A Cyril Swallow does not make a Summer of Growth: How business friendly is Ramaphosa’s New Deal?

“We need to massify the creation, funding and development of black-owned small businesses, township businesses and co-operatives.” Cyril Ramaphosa’s New Deal for South Africa (14 Nov 2017).

This quote from Ramaphosa’s 10 point plan manifesto to get the economy growing forms part of the action steps under Point 5: “we must accelerate the transfer of ownership and control of the economy to black South Africans.“

At first take the creation of an immense number of enterprises sounds like a pro-business approach. But is this objective realistic? Will it render the desired outcome? Even more basic: is it sound economics?

The New Deal is silent on how this enterprise factory that will mass-produce black-owned businesses would work. Whilst the manifesto was announced in the context of the ANC leadership contest, the “we” that Ramaphosa refers to is clearly Government and its administrative institutions.

The following questions and comments are relevant:

• In general, successful enterprises have entrepreneurial and management competence. The New Deal is silent on how to “massify” entrepreneurs that possess such competence.
• Empower Government’s track-records in running State-owned Enterprises and business incubation by both the Department of Trade & Industry and the Department of Small Business Development the public sector with the necessary expertise to be a successful business incubator.
• In 2010 an EU assessment (Lyonette and Pearson) found in key departments officials lacked “the capacity for economic analysis at any level”. For the New Deal to be successful, this capacity should have improved otherwise initiatives will be entrusted to officials without capacity.
• Can Government publish a comprehensive list of all the Khula and SEFA-funded interventions indicating the percentages of these investments (financing enterprises) that were successful resulting in businesses that are still operational? This list should deal with both the number of enterprises supported as well as the value of loans/grants dished out. Such evidence would inform whether the Ramaphosa New Deal action plan is realistic, what foundation is there to build upon, and what would the cost be to achieve the massively large number of successful black businesses.
• Who are the customers and clients that by buying the products and services of the new mass of black-owned businesses will make them viable? Consumer spending is under stress in a low-growth economy. To “massify“ black-owned businesses would therefore require a far greater “massifying” of consumer demand. Where would that come from: More public sector jobs? That route is exhausted. More social grants? The carrying capacity of tax-payers is close to maximum. Economy stimulating government procurement? These new businesses will not get the contracts for PRASA locomotives (whether they fit or don’t fit on the rail tracks) or for Eskom power stations. Therefore, how many of the massive number of newly created black-owned businesses would become successful based on public procurement of stationery, security services, catering and cleaning services, etc.? Will the extra pressure on the budget deficit (BEE premiums for all such affirmative procurements) and the demise and even closure of existing businesses (by being side-lined) with resultant job losses and a decreased tax income be afterwards described as unintended consequences?

I do not see a sudden boom of entrepreneurs, neither a wave of consumer cash and credit cards to sustain all the envisaged new businesses. The logic and the sums do not add up and the New Deal needs substantially more detail to be convincing.

How does the New Deal match the reality of how enterprises occupy entrepreneurial space? Ramaphosa’s proposal suggests there is immense business or entrepreneurial space vacant waiting to be filled by Government-sponsored black businesses. All that is required for a multitude of new black-owned businesses is for Government to act as:

• an enterprise breeder;
• enterprise financier;
• business coach and adviser.

These are not normal tasks for Government. In addition, the approach ignores the close correlations that are at work in the world of enterprise. A basic balance of the marketplace is that a multitude of consumers who earn livelihoods through a range of economic activities buy goods and services from a smaller number of entrepreneurs. This relationship has spatial dimensions with a close correlation between town or city population and enterprise. Ferdnand Braudel in The Wheels of Commerce (thelectern.blogspot.co.za/2008/10/wheels-of-commerce-fernand-braudel.html) remains extremely relevant in his assessment of the historical development of businesses.

With the growth of cities like London and Paris a range of middlemen emerged positioning themselves between the producer and the consumer. This enterprise growth was enabled by expanding urban populations. Some middlemen operated at local town or city level buying products along the roads from village people who brought their goods to the fair or market (saving these producers time and expense in selling at the market: time that they could apply to production). Other merchants travelled wide and far procuring goods and establishing permanent outlets for these producers. In this process shops as places of retail made their permanent appearance alongside the workshops of the artisans. In Braudel’s words: “this marked the triumphant appearance of a tertiary sector as shops provided a fixed point of sale and the number of services was extended.”

This birth of new enterprises did not occur by intervention of a city or national government or by one or other national or local development plan that arranged the “massification” of shops. They appeared spontaneously in growing cities and towns where consumers were on the increase, thereby creating additional entrepreneurial spaces that were occupied by entrepreneurs.

In addition, the new businesses appeared since bakers, tailors, weavers and cobblers realised they could increase their income by producing full time, rather than spending a few hours daily selling at the market place. This division of labour enhanced productivity. As formal shops increased as places of permanent trade, fairs and the market places slowly declined in importance. Some became weekly markets, others disappeared. The entrepreneurial space for those informal outlets (fairs, stalls at the market places, pedlars) decreased.

Braudel had a hunch that there were correlations at work between:

• the number of residents in a city or town and the number of enterprises in such city or town;
• the number of workshops of the tradesmen (bakers, weavers, tailors, carpenters, etc.) and shops (retail tertiary outlets).

