Analysis: The crisis in South Africa's small business sector

According to the Minister of Finance, about 68% of all South African workers are employed by small businesses employing fewer than 50 people. A sizeable proportion of the national workforce (43%) is employed by businesses employing fewer than 5 people. The small business sector is clearly the most important originator of jobs in South Africa.

Against this background, two worrying patterns have recently emerged.

Firstly, the number of small businesses in South Africa has stagnated over the past decade. Between 2001 and 2011, there was a roughly constant number (2 million) of small businesses (see figure). The number of small businesses increased slightly (to 2.4 million) during the economic boom of 2004-2006, but since 2006, the number has shrunk by 18.2%. Since the boom, about 100,000 small businesses have closed their doors each year, bringing the total number of small business closures over the past five years to 440,000. 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.

Number of people running their own small businesses in South Africa, 2001-2011

The second worrying trend is that the number of people trying to start their own businesses has fallen to an all-time low. In 2001, at a given time around 250,000 people were involved in starting their own businesses, whereas in 2011 only 58,000 people were trying to do so, a decline of 76% (see figure).

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.

Number of people trying to start their own businesses, 2001-2011

To some extent, the precipitous decline in small business commencements is connected to the 2009 recession. If one were to cast this in an optimistic light, the decline in small business commencements might be viewed as a cyclical phenomenon and likely to reverse as the economic recovery gathers pace.

However, small businesses have been beset by serious challenges over the past decade. Between 2003 and 2010, the South African Revenue Service's 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' 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 World Bank's Doing Business Report indicates that, in terms of total tax cost and efficiency, South Africa's ranking fell 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. Between 2004 and 2011, the number of cases dealt with by the Commission for Conciliation, Mediation and Arbitration (CCMA) increased from 128,000 to 156,000 per year, an increase of 22%: 81% of referrals relate to dismissals, and 41% of these referrals occur in the small business-dominated, labour-intensive retail and wholesale trade and business and professional services sectors.

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 cites labour problems - weak public education, restrictive labour laws, and poor work ethic - as among the most problematic factors for doing business in South Africa.

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.

This is an extract from the Adcorp Employment Index, March 12 2012. The full report can be accessed here - PDF.

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