Growing small businesses in a low growth economy

3 September 2015

SA's economy desperately needs a new growth path yet the nation's policy makers, reflecting a political-economy captured by Tripartite Alliance priorities, compound already complex challenges by indulging industrial fantasies. Lacking a workable vision and adequate implementation capacity, the vague notion is floated of emphasising small business expansion programmes.

Masquerading small businesses development as a growth strategy reflects SA's policy makers being overwhelmed by deteriorating political economics . Nonetheless, this could be an immensely valuable policy development - but for reasons, and in ways, which ruling elites seem unlikely to have considered.

The world has known two key drivers of economic development: industrialisation and trade. The industrial era is losing ground to the information age at an accelerating rate as evidenced by soft commodity prices and acceptance of climate change threats. SA has long been de-industrialising for lack of competitiveness while relying evermore perilously on domestic consumption and natural resources.

SA's trading potential has always been constrained by distance to major markets. Then the sanctions era was followed by the incumbent ruling party's alliance structure which is profoundly inward focused, ideologically opposed to competition, and routinely hostile to big business interests. As commodity based economies are now floundering and most SA households are either poor, overly indebted, or both, there is an immediate need for new sources of economic growth.

The idea of having multitudes of startups exploring export opportunities is practical and necessary. It is the young and the restless which are redefining economies across the world. Meanwhile, SA's old-thinking policy makers can't seem to dismiss their delusional notions of 1950's styled industrial renaissance. Nor are the nation's big businesses sufficiently nimble to identify myriad new ways SA can compete. This reflects global norms. IBM has suffered 13 consecutive quarters of revenue declines while much younger companies have birthed new markets under its feet.

Startups are clustered among two extremes: disrupters and survivalists. Internationally and in SA, both have exceedingly high failure rates. SA's environment is not welcoming to either. During the industrial era disrupters benefited workers and accelerated broad development. Today's disrupters remain critical to global growth but they mostly benefit consumers and the highly skilled. Most survivalist who start businesses would prefer to be suitably employed.

Extreme levels of unemployment help inspire the questionable expectation that profound efforts by government and NGOs to expand startups will spur job creation. However, unsuccessful job seekers who pursue self-employment typically seek customers by undercutting incumbents' prices. Due to the nation's lowered economic growth trajectory, of roughly 1% per year on a per capita basis, such efforts will increasingly provoke incumbent failures.

Most survivalist startups routinely under deliver, and ultimately fail, or persist at a subsistence level, for lack of: experience, assets, and access to reasonably-priced capital. Government or private donor efforts to remediate such shortcomings risk undermining, at great aggregate costs, existing small businesses run by neighbours who independently overcame such deficiencies.

Today's stagnating discretionary incomes restrict the potential to increase SA's net number of jobs and businesses. Even well designed catalyst-styled programmes risk compounding job creation challenges if they aren't focused on exporting or attracting overseas tourists.

Most innovations by disruption-styled startups advance the industrial-to-information-age shift. They tend to either enhance business efficiency or stimulate consumption. Yet SA's Tripartite Alliance is continually resisting efficiency improvements while the nation's consumers are overly stimulated.

SA's isolated economy has always focused on achieving competencies with little emphasis on global competitiveness. Since the sanctions era began however, global growth has increasingly emphasised: specialisation and integration to improve competitiveness. Over the past twenty years, the Tripartite Alliance has habitually impeded big business from adapting to global demands.

Unions and communists aligned with a ruling party focused on transformation-linked patronage are not inclined to collaborate with big business or to embrace competitiveness-focused growth strategies. Hence, seeking to support small businesses is a reasonable compromise - but the core focus must be on selling to wealthy overseas markets.

Such concessions to reality are all the more ironic in that the ruling elites have become evermore short-sighted in their prioritising. They have been responding to a deteriorating economy desperately in need of structural reforms by continuing to accommodate unaffordable wage and social welfare demands at the expense of much needed infrastructure investments - thus careening toward a fiscal cliff while greatly limiting long-term growth prospects.

It is ironic on multiple levels that, amid rampant short-sightedness, SA's policy makers are now emphasising small business development to spur economic growth. While encouraging export focused startups would be slow to produce benefits, it represents a promising step toward much needed structural reforms – irrespective of whether the idea was hatched in such a context. SA's best option to discover paths to meaningfully integrate into the global economy is probably to support waves of disruptive startups which will probe thousands of seemingly improbable possibilities.

Interventions can be designed to accommodate startups through complementing incumbents and thus spurring growth in a low-growth environment. Various East Asian nations have excelled at this leading to high growth. Importantly, the ultimate buyers have tended to be distant wealthy consumers.

The evidence is overwhelming, SA must diversify beyond domestic consumption and exporting minerals while growth prospects through selling to sub Saharan markets is modest as the region's prospects are overly reliant on extracting natural resources. A key consideration for exporters is disposable income and, excluding SA, all of the sub Saharan region's disposable income is less than that of a major eastern or western city's.

Just as SA must identify new growth paths, so must its neighbours. Finding paths to sell to wealthy consumers will require much creative risk taking. SA's next waves of startups should be well positioned to probe creative ways to advance and integrate SSA economies with SA's - and the entire region's with those of the East and West. For SA and SSA to maintain high growth in the absence of strong commodity demand, it is essential that workers add value to products and services which are sold into high disposable income markets.

The nation's and the region's future will pivot on global integration. While government's vision for advancing small business development seems to be vaguely conceived, inspiring waves of startups is a clever next step if it leads to new sources of foreign earnings.

Shawn Hagedorn is a strategy adviser @shawnhagedorn

This article first appeared on www.biznews.com