Small and Medium Enterprise Development: A Case of Hamlet without the Prince

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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.

Photo: GovernmentZA

One thought on “Small and Medium Enterprise Development: A Case of Hamlet without the Prince

  1. It is the right of access to opportunities that should be made equal and not the ability to work. People are good at working but they don’t always get a chance due to the way landlords and banks speculate in the national resources. Please read my essay below and see how the equallity of opportunity can be restored.

    Socially Just Taxation and Its Effects (17 listed)

    Our present complicated system for taxation is unfair and has many faults. The biggest problem is to arrange it on a socially just basis. Many companies employ their workers in various ways and pay them diversely. Since these companies are registered in different countries for a number of categories, the determination the criterion for a just tax system becomes impossible, particularly if based on a fair measure of human work-activity. So why try when there is a better means available, which is really a true and socially just method?

    Adam Smith (“Wealth of Nations”, 1776) says that land is one of the 3 factors of production (the other 2 being labor and durable capital goods). The usefulness of land is in the price that tenants pay as rent, for access rights to the particular site in question. Land is often considered as being a form of capital, since it is traded similarly to other durable capital goods items. However it is not actually man-made, so rightly it does not fall within this category. The land was originally a gift of nature (if not of God) for which all people should be free to share in its use. But its site-value greatly depends on location and is related to the community density in that region, as well as the natural resources such as rivers, minerals, animals or plants of specific use or beauty, when or after it is possible to reach them. Consequently, most of the land value is created by man within his society and therefore its advantage should logically and ethically be returned to the community for its general use, as explained by Martin Adams (in “LAND”, 2015).

    However, due to our existing laws, land is owned and formally registered and its value is traded, even though it can’t be moved to another place, like other kinds of capital goods. This right of ownership gives the landlord a big advantage over the rest of the community because he determines how it may be used, or if it is to be held out of use, until the city grows and the site becomes more valuable. Thus speculation in land values is encouraged by the law, in treating a site of land as personal or private property—as if it were an item of capital goods, although it is not (Mason Gaffney and Fred Harrison: “The Corruption of Economics”, 2005).

    Regarding taxation and local community spending, the municipal taxes we pay are partly used for improving the infrastructure. This means that the land becomes more useful and valuable without the landlord doing anything—he/she will always benefit from our present tax regime. This also applies when the status of unused land is upgraded and it becomes fit for community development. Then when this news is leaked, after landlords and banks corruptly pay for this information, speculation in land values is rife. There are many advantages if the land values were taxed instead of the many different kinds of production-based activities such as earnings, purchases, capital gains, home and foreign company investments, etc., (with all their regulations, complications and loop-holes). The only people due to lose from this are those who exploit the growing values of the land over the past years, when “mere” land ownership confers a financial benefit, without the owner doing a scrap of work. Consequently, for a truly socially just kind of taxation to apply there can only be one method–Land-Value Taxation.

    Consider how land becomes valuable. New settlers in a region begin to specialize and this improves their efficiency in producing specific goods. The central land is the most valuable due to easy availability and least transport needed. This distribution in land values is created by the community and (after an initial start), not by the natural resources. As the city expands, speculators in land values will deliberately hold potentially useful sites out of use, until planning and development have permitted their values to grow. Meanwhile there is fierce competition for access to the most suitable sites for housing, agriculture and manufacturing industries. The limited availability of useful land means that the high rents paid by tenants make their residence more costly and the provision of goods and services more expensive. It also creates unemployment, causing wages to be lowered by the monopolists, who control the big producing organizations, and whose land was already obtained when it was cheap. Consequently this basic structure of our current macroeconomics system, works to limit opportunity and to create poverty, see above reference.

    The most basic cause of our continuing poverty is the lack of properly paid work and the reason for this is the lack of opportunity of access to the land on which the work must be done. The useful land is monopolized by a landlord who either holds it out of use (for speculation in its rising value), or charges the tenant heavily for its right of access. In the case when the landlord is also the producer, he/she has a monopolistic control of the land and of the produce too, and can charge more for this access right than what an entrepreneur, who seeks greater opportunity, normally would be able to afford.

