THE SBP (SMALL BUSINESS PROJECT)
PRESENTATION TO THE PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY
ON THE DTI STRATEGY DOCUMENT ENTITLED:
"Accelerating Growth and Development: The Contribution of an Integrated Manufacturing Strategy"
WEDNESDAY 24 APRIL 2002
First a brief word about who and what the SBP is. We are a donor-funded, not-for-profit organisation based in Johannesburg. We do not speak for and are not answerable to any political or business constituency. Our contribution today is founded on two things: Our theoretical knowledge and our practical experience. This practical experience is derived from our interaction with small businesses and corporates in various parts of SA, mostly through the mechanism of business linkages but also, more recently, through an SME equity fund. We have interacted with over 4 000 SMEs over the past 4 years. We like to think that this blend of theory and practice has given us a very real understanding of the issues facing small businesses in SA today.
Now briefly, some history. The Integrated Manufacturing Strategy document we are discussing today has a predecessor. This was called "Driving Competitiveness: An Integrated Industrial Strategy for Employment and Growth". It was released in May 2001 and in September last year we published, as a contribution to the debate, a response to that document. There are copies of that response available today.
It is worth summarising the points we made then as they provide something of a checklist against which to assess this new and supposedly more focussed document.
Last year we suggested:
We knew that a second draft of this document was being prepared - or at least we thought it was a second draft of an industrial strategy. We didn't know until last week that it had somehow transmuted into a manufacturing strategy. But we knew things were stirring. We communicated our views - encapsulated in that document - to many people. And we looked forward to the DTI's next offering with eager anticipation.
We have been intensely disappointed.
First, small business growth remains an add-on. It is lumped together with policies for Black Economic Empowerment, Women's empowerment, income distribution and, for some reason, alternative forms of enterprise (or cooperatives). But these other things are optional - at least from an economic perspective. They might be morally desirable or politically imperative - but if the DTI doesn't have policies that specifically pursue them, it is still conceivable that we will have vigorous economic growth. But if we don't deal with the issues facing small business, we simply won't.
Second, trade-offs have simply not been confronted.
One of the most fundamental trade-offs encountered in economics - whether it be Keynesian, Monetarist or anything else - is between efficiency and equity. This stuff is Day One of Economics 101.
We do not have a problem with policies that try to reduce the harshness of this trade-off. But we do think that policies that completely ignore it are heading for disaster.
This manufacturing strategy is full of examples of how the trade-off has been fudged or ignored.
On p.2. "Failing to integrate the employment and equity focus into the strategy would place limits on the dynamism (of the) economy".
The very last paragraph of Part 2. says that the DTI will have "a particular focus on championing competitiveness, while integrating equity considerations".
This insistence that equity and efficiency fit seamlessly together without contradiction runs throughout the paper. We even found a practical example - quite something in a document that seldom diverts from the abstract. In the section in Part 1 entitled :Productivity and Employment", the paper observes (correctly) that "Labour intensive sectors are growing less rapidly than the non labour intensive sectors". But the author or authors of the paper never says why. And we think he or she or they cannot explain why because that would mean bringing in the idea of trade-offs.
The truth is quite simple: The labour intensive sectors of the economy are growing less rapidly than the non-labour intensive sectors because in the SA economy, labour is a relatively expensive input.
Please note that we are not in any way suggesting that minimum wages should be revised downward. We are simply saying that if you don't acknowledge the cause of a phenomenon, you cannot deal with its effects.
This refusal to consider the equity-efficiency trade-off reaches something of a climax near the end of Part 3. There it is suggested that "our particular South African context means that we have to develop a definition of competitiveness that does not run counter to our objectives of employment and equity". I hope you all understand how absurd this statement is. Basically it says that reality refuses to conform to the theory - so we will defeat reality by finding find new words to avoid it.
Competitiveness is competitiveness. You can trade some competitiveness off to achieve greater equity - but you can't redefine competitiveness to bring about greater equity - because then whatever it is you are referring to is no longer competitiveness.
