Enterprise policies as untested as the practice of bloodletting: no wonder they fail (1)

Johannes Wessels
@johannesEOSA1

More than 3000 years the practice of bloodletting was applied to cure a range of illnesses: intense headaches, constipation, abdominal pain, boils or fever… It was administered by barbers (they had sharp blades) and later by qualified doctors. Some of the famous who received this treatment were Marie Antoinette (when giving birth in 1778 to her daughter Marie-Therese) and George Washington in 1799 on the day of his death when doctors drew about 40% of his blood in an attempt to cure him from a severe throat infection.

In Washington’s case one can only wonder to which extent the bloodletting had contributed to his death. In 1793 acute bloodletting by guillotine definitely caused the demise of Marie Antoinette.

Why did the bloodletting practice with its origins in ancient Egypt continue until a century ago as an esteemed medical practice? Two reasons:

• The existing paradigm considered bloodletting successful, elevating it to the realm beyond questioning or doubt. It was practised by all the trained practitioners. It was therefore not questioned. Respect for specialist insistence on accepted practice re-enforces paradigmatic reign. Even after the description of the circulatory system by William Harvey in 1628 it took three centuries before the practice of bloodletting was largely abandoned as an unproven cure. One of the most striking examples of this blind acceptance of so-called “expert opinion” is the 1500 years that Greek physician Galen’s doctrines were revered. Galen said of one of his cures: “All who drink of this remedy recover in a short time, except those whom it doesn’t help who all die. It is obvious that it fails only in incurable cases.“

• The second reason is that there was no systematic record-keeping to assess the effectiveness of bloodletting as treatment for the various illnesses it was supposed to cure. No-one bothered to record the outcomes. Narratives and beliefs built on narratives are powerful in the absence of facts. Why bother about assessments and facts if the truth is known? Randomised trial experiments only commenced less than a century ago after WWI to start with the development of a proper scientific basis for medical practise and treatments.

Ignorant?

Not more than current approaches in several fields that are paraded with the same conviction without proof. Also in the field of enterprise development and job creation.

Does the following sound familiar?

• “We need to promote new businesses and nurture and support entrepreneurship”.
• “Small businesses will drive economic growth and provide job opportunities”.
• “Our economy struggles because we have too few entrepreneurs”.

These statements flow from experts or are propagated by the Department of Trade & Industry (dti), the Department of Small Business Development (DSBD), the Democratic Alliance, Business School after Business School, the National Development Plan, Raymond Parsons, the small business divisions of Nedbank, and Standard Bank and all the other banks, to mention just a few.

But where is the quantitative evidence or are these utterances incantations similar to those driven by the untested belief in the curative effects of bloodletting?

Consider the statement that small firms are the best job creators. The belief took root after the research in the 70s by David Birch in the US. Adhering to that belief, SA has seen the following list (not a comprehensive one) of policy, legislative and strategic enterprise interventions since 1994 to promote small business development:

• The National Small Business Act (No 102 of 1996)
• The Centre for Small Business Promotion
• Khula Enterprise Finance (later wrapped into SEFA)
• Ntsika Enterprise Promotion (wrapped into SEDA)
• SA Micro-Finance Apex Fund (SAMAF)
• Youth and Female Enterprise Development Funds
• The Cooperatives Act (No 14 of 2005)
• The Cooperative Incentive Scheme ¥ The National Gazelles Program
• A dedicated Department for Small Business Development
• Grants for Micro Enterprises (e.g. Free State Province)
• Billions rands of Local Economic Development efforts
• Prescriptive procurement practices to force larger businesses to buy from small (black) enterprises.

Despite these efforts, between 2007 and 2015 formal small enterprises had folded at an average rate of 31/week (according to company income tax returns submitted to SARS.) All these costly interventions failed to expand the formal enterprise base.

In addition, the loan book of Khula Enterprise Finance in 2010 when it was collapsed into SEFA was incomplete, in arrears and in shambles. Numerous loan agreements were missing, a comprehensive list of recipients of what effectively turned out to be grants, could not be established. There was no comprehensive assessment of impact. With SEFA capitalised in 2010 as a wholly-owned subsidiary of the IDC an assessment could now be done on the performance of both the loan book and the impact by quantifying how the loans have contributed or not to sustained businesses (current status measured against pre-loan turnover, profit and jobs).

Without such evidence, it could have been another round of bloodletting.

Birch in the 1970’s considered small enterprises as any business with less than 100 employees. Included in his counts were all the new franchise outlets that mushroomed in the 60s to 90s all over the US.

Can a McDonald’s franchise really be counted as a small business whilst being utterly dependent on a multi-national brand, national advertising and product development? In addition, would Birch’s US assessment hold for all countries?

The last 10 years, several longer term studies have concluded differently, not against small businesses, but simply advising that the belief in their curative power to create jobs is unfounded:

• “Studies using industrial surveys … tend to find that net job growth comes from large firms and startups.” And, “Of special concern is that SMEs in developing countries tend to be exceptionally stagnant as compared with their developed country peers.” – (Caroline Freund, World Bank 2012).
• “Once we add controls for firm age, we find no systematic relationship between net growth rates and firm size” Haltiwanger, J C (2010): Who Creates Jobs? Small vs Large vs Young? National Bureau of Economic Research, Working Paper 16300

The World Bank also published findings from a longitudinal study tracking the job creation capacity of small firms over a period of 34 years in the US, Mexico and India. That proves (Figure below) that the belief in small firms as the best job creators is scientifically as secure as those believing in bloodletting as cure.

All the firms commenced as me-only enterprises (self-employment). After 34 years the surviving US firms had created on average eight jobs per enterprise, in Mexico only one additional job, but in India the surviving firms could on average not even sustain the original single full-time job. In the latter case these surviving firms provide at best part-time jobs.

This evidence in the figure has been in the public domain since 2009, but the small-firm-big-job-creator gospel choir stuck to their song in similar fashion as the bloodletting practitioners (and those that trained them at an Edinburgh or Vienna) stuck to their blades, not taking note of the implications of the circulatory system and doubting their belief in bloodletting as an almost cure-all practice.

Even at the US recorded pace of eight additional jobs over 34 years, small firms will not solve the South African unemployment problem: population growth will ensure a bulging of the ranks of the unemployed. Further, there is no reason to think South Africa’s surviving firms would resemble those of the US and not those of India.

Firm size is not the issue for job creation and the belief in small enterprise as the big knight that will deliver, is simply unfounded.

Likewise: stimulating entrepreneurs and “massifying enterprises” (as Ramaphosa announced in his New Deal) are not the route for successful enterprise development.

Of far greater importance is:

• Understanding the regularities that exist and govern entrepreneurial space, and
• promoting an enterprise friendly environment.

These two issues will be dealt with in subsequent blogs that will share some insights based on EOSA’s analyses of its data set of almost 100 000 formal enterprises (classified per enterprise sector and enterprise type). There are strong data supported messages and algorithms.

At this stage, these messages are not heard, and if heard, ignored.

As in the case with bloodletting, policy makers and experts remain blind for their own policy and strategy failures. They adhere, Galen-like, to untested remedies and failed ideology.

No wonder the guillotines of unfriendly business environments kill on average 31 formal enterprises a week (8 000 fewer firms submitting tax returns in 2016 than in 2007).

Paradigmatic rigor mortis has set in…