    A wise and sensible government would recognize that this problem derives from lack of opportunity to work and earn. It can be solved by the use of a tax system which encourages the proper use of land and which stops penalizing everything and everybody else. Such a tax system was proposed 136 years ago by Henry George, a (North) American economist, but somehow most macro-economists seem never to have heard of him, in common with a whole lot of other experts. (I would guess that they don’t want to know, which is worse!) In “Progress and Poverty” 1879, Henry George proposed a single tax on land values without other kinds of tax on produce, services, capital gains etc. This regime of land value tax (LVT) has 17 features which benefit almost everyone in the economy, except for landlords and banks, who/which do nothing productive and find that land dominance has its own reward.

    17 Aspects of LVT Affecting Government, Land Owners, Communities and Ethics

    Four Aspects for Government:
    1. LVT, adds to the national income as do other taxation systems, but it replaces them.
    2. The cost of collecting the LVT is less than for all of the production-related taxes–tax avoidance becomes impossible because the sites are visible to all.
    3. Consumers pay less for their purchases due to lower production costs (see below). This creates greater satisfaction with the management of national affairs.
    4. The national economy stabilizes—it no longer experiences the 18 year business boom/bust cycle, due to periodic speculation in land values (see below).

    Six Aspects Affecting Land Owners:
    5. LVT is progressive–owners of the most potentially productive sites pay the most tax.
    6. The land owner pays his LVT regardless of how his site is used. A large proportion of the ground-rent from tenants becomes the LVT, with the result that land has less sales-value but a significant “rental”-value (even when it is not used).
    7. LVT stops speculation in land prices and the withholding of land from proper use is not worthwhile.
    8. The introduction of LVT initially reduces the sales price of sites, even though their rental value can still grow over a longer term. As more sites become available, the competition for them is less fierce.
    9. With LVT, land owners are unable to pass the tax on to their tenants as rent hikes, due to the reduced competition for access to the additional sites that come into use.
    10. With LVT, land prices will initially drop. Speculators in land values will want to foreclose on their mortgages and withdraw their money for reinvestment. Therefore LVT should be introduced gradually, to allow these speculators sufficient time to transfer their money to company-shares etc., and simultaneously to meet the increased demand for produce (see below).

    Three Aspects Regarding Communities:
    11. With LVT, there is an incentive to use land for production or residence, rather than it being unused.
    12. With LVT, greater working opportunities exist due to cheaper land and a greater number of available sites. Consumer goods become cheaper too, because entrepreneurs have less difficulty in starting-up their businesses and because they pay less ground-rent–demand grows, unemployment decreases.
    13. Investment money is withdrawn from land and placed in durable capital goods. This means more advances in technology and cheaper goods too.

    Four Aspects About Ethics:
    14. The collection of taxes from productive effort and commerce is socially unjust. LVT replaces this extortion by gathering the surplus rental income, which comes without any exertion from the land owner or by the banks– LVT is a natural system of national income-gathering.
    15. Bribery and corruption on information about land cease. Before, this was due to the leaking of news of municipal plans for housing and industrial development, causing shock-waves in local land prices (and municipal workers’ and lawyers’ bank balances).
    16. The improved use of the more central land reduces the environmental damage due to a) unused sites being dumping-grounds, and b) the smaller amount of fossil-fuel use, when traveling between home and workplace.
    17. Because the LVT eliminates the advantage that landlords currently hold over our society, LVT provides a greater equality of opportunity to earn a living. Entrepreneurs can operate in a natural way– to provide more jobs. Then earnings will correspond to the value that the labor puts into the product or service. Consequently, after LVT has been properly introduced it will eliminate poverty and improve business ethics.

    TAX LAND NOT LABOR; TAX TAKINGS NOT MAKINGS!

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