It’s that time of the year again when countries from around the world celebrate entrepreneurship. In this year’s Global Entrepreneurship Week (GEW) organisations from 150 countries will this week host workshops, seminars and more to promote entrepreneurship.
I was in São Paulo for the launch of GEW Brazil. I’ve been in Brazil since February studying Portuguese. It's a country that has long fascinated me and this is my fourth visit here.
It may face similar challenges to that of South Africa, but one problem that Brazil doesn’t seem to have is that of enough entrepreneurs.
One thing that immediately becomes apparent when you enter any city centre or even slum here is the intensive activity – traders, small shops, restaurants, workshops. South Africa’s slums or city centres are markedly more quiet when it comes to commercial activity.
The 2013 Global Entrepreneurship Monitor (Gem) report reveals perhaps why. While over 17% of Brazilian adults are involved in a start-up venture, the figure is 10.6% of adults in South Africa.
Nearly an equal amount (15.4%) of Brazilian adults own a business of three-and-a-half years or older - while just 2.9% of South African adults do so.
These statistics reveal (see this earlier article I wrote on Gem figures) not just how few start out and continue but just how few small businesses survive after 3.5 years.
If you ask most South Africans why so few run their own business the common refrain you will hear is that red tape (especially labour laws) is an overwhelming limiting factor. But is it really that bad?
Brazil has one of the worst bureaucracies in the world. The latest figures from the World Bank reveal that it takes 84 days to register a business and 2,600 hours to file a tax return. In South Africa it takes 19 days and 200 hours to complete tax returns. India is similarly burdened by red tape, but this hasn't stopped it either from being one of the most entrepreneurial nations in the world.
You can reduce red tape to the bone just as Georgia has done, but this will not suddenly transform the country into a nation of entrepreneurs. It needs something else – a culture of entrepreneurship.
In South Africa the interest in entrepreneurship has increased significantly in recent years, as has the support for small businesses by the government. Yet the country still has far too few business owners.
The 2015 Global Entrepreneurship and Development Index suggests that though South Africa’s entrepreneurship ecosystem is far stronger than Brazil’s (South Africa is ranked 100 versus South Africa’s 52) its start-up skills are extremely low (0.12 versus 0.38 in Brazil). This is down to the country’s low experience in business.
Much of this is down to the country’s history – under apartheid it was basically illegal for black Africans (who make up more than three quarters of the population today) to run their own business. The white state placed capital in the hands of a few, such that the economy remains highly concentrated, restricting access to small businesses.
Some reforms have been made, including tax incentives, various funds aimed at small businesses and the use of Black Economic Empowerment (BEE) - an affirmative action programme which favour the hiring of black talent and prioritises the purchasing by the state from black firms.
Recently the state tweeked the BEE laws to get large companies to mentor and buy from more black supplier. It’s also been setting up more incubators and has been slowly reducing the cost of business by making it possible to register a business online and by releasing a simplified accounting measures for small firms (through the 2008 Companies Act)
It's the education system stupid
These are all commendable things. But much of it is undone by one of the worst education systems in the world. The effect is that many new potential entrepreneurs fail to come up with bankable ideas or lack the kind of basic financial management to run a business.
Poor business ideas are often cited by banks for why they have little faith in lending to businesses referred to them by the state for a credit guarantee schemes (where the state pledges to cover a certain portion of a loan to a small business) have never gained the trust of banks here. In comparison Chile, Malaysia, Brazil and India all make ample use of credit guarantees.
The present cry for a state bank is being fuelled by obstinate (some would say conservative) banks refusal to work with the government.
One glimmer of hope is the Financial Sector Code in which banks must lend out R48 billion ($4.3-billion) to priority sectors (including low-cost housing and black small businesses) between 2012 and 2017. But then again the amount dwarves what other emerging nations are directing to small firms.
Poor education also cripples state organisations which are supposed to help business owners. The state in South Africa has long not been an employer of choice: the best candidates head to the private sector. The worst, often under-skilled are hired en masse by state agencies, many of which are poorly run too.
The Small Enterprise Development Agency (Seda) for example relies too much on internal staff who work as business advisors to help businesses, rather than to use more professional business advisors as Brazil’s small business agency Sebrae does (see this earlier article I wrote on the Brazilian agency)
On top of this the state underplays the importance of internet access, partly because poor areas from which many members of parliament (MPs) originate have never had quality internet. Without good internet the country is further crippled.
Meanwhile in Brazil (which has faster internet) the state is preparing for the role out of 4G. South Africa is still trying to get 3G to all parts of the country. Brazilian municipalities also have free internet cafes for community members.
The South African government must stop fooling itself that it is doing enough to improve the quality of the country's education. Serious improvements will do more to boost entrepreneurship than most other things. A weak president, plagued by countless scandals, likely constrains entrepreneurship further.
Stephen Timm writes on small business. Sign up to his monthly newsletter on small business lessons here.
Stephen Timm is a