In unearthing a wealth of documentation from England, Spain, Italy, the German princedoms and France about these merchants, Braudel opined that this rise (in shops) “could be charted with a whole range of statistics if it were possible to calculate the ratio of shops to population, the respective percentages of tradesmen’s shops and retail shops, or the average size and income of shops.” Observing that according to Bartolomé Bennasser there were in 1570 in Valladolid 1870 artisans’ and tradesmen’s shops for 40 000 inhabitants (a ratio of 1 shop for every 21,4 inhabitants) while in 1622 in Rome Jean Delumbeau recorded 5578 shops in a population of 114 000 (a ratio of 1 shop for every 20,4 residents), Braudel says “(a) serious study has yet to be done”.

The Enterprise Observatory (EOSA) has done just that on contemporary enterprise data in South Africa. Our work based on data of 85 000 formal enterprises in 418 cities and towns prove that there are indeed strong correlations between population size and number of enterprises. There are also in most enterprise sectors (traders / legal services / health services / personal services / etc.) very strong correlations between the number of enterprises in those sectors and the overall number of enterprises in the town or city.

Daan Toerien’s academic publications record these findings and any enterprise promotion policy or strategy that aims at success needs to understand and operate with the unplanned orderliness that manifests in these correlations. ( Publications by Daan Toerien ).

In a city or town the population (in numbers) and their consumer spending are directly related to the number of viable businesses that can exist, except for that special category of entrepreneurs that earn the bulk of their income through exports.

Ignoring this system with strong correlations will lead to failure of attempts to create businesses. Under President Zuma there was an attempt to “massify” cooperatives with more than a 100 000 formally registered at the CIPC. For someone taking an interest in the economy and the person responsible in Parliament for the Executive, Ramaphosa should be aware of the massive failure of this exercise. The following Figure should suffice:

Of the 2 716 cooperatives that were registered in the areas of the District municipalities of Lejweleputswa and Thabo Mofutsanyana in the Free State Province as part of Governments thrust to massify the creation of cooperatives, within 15 months only 81 were still operational, only 13 recorded an improvement in turnover and a mere 2 had improved margins compared to when they were still an informal business. It is a failure rate of 99,93% and Ramaphosa’s New Deal proposal is advocating a repeat.

The lack of a range of skills amongst the failed cooperatives should warn about the expected success rate of the New Deal’s enterprise production line. It also reminds of the policy advice by the International Panel on Accelerated and Shared Growth Initiative for SA (ASGISA) under chairmanship of Ricardo Hausman in 2008. The advice in their final report in 2008 has up to now been flatly ignored by Zuma and his Government (including Ramaphosa).

The International Panel stressed the importance of productive knowledge for a growing economy and recommended pursuance of strategies to achieve “the stoppage and reversal of the emigration of high-skilled whites. Encouraging the retention of all high skilled South Africans and the attraction of foreign high skilled persons will be crucial to limit wage inequality and facilitate the creation of jobs for the less skilled and thus achieve shared growth.”

The International Panel also reckoned it would be advantageous “to define sunset clauses for BEE: if the policy is successful, it should become redundant”. It warned that “elements of BEE as currently envisioned, by requiring equity transfers, imply an open-ended tax on existing and new capital” that has implications for firm formation and investment.

Ramaphosa’s New Deal is silent on the importance of productive knowledge and his emphasis on black enterprises flies in the face of the conclusions and recommendations of a well-respected International Panel of Experts.

Skills and talent are not to be wasted. The new South Africa’s policy mix that drives skills abroad is an economic abomination similar to apartheid’s job reservation: negative for growth with the unemployed suffering most.

A concern is that Ramaphosa’s New Deal (and his utterances in numerous speeches) ignore above-mentioned economic realities. Could it be a case of ignorance and that Ramaphosa views the economy and the world of enterprise as being totally pliable and that he could strike any deal? He is a person with a track record of “Deals” rather than “Trade”. He negotiated deals:

• for NUM;
• that led to the interim and final Constitution;
• resulted in an empowerment package for himself, and
• led to his return to politics prior to the Mangaung ANC conference where he became the ANC’s deputy-president.

In March 2016 Ramaphosa said the time of white business monopolies was over (at that stage both he and Pres Zuma enthusiastically talked of white monopoly capital). He said Government was hell-bent on making sure blacks owned and managed the economy (We will end white control of the economy.)

“For far too long this economy has been owned and controlled by white people. That must come to end. For far too long, this economy has been managed by white people. That must come to an end. Those who don’t like this idea – tough for you. That is how we are proceeding.”

Since the correlations between population and number of enterprises, as well as between total number of enterprises in a locality and the number of enterprises in sectors within that locality are the spontaneous outcome of a multitude of independent decisions, the New Deal strategy to “massify” black-owned enterprises is unrealistic. If Ramaphosa wants to succeed he is left with only one alternative: make the new mass of black-owned businesses viable by mobilising black consumers to buy only from black-owned firms, thus crippling other enterprises… There are precedents for such an approach.

Hitler was also “hell-bent” on transforming Germany’s economy. So was Mugabe on land reform and getting rid of the commercial farmers…

Hopefully the “business friendly” Ramaphosa will not pursue his plan to “massify” black-owned enterprises by seeking the demise of existing enterprises. His confession that he is hell-bent on achieving his objective should however not be ignored.

Ramaphosa is not a swallow heralding economic freedom, rather of enforced transformation deals..   (See also: Business has a better choice than between Zuma or Gordhan )