/ 28 June 2019

Let’s use ED to develop globally

Given South Africa’s current economic malaise
(Photo: David Harrison)

To say South Africa is in the middle of difficult economic times is stating the obvious. President Cyril Ramaphosa described youth unemployment as a national crisis, which is sitting at 55.2%. State Capture – Eskom the starkest example – and the private sector’s own regulatory ills are real.

However, to further bemoan the regulatory environment, especially elements of the B-BBEE scorecard focused on Enterprise Development (ED) is to repeat the common yet misplaced perception: ED creates new jobs in Small and Medium Enterprises (SME) but leads to job losses within larger enterprises.

First, it is important to understand why Government places so much emphasis on the SME sector. According to a 2017 Organisation for Economic Co-operation and Development (OECD) report, SMEs are the predominant form of enterprise, and account for 70% of jobs and 50 – 60% contribution towards GDP. By contrast, SMEs in South Africa account for 54% of the jobs and contribute to 49% of GDP.

Given South Africa’s current economic malaise, if the SME sector can be catalysed for growth, it can prove a catalyst of positive change for our national economic fortunes.

Importantly, that does not mean supplanting large companies as key employers within the economy, but rather supplementing job creation through the SME sector. Through the globalization of markets, SMES now have the opportunity to work in an integrated way with large organisations, acting as strategic partners instead of competitors.

This is how South Africa’s SME sector can aid growth without undermining the economic livelihood of larger organisations and employers. In this context, focus on the sector should be two-fold:

  • Develop SMEs so they can produce high quality product and service levels to replace imported services and products within large supply chains
  • Develop SMEs so they can be globally competitive, with their products and services exported to other cross-border markets
  • If these two objectives can be achieved, South Africa’s economy will enjoy tremendous value addition, with both SMEs and large organisations acting as job creators. Further to this, SME growth will drive transformation in South African business, the economy and reduce inequality.

    However, for SMEs to be given the best chance to succeed and be competitive in a globalised market, they cannot do it alone or in isolation. They need the support of large businesses and state agencies to thrive. The finite resources available to support SMEs must also be used in a strategic and thoughtful way, because development finance catalyses economic development and growth in a country.

    South Africa’s development finance assets as percentage of GDP is 5.3%, which is low compared to peer countries like Brazil, China and Malaysia, who are sitting at more than 14%. In this context, Enterprise Supplier Development (ESD) funds are meant to supplement development finance funds with a specific focus on developing SMEs.

    Strategic support begins with identifying the right products or services where SMEs in South Africa can attain the competitive levers required to compete globally. This entails identifying products/ services where South Africa has location factor advantages and factors such as scale, R&D and logistics do not play a role in achieving global competitiveness.

    For South Africa to achieve its future now, enterprise development and the SME sector offer a needed remedy to close the joblessness and inequality gap. Doing so means changing the way enterprise development is perceived and targeting areas of the economy where both small and large business can benefit.

    Let us develop South Africa’s SME sector for the global economy.

    Tafadzwa Mudyiwa is a senior manager in Letsema’s Economic Development Practice