Elastoplast for the knocked-out economy

Johannes Wessels
@johannesEOSA1

Just as a heavy punch on the side of a boxer’s head can disrupt his brain’s neurovascular coupling processes causing him to fall like a log, the lockdown blow had disrupted the intricate flow of funds in the economy. BankServAfrica’s figures for Black Friday confirmed consumers are still on the canvas: turnover declined by a whopping 52% and there was a 30% decline in the number of in-store card transactions.

The pockets of the majority of individuals and a substantial share of businesses now resemble those of the state-owned enterprises.

People are hesitant to spend with unemployment dramatically higher than before lockdown, due to the government turning off the income tap for most enterprises for at least 3 months, declaring them non-essential (in the case of the hospitality sector almost 8 months). The government has thus achieved not only the lengthening of the jobless queues but also driving the rest of the population closer to poverty.

It was a cruel knock-out blow by the government

The religion of the developmental saviour

The subconscious neurovascular coupling process ensures oxygen supply in nano-seconds through blood flow to the brain segments most active at that split second. A boxer can recover from a knock-out if there was no rupture of arteries and quick restoration of normal flow of blood in the brain. If not, there can be permanent brain damage, even death.

Our thought processes depend on continuous uninterrupted subconscