New data shows that around 440 000 small businesses have closed in the past five years, and the number of businesses starting up is at a record low.
Around 440 000 small businesses have closed in the last five years, according to the Adcorp Employment Index released on Monday.
“The group’s February 2012 employment index highlights with alarm the closure of 440 000 small businesses over the past five years,” Loane Sharp, labour economist at Adcorp, said in a statement.
In addition, the number of new business start-ups was at an all-time low.
“The gravity of the situation is emphasised by the fact that 68% of all South African workers are employed by small business employing fewer than 50 people,” Sharp said.
There were several reasons for this, including the 2009 recession.
Small business stagnates
The number of small businesses in South Africa had stagnated over the past decade.
“Between 2001 and 2011, there was a roughly constant number [two million] of small businesses. The number increased slightly [to 2.4 million] during the economic boom of 2004-2006, but has, since 2006, shrunk by 18.2%,” Sharp said.
“Given that the typical small business employs 12 people [aside from the owner-manager], a revival of this sector could potentially create 5.3-million jobs.”
In 2001, around 250 000 people were involved in starting their own businesses.
In 2011, only 58 000 people were trying to do so—a decline of 76%, Sharp said.
“Applying the average ratio of 12 workers per small business, the reduction in entrepreneurial activity over the past five years has reduced the economy’s job creation potential by around 2.3-million jobs.”
Recession not the only factor
Sharp said if the recession were the only factor to blame, then this trend should reverse as the economy recovered.
However, regulatory issues were not helping.
“Between 2003 and 2010, the South African Revenue Service’s [Sars] tax amnesty for small businesses netted 355 000 new business taxpayers. Over the same period, the number of personal taxpayers [probably including a significant number of unregistered small businesses] increased by 2.5-million or 74%.
“Although Sars’s intention in broadening the tax base was to ensure greater equity and fairness in the tax burden, it is likely that the increased tax incidence fell significantly more on small businesses than on medium and large enterprises.”
The recent World Bank’s Doing Business report shows that in terms of total tax cost and efficiency, South Africa’s ranking has fallen from 18th to 44th out of 183 economies—a drop of 26 places—between 2011 and 2012.
“Also, labour laws and regulations for small businesses have been particularly onerous.”
Doing business in South Africa
The number of cases dealt with by the Commission for Conciliation, Mediation and Arbitration between 2004 and 2011 had increased from 128 000 to 156 000 a year.
Of these, over 80% related to dismissals and 41% occurred in the small business-dominated, labour-intensive retail and wholesale trade and business and professional services sectors, Sharp said.
“The automatic industry-wide extension of bargaining council wage agreements, typically reached between a handful of large employers and trade unions, has forced small businesses, among other non-parties, to pay high wages applicable to the large business sector.
“Or - increasingly—to opt out of official dismissal protections and mandatory statutory wages through the informal sector.”
The World Economic Forum’s Global Competitiveness Report for 2011 cited labour problems—weak public education, restrictive labour laws, and a poor work ethic—as among the most problematic factors for doing business in South Africa, Sharp said.
“Small businesses offer the only real prospect of large-scale job creation in South Africa, yet conditions for small businesses have deteriorated markedly. The number of people trying to start their own businesses is a critical indicator to watch in the coming months.”
Slowing job growth
The report found that job growth slowed in February to an annual rate of 1.5%—or 24 000 jobs created.
“During the month, the economy created 24 000 jobs, slowing from the 80 000 jobs created in January,” Adcorp said.
Over 90% of the jobs—around 22 000—were created in the informal sector.
In the formal sector, more jobs were created in the manufacturing sector (5.3%), the construction sector (4.7%) and wholesale and retail trade (3.5%).
“This is the first time in more than 12 months that job growth in the production-oriented sectors exceeded job growth in the consumption-oriented sectors,” Adcorp said.
“Nonetheless, mining employment continued to shrink, with a loss of 3 000 jobs in February.”
High-skilled employment—senior managers and professionals—showed the strongest growth at a rate of 5.3%.
The steepest decline was recorded among low-skilled employment—trades and elementary workers—at minus 1.3%.—Sapa