rather than focusing on learning and progress. Besides the fact that the existing evidence contradicts the idea that SMEs fuel growth and create jobs, the current approaches ignore questions of structural change and technological capabilities. It is assumed that correcting a few market failures and offering expert advice from the C-suites is all that it will take to unleash the power of SMEs. The promise of small business looks to be headed the way of the promise of microfinance. Should this continue then the only people who will truly flourish because of SMEs are the entrepreneurs that have emerged to support other entrepreneurs.
Kagiso Zwane is a Masters student in Development Theory and Policy at Wits University in Johannesburg, South Africa.