25 April 2014

Viewpoint: To Get South Africa Working Again, Fire the DTI

By Ben Levitas.

It’s official that South Africa’s growth rate lags badly behind the rest of Africa, with no imminent solution in sight.  The New Development plan is supposed to be the knight in shining armour that will rescue us from our predicament.

Sure it sounds grand;  increasing the number of employed to nearly 12 million, doubling per capita income and achieving a growth rate of 6%.

On 6 August, business and President Jacob Zuma met for the umpteenth time to reach a consensus on the way forward.  Yet on the very day that unanimity emerged from this propitious meeting, that ‘red tape’ must be cut to an absolute minimum especially for SME’s, Trade and Industries Minister Rob Davies pushes ahead with draft legislation requiring all businesses, formal or informal, no matter how small, to register.

Davies’ justification that “all kinds of outlets [are] springing up that may well be involved in illegal imports and things of that sort.  So, we have been saying for some time that we need to crack down on things like illegal imports, or sub-standard goods, or counterfeit goods and things of that sort”, is unadulterated claptrap.Actually, the task of keeping counterfeit goods out of the country is the work of the department of Customs and Excise and of the police.  Davies is being disingenuous if he believes that registration will achieve this.

What Davies is doing is imposing more unnecessary red tape on micro businesses that struggle daily just to survive.

While Davies argues that the ease of doing business in South Africa had improved based on the World Bank 2013 rankings, which indicated that South Africa had moved from position 41 in 2012 to 39 in 2013, this is clearly not good enough and should not provide him with any comfort.

The problem is that Dr Davies and Economic Development Minister Ebrahim Patel are antagonistic to capitalism and do not understand business.  They do not appreciate that the vital ingredient that will either make or break any central or national plan is entrepreneurship.  Entrepreneurs take huge personal risk, and in return expect to be well rewarded.  Indeed they are entitled to be well rewarded because they bear a huge personal responsibility and create employment for many people.  If central planners meddle in private enterprises for ideological reasons, appetite for risk is reduced:  the greater the meddling or ‘governance’, the greater the commensurate reduction in appetite for risk.

That is why the imposition of BBBEE scorecards are so insidious:  they remove the incentive to take risk because the rewards must be shared.

Although it is often argued that there is a mismatch between our workforce and the skills required, this certainly doesn’t apply to South Africa’s ability to produce entrepreneurs and business leaders.

Almost all of the CEOs of some of the world’s largest companies, such as BHP Billiton, Glencore, Exstrata and Rio Tinto, were born and bred South Africans.  Then there are the likes of Elon Musk and others that are trailblazing in space, green energy and the internet.  The only problem is that they have all relocated offshore and we need to interrogate why that should be the case.

Instead of formulating plans which are nothing more than wishlists, we would be well advised to follow the example of successful countries like Germany.  According to Rana Foroohar, writing in the 12th of August edition of Time magazine; “Germany’s famous Mittelstand firms – the term commonly used to denote small and mid-size family-owned export companies – churn out top-notch auto components, lasers and high-tech machinery and health care equipment”.  These firms employ 60% of the nation’s workers and contribute more than half of the country’s GDP.  While Davies aspires to build up a manufacturing sector able to be sufficiently competitive to export, in Germany exports comprise 50.2% of GDP, versus 31% in China.  Twenty three percent of Germany’s economy is built on manufacturing, versus less than 10% in France and about 13% in South Africa.

A significant contributor to the success of Germany’s competitiveness is due to the relatively cheap wages paid to its workers and the almost stagnant wages, increasing by only 1.1% per annum since 2001.  More important is the compact of understanding between employers and employees that when times get tough, as occurred in 2008, salary sacrifices need to be made in order to keep companies afloat and retain jobs.  Such a solution in South Africa, with its inflexible labour relations structure and essentially antagonistic labour relations environment, is almost unthinkable.

South Africa, to make a fresh start after 1994, cleansed itself from teacher training and nursing colleges and embarked on an unproven and disastrous Sectoral Training Scheme (SETAS) which have produced a dysfunctional workforce, with one out of two youth that will never be employed.  Germany, on the other hand, has stuck to its tried and tested artisan training model, which continues to produce a young and employable workforce with appropriate skills.

While Davies plans more legislation, such as the Companies Act and introducing changes through the BBBEE codes, and asserts that these would assist in bringing down private sector red tape;  he laments that the private sector is not growing and not making a larger contribution to the economy.  He contends that, because small businesses supplying larger corporates will no longer be required to submit BEE verification certificates and can instead present an affidavit which will not cost them anything, he is removing red tape.

What is defined as small business, R2 million turnover in agriculture and R10 million in manufacturing, is indeed small;  and when the business just begins to gain traction, it must enter the minefield of BEE verification and the threat of penalties and interference for non-compliance.  The potentially huge fines, millions of Rands for not complying to the letter of BEE codes, has the potential for transforming ordinary businessmen into criminals.

The threat of criminalisation also hangs over the new Bill, which clearly states that an operator must produce their licence on demand to an inspector or face a fine.  Nothing speaks louder about the disjuncture of conflicting ideologies than these threats by government against business.

As a consequence, when plans fail to work out, when unemployment is not reduced and when inequality increases, the knee-jerk reaction of government is to impose even more penalties and more surveillance on a hapless private sector.  Actually, the solution is simple:  banish the Trade and Industry and free the impulses of entrepreneurship that drive business to nourish the private sector and the larger economy.

This opinion piece originally appeared in The Mail & Guardian’s Thought Leader…

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