Pro-poor LED fails our cities, towns & the poor: Enterprises of the right kind generate city growth

There is an intriguing symbiosis between cities and towns on the one hand and enterprises on the other. As the world population urbanise, so are business activities.

Physicist Geoffrey West in his “Scale:  The Universal Laws of Life, Growth and Death in Organisms, Cities and Companies” says based on city growth one can state precisely what will happen with the number of businesses in that city: a doubling of population does not require a doubling of grocery stores or filling stations, economies of scale kick in in a predictable manner. The reverse is also true.

Geoffrey West & Scale

Unfortunately, South Africa’s economic and enterprise development policies and strategies ignore these predictable realities. In addition, LED plans by municipalities in the main demonstrate a lack of understanding of what drives development.

LED strategies remain stuck in infrastructural roll-out (low-cost housing, water networks, sanitation) or community-based interventions: promoting vegetable gardening, knitting cooperatives and township tourism. How to strengthen the conditions for private sector development, is not considered.

The question “What can the community produce?” resounds but “What is the demand?” seldom heard. There is also little, if any, in-depth analyses of the existing enterprise composition and structure of towns and cities, failing to understand that intricate symbiosis.

Economic activity shape settlements

When hunting-gathering was the mode of existence, humans operated in small communities (and resided for centuries more in shelters like caves than in man-made structures). Their (subsistence) economic activities took place in non-settlement areas:  the forest people gathered fruit and roots, set traps for birds and animals; the San from the Kalahari dug tubers and roots for moisture and their diet ranged from plants and insects to the game they hunted. Even with the development of pastoralists and small croppers, permanent settlements were not the norm – to follow better grazing and fresh fields to till, required mobility.

As perceptions about nature were transformed from the realm of the magical to an environment to be managed (by fertilising fields and the domestication of animals), subsistence slowly paved the way for surplus production. This resulted in improved diets and subsequently larger populations, enabling people to devote time and energy to other activities than hunting, gathering and subsistence cropping. More permanent settlements became possible and craft production and trade gathered pace with a growing differentiation in activities.

Permanent expanding settlements with more complex differentiated societies and a growing variety of enterprises had arrived. The symbiosis between settlements and enterprises was forever established.

Bruges: how skills attracted riches from all over

To understand the symbiotic relationship, it is important to note that enterprises can broadly be categorised into consumer-driven and export-driven enterprises. A brief reflection on the history of Bruges, in the 14th C the commercial hub of Europe, will make the distinction clear.

The bakers and the masons of Bruges sold their wares and crafts predominantly to consumers within the city. But the weavers, goldsmiths and printers (read also carvers since it was before Gutenberg’s innovation of movable type) were considered the best in Europe.  Their products were exported: by the Hanse to the Baltic and Russia and through the Genoese and Venetians to the Mediterranean and Levant. William Caxton had the first printed book in English produced by the guild of printers in Bruges.

Bruges Tapestry wine-making
A tapestry design from Medieval times:  wine-making

Bruges tapestries were in demand in the palaces and houses of the rich, such as the Pope, the De Medici’s, Isabel of Spain and Sigismund I of Poland (the latter bought more than 100 mural tapestries – many surviving at Wawel Castle in Krakow).

The flow of money into Bruges stimulated population growth to a peak of about 200 000 in 1400. That growth – generated by the export-led activities – provided more opportunities for the bakers, the millers and the masons.

Bruges tapestries Wawel Castle
Some of the Bruges tapestries in Wawel Castle, Krakow

When the silting of the Zwin Channel in the latter part of the 16th C cut Bruges and Damme from the sea and the court of Burgundy relocated, the merchant houses and export-led artisan guilds moved elsewhere (predominantly to Antwerp). The population of Bruges dwindled to 50 000, resulting in a decline in the number of consumer-led activities.

It was not the millers or the bakers that propelled or culled population growth: the steady growth of Bruges (and its later decline) depended on the success or failure of the weavers, the goldsmiths and the printers to attract money from outside the medieval city walls, as well on its increasingly sophisticated banking and financial sector providing loans for importers and partial risk insurance for exporters.

Entrepreneurial space

Entrepreneurial spaces for businesses that are consumer-led (run-of-the-mill entrepreneurship) are strongly determined by population size and household income (both determining local consumption demand).  In contrast, export-led enterprises succeed in convincing consumers elsewhere to channel money to the locality to obtain the desired goods and services. This require goods and services of quality at a price that trump competitors elsewhere: special entrepreneurs who understand markets far and away as well as what the competition are up to.

It can easily be shrugged off as obvious truths.

Few realise that strong statistical correlations can be deduced from this symbiosis. These correlations are so significant that entrepreneurial space can be predicted for not only enterprise sectors (e.g. financial services, construction sector, traders, legal sector, etc.), but also for enterprise types (e.g. grocers, building material suppliers, accountants, attorneys) within sectors when only given the population size of a city.

