The right regulatory and institutional environment is the single most important element in any economic growth strategy. Only one other factor — available skills, especially technical skills — is anywhere near as closely correlated with per capita economic growth.
This is the central finding of a study of 10 countries — seven in Africa, three in Central Europe — coordinated by London-based Bannock Consulting, in which the Small Business Project took part.
Sound and stable macroeconomic policies are essential for development, but have not been sufficient to promote business growth in South Africa. The rate of job creation lags well behind the growth in job-seekers — to absorb all new entrants to the job market, for example, employment would have needed to expand by more than 33%.
Minister of Trade and Industry Alec Erwin has said the small-business sector is more than a decade away from where it should be in South Africa, and that it contributes only 35% of gross domestic product.
To boost private-sector growth and job creation, the enabling environment for business, especially small and medium enterprises, must be revisited. The government must set its sights on making South Africa a good place to do business, where investment is protected, and where laws and regulations are sensible, enforceable and can be easily obeyed.
Inappropriate regulations weigh most heavily on smaller firms, which often do not have dedicated human resources staff or in-house tax specialists. An American study found that businesses with less than 20 employees spend about $7 000 a year on compliance, while firms with more than 500 employees spend $4 000. An Australian small-business deregulation task force found that the average small business spends 16 hours a week on financial accounts and compliance issues, with the latter taking up a quarter of that time.
Informal operators tend to ignore regulations, taxes, levies and health standards. But inappropriate regulations act as a barrier to development by keeping many of them out of the formal economy. Southern Africa surveys strikingly show that less than 1% of firms “graduate” from the micro-enterprise seedbed and become established enterprises employing more than 10 workers.
A large informal sector may signal that the regulatory costs imposed on business are too high and offer incentives to remain small and informal, inadvertently compromising standards. In over-regulated systems, many regulations cannot be enforced, bringing the law into disrepute. The more complex the regulatory apparatus, the greater the scope for corruption.
Regulatory regimes are “walls” informal businesses must scale to be formalised. Only when small firms operate in the formal sector can they access capital and use infrastructure to grow.
The challenge is to turn the wall into the gentlest slope possible. This is not simply to demand deregulation, but requires regulation conducive to private-sector growth and better enforcement of a simplified regulatory structure.
Questioning the regulatory environment may raise fears that standards will be undermined. Some regulation is necessary, for example to raise tax revenues and maintain reasonable environmental, health and safety standards.
But when imposed at unrealistic levels, regulations divide the economy into formal and informal sectors and erect barriers between the two, when stronger connections are needed.
In the bustle of national legislation, small business often risks being lost. Since the demise of the National Small Business Council in July 1998, smaller firms have been without an official voice in policy debates.
A way of giving a voice to small entrepreneurs is for the government to introduce regulatory impact assessments (RIAs) to assess the likely impact of regulations. This has been done in the United States, the United Kingdom, New Zealand and Australia. In the UK government departments are reminded to “think small first” in assessing proposed regulations.
RIAs quantify the transaction costs of doing business and test the costs, benefits and risks of each course of action. They ask basic questions: Are civil servants trained to implement the law? Is it enforceable? Is it good for business growth and job creation?
Political will and commitment to regulatory best practice, and specifically the use of RIAs to weed out inappropriate regulations, are vital. No country has entirely succeeded in curbing problematic regulations.
But RIAs can only go so far. The real test is whether the cost of doing business is reduced, particularly for small enterprise.
Judi Hudson is policy manager at the Small Business Project, a business development, research and advocacy organisation based in Johannesburg. More details