Our third problem with this paper is that, as I have already indicated, it is extremely abstract. But the problems facing the manufacturing sector are extremely concrete. Perhaps nowhere is this clearer as from a small business perspective.
Consider the owner of a small manufacturing business. That person has launched him or herself into business because he or she has identified an opportunity.
An aside - there is a sentence in Part 2 that suggests that it is the role of the DTI to identify "specific opportunities". So salaried officials will presume to do what they believe motivated entrepreneurs cannot! I'll come back to this point a little later.
But firs consider our small-scale manufacturer. When this person starts his or her small factory, there will be a burst of new on-the job learning. The entrepreneur may hire a foreman or senior artisan with experience in that particular business. But most of the workers will typically have worked in completely different business or perhaps they will be individuals who have never worked before.
They will all learn new skills and that will be good for the economy. But remember, the entrepreneur didn't start the business in order to bestow upon the national economy a cadre of more skilled workers. He or she started it in order to make a profit. That means manufacturing something that other people want to buy - so filling a gap in the market. Moreover the production cost of that good must be lower than the cost of the alternatives, whether those be an imported substitute or some other slightly different product made locally. So the entrepreneur is motivated to both maximise efficiency and to innovate across one or more of production, design, distribution and marketing. These factors of course have positive consequences for consumers in terms of both price and quality.
This is all well and good. But very soon, the manufacturer will discover that running the factory is only part of the job. There's all sorts of paperwork to get done. Of course there are ordinary management accounts to be kept, keeping track of revenue, cash flow and costs. Plus production and labour management. Suddenly this is no longer a person with a bright idea but someone embroiled in the very practical and time-consuming task of running a business.
But then at the end of the first month in business the curse of bureaucracy descends - and never departs. The manufacturer has to calculate employees tax obligations and deduct them from salaries. For each employee, the firm has to pay a contribution to the Unemployment Insurance Fund, The Workmen's Compensation Fund, the local District or Metropolitan Council (the "RSC" levy) and the Skills Development Fund. He or she also - horror of horrors - has to pay VAT. And the amount that has to be paid is the value of the invoices sent out that month, not cash received. So the entrepreneur may owe money to the taxman that he or she has not yet managed to collect! And all of this excludes obligations to local government (including rates), the health and safety authorities and the complicated paperwork that goes into recording employees ordinary leave, sick leave, maternity leave, overtime and so on. This is all complicated enough when business is going well. When there's an extraordinary problem - a breakdown perhaps or something systematic like persistent problems with debtors who won't pay up - the burden can become near intolerable.
Perhaps we shouldn't expect the DTI document to deal with these specific problems - a certain level of abstraction is probably appropriate for a "strategy paper".
But the very word "strategy" suggests that there should be a mechanism for reviewing these issues. The document observes that "the survival rate of small businesses remains low by international standards". But then it stops.
Much later it says that "lowering excessive compliance on enterprises, especially small business, will be pursued". And then? No reference to the real, practical problems facing small business. Instead it suggests that:
"Projects to meet this objective include:
And all of this despite the fact that the document is peppered with generic references to "the constraints to growth".
I'm not going to go on much longer. The concerns, the virtues, the vices, the essential nature and the problems of the small business sector has quite simply not been taken into account in this document.
One final point. If the ideas in this document are to be taken seriously - and I'm not convinced that they are intended to be - then we need to note that the approach proposed here is frighteningly interventionist. The document proposes extensive use of something called "value-matrix analysis" with which it intends to identify "integrated value chains" and other correct sounding phenomena, so that the government can act. Act in what way? We're not really told - but at different points the document does suggest:
What's the purpose of "value matrix analysis"? [Quote] "Value matrix analysis is critical in identifying these (missed) opportunities and linking them to areas market access opportunities exist as well as too logistics platforms". Clouds of jargon? Undoubtedly. But also an unhealthy desire on the part of government to Do rather than Refrain from Doing.
If this document is intended to be an analysis of where the SA manufacturing sector is, then it's deeply disturbing. If it's intended to signpost the way ahead, then its thoroughly inadequate.
In fact everything we have to say about this document can be boiled down to a single piece of advice:
"Back to the Drawing Board".