The percentage of adult South Africans involved in starting a business has plunged by 34%, a new report shows.
The Global Entrepreneur Monitor (Gem) global report for 2014 reveals that the percentage of adults involved in a business less than three-and-a-half years old (the TEA rate) fell to 6.97% last year from a 13-year high of 10.6% in 2013.
This, while the percentage of South African adults running established businesses (those of older than three and a half years) has also slipped - from 2.9% to 2.68%.
The 2014 report surveyed over 206,000 individuals and 3,936 national experts on entrepreneurship across 73 economies.
South Africa is not alone in its decline. The rate of adults starting new businesses also fell dramatically in India (along with its established business rate) and Colombia, and slipped slightly in Russia and Malaysia.
South Africa continues to perform below similar, efficiency driven economies (see graph below), where the average early-stage entrepreneurial activity (TEA) rate rate is 14% of adults, while that of established businesses is 4.5%.
Below par performance
“When one looks at the TEA rates of different countries and compares these to the GDP per capita in the country, a “line of best fit” shows that South Africa should have a TEA rate in the region of 14%, which, if achieved, would go a long way towards reducing unemployment and alleviating the poverty experienced by much of its population,” says Gem executive director Mike Herrington, (pictured right) in the report.
Herrington adds that it’s difficult to show where Gem has influenced policymaking in South Africa except that over the years Gem results are being quoted by businesses and government departments to a greater extent than when Gem first started tracking South Africa in 2001.
High failure rate
While there is evidence that South African firms are failing less than in previous years (with the discontinuance rate fell falling from 4.9% to 3.89%) an analysis by Small Business Insight of Gem data for 2014 shows that South Africa still has one of the high failure rates (those running established companies as a ratio of the sum of both established and early-stage entrepreneurial activity).
Of a group of eight emerging economies (Brazil, Chile, Colombia, Malaysia, India, Russia, Georgia and South Africa) South Africa, with the exception of Chile and Colombia, has the highest business failure rate.
But what makes South Africa's case concerning is the country's low number of adults involved in start-up activity (see graph) and in running established firms.
Of the group of eight, Malaysia is ranked as having the most favourable entrepreneurial eco-system – with good access to finance and good policies and government programmes, among other things. Last year it eco-system was judged as more favourable than in 2013.
The biggest gain was made by India, possibly driven by prime minister Narendra Modi and his mooted reforms. Local experts there rated the country more favourably than in 2013, particularly in government policies as well as programmes and finance and cultural norms.
The rating of South Africa’s entrepreneurial eco-system slipped (as did those of Colombia and Chile). The African country is weighed down by poor ratings on government programmes and primary education.
Brazil continues to trail at the bottom of the rankings, bogged down by its low rating by local experts on regulations and poor primary education.
Four types of nations
Of the eight emerging economies analysed by Small Business Insight, four types of countries emerge:
Timm is the author of Trade and Industrial Policy Strategies (TIPS) 2012 report ‘How the state and private sector can partner to boost support to SMEs: Lessons from Chile & Malaysia. Click here to view the report. Click here to sign up to his monthly newsletter. Follow him on Twitter at @Smallbinsight and on Facebook.
When it comes to labour laws the South African government is in denial. Even its president, Jacob Zuma, seems to live in cloud cuckoo land.
In September last year he told members of the country's upper house, the National Council of Provinces, that critics of South Africa’s labour laws fail to compare the country’s laws to those of similar countries or to consider the country’s history during apartheid when black workers had few rights.
Zuma, known for his scanty reading habits, perhaps never glanced at last year's Global Competitiveness Report 2013-14. The report, by the World Economic Forum (WEF), ranks South Africa second last out of 148 countries on hiring and firing practices (only Venezuela fares worse) and 144 for flexibility of wage determination. It also ranks South Africa last for co-operation on labour-employee relations. This year's report, due out in the next few weeks is unlikely to reveal any progress in these areas.
South Africa's Brics partners are all ranked far higher on these measures (see the graph below). Only Brazil comes close to the level of labour legislation that South Africa has.
Earlier this month, Lindiwe Zulu chosen by Zuma as South Africa's first small business development minister, was already busy shaking things up. In her inaugural budget speech she hinted at her intention to review legislation that make it difficult for small businesses to survive and said her department would over coming months look at present labour regulations to see how they can be improved.
She may need to act fast, particularly with MPs' plan to amend a number of the country’s labour laws, which will among other things force all employers to provide reasons for hiring any one on a contract for more than six months. The amendments have been stuck in Parliament for a number of years.
South African business owners have long complained that the country has some of the toughest labour laws in the world (contained in its Labour Relations Act. Historically bad relations between employers and employees worsen things.
Central among the complaints is that the country has difficult firing procedures and a central bargaining system that crushes small firms.
The first stems from the fact that employers can be dragged to the country's labour mediation body - the Commission for Conciliation, Mediation and Arbitration (CCMA) - for merely neglecting to follow the correct procedure when firing an non-performing worker.
Added to this the country’s high unemployment rate drives many desperate employees who have been fired, often legitimately, to lodge cases with the commission in the hope of extracting severance pay. Small business owners often simply pay up rather than spend weeks tied up in labour cases – which only makes many an employer think twice before hiring anybody.
Bargaining council agreements are the second central complaint. These agreements apply to a number of mainly industrial sectors (covering a third of all workers). They mandate that all firms, no matter their size, pay employees the same wages and benefits. The terms of agreements, including benefits and wages, are negotiated by trade unions and big firms in each particular industry and then extended to small employers.
Many small businesses cry foul and say that extending the agreements without them having had a hand in negotiating them is unfair and goes against one of the country’s constitution’s basic principles: that of freedom of association. The bargaining council system allows for an exemptions procedure, but many point out that it doesn't work. Like this court challenges have been plenty in recent years.
Politicians' cries that South Africa isn't so bad when compared to its peers may only show just how out of touch they are. Some may point out that compared to Brazil South African labour law isn't too bad.
But Brazil is hardly an example for others to follow. Mandatory requirements in its labour laws (including employers having to pay a 13th salary, cover lunch and transports costs and contribute to various taxes and pension costs) increase payroll costs by 70% to 80% on average, according to accounting firm Deloitte, and drive many employers to take on freelancers instead, while spending endless hours on labour issues.
Even in India labour laws have recently been criticised*. There the main problem is the country's large number of labour laws (44 central laws), which leads to inspection visits by different officials under different laws and promotes corruption. In July small firms joined a chorus of others calling for labour reforms. South Africans should be shouting too.
Time for some more
In South Africa in 2002 a number of small amendments to the labour laws came into effect, following a 1999 review. These among others included scrapping the daily work overtime limit of three hours and allowing conciliation to be followed immediately by arbitration in order to expedite matters at the CCMA .
While it's not clear how good the amendments have been in assisting small firms, the latter measure hasn't done much good. The commission's annual report last year pointed out that years on few employers and employees still opt for the expedited process.
It's time to do more. The news this week that the country's unemployment rate has hit the highest in six years is nothing to be taken lightly. Bold steps are required. Making it easier to fire employees and ending obligatory membership by small businesses to bargaining councils may help small businesses to hire more employees. It could do something to tackle the country's terrible joblessness.
*On July 30 India's cabinet approved proposals to amend three labour laws. Some of the proposals will do away with the prosecution of petty offences, for example the failure to provide a clean toilet, others simplify procedures for small firms.
Stephen Timm is a