Already in 2003 Kuhnert, Helbing & West described the remarkable regularities between city populations and the number of filling stations in France, Germany, Spain and the Netherlands.

Filling stations vs population Geoffrey West

EOSA’s research on the population of 370 SA cities and towns (see also Daan Toerien’s academic articles)https://eosa.org.za/publications/ ) indicate a very strong correlation between the total number of formal enterprises in a town or city and the size of the permanent population of these towns and cities.  In the cases where towns are some distance from the regression line (e.g. Mbombela) the enterprises in the locality cater also for the vast populations of the traditional authority areas close-by.

CORRELATION 370 TOWNS RESIDENTS & ENTERPRISES

Even within enterprise sectors regularities can be detected between the total number of enterprises in a sector, and the number of enterprises of a certain type within that sector.

CORRELATION TRADERS-GROCERS & CONSTRUCTION-B M SUPPLIERS

Entrepreneurial space in consumer-led enterprise sectors therefore demonstrates regularities that haven’t been planned or devised:  they are the outcome of a spontaneous self-regulating process.

EOSA has not encountered a single LED strategy that explores these regularities. In fact, LED strategies in the main remain stuck in the rut of short term pro-poor interventions. Numerous academic LED assessments by Chris Rogerson (UJ) and Etienne Nel (Otago) reveal a “disconnect” between business development and LED resulting in at best “disappointing” outcomes.

Implications for LED

The strong immanent regularities have implications for both enterprise formation and local or regional economic development:

  • If the population of a town or city is not expanding, new trader entrants (and other consumer-led enterprises) will in all probability either fail or replace existing businesses in those sectors: rather churn than growth.
  • The differentiation by additional enterprise types (first of its kind in the locality) can be projected in accordance with the expansion of the total number of enterprises in a city or town. The reverse for declining localities also holds true.
  • To increase the flow of funds into a town/city, strategies to help people to become traders or rendering general services (e.g. garden services or a copying shop), will not really improve the economy: entrepreneurial space in those sectors are in the main automatically occupied.  To grow the local economy, one requires special entrepreneurship:  enterprises that understand demand elsewhere and whose services or products are so unique or well-made that it entice customers in other places to swipe their credit cards to obtain these.

LED strategies that promote enterprises in consumer-led sectors will not yield much since these spaces are automatically occupied. Concentrate rather on export-led enterprises, but realise these require special entrepreneurship, or, as Ricardo Hausmann states:  productive knowledge.

Luring and cultivating special entrepreneurs worked for Bruges.  When its decline kicked in these skills moved out, hastening the decline.

As Hausmann states:  “It is easier to move brains than moving productive knowledge into brains“.

Bruges realised that too late.

Is it too late for the majority of SA’s cities and towns as well?  The registrars of companies in Mauritius and Botswana suggest that the emigration of productive knowledge from South Africa is underway.

NB:    Entrepreneurial space should not be confused with market share.  The ecological analogy is when counting elephants in a game reserve:  the massive bull elephant counts as 1 and the baby elephant calf also as 1: but the total gives no indication about size of the elephants. When counting traders, the hyper-store as well as the corner cafe as occupants of entrepreneurial space have the same weight.

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One thought on “Pro-poor LED fails our cities, towns & the poor: Enterprises of the right kind generate city growth

  1. This is a very interesting & well written article. And I agree with many comments. It is a good analysis of the current reality in S.A. I further agree that LED strategies/interventions have been wrongly interpreted and implemented by both politicians and administrators alike, since I hv also been an LED manager myself. My experience is that we hv implemented LED programmes n projects so that we are seen doing something 4 the people rather than economically empowering people to become thriving entrepreneurs or cooperatives. We think throwing money or infrastructure will yield the businesses n employment. Then the opposite happens.

    However, the status qou of what is needed to address the issues apply 100% in urban areas, and somewhat less than 50% in rural areas as explained in the reading. This is the real situation, an internet cafe shop does not make much profit in an urban area bcoz many residents hv desktop/laptop, 3G/wifi connectivity and printer at home. But in rural areas/small towns this is a thriving business bcoz rural massses do not have such at home (desktop, laptop, printer, internet, etc). Many resort 2 using smart phones 4 intenent connectivity, but this will not get you a job bcoz many employers still need a hardcopy CV & certified copies 2 be submitted. It also means you cant open a business that needs funding coz funders need hardcopy CVs, business plan, company registration docs, etc. So this means that rural areas are at the same level where urban areas were 10 or 15 years ago. Rural areas are lagging behind compared 2 urban areas.

    Another real example is this one. As much as I’m a professional in an urban area, I’m a farmer back home in rural Giyani. Here, a simple service like renting an excavator for digging graves, digging house foundation, or simply clearing a site in a farm is bigger business. And you are rergaded to be technologically advanced and rich to be using such services bcoz the majority of the people still use piky & shovel for such jobs and rely on communal manual labour. So my point is that those skills and services not thriving in urban centers needs to find expression in our rural areas rather than going to other countries near and abroad.

    Liked by 1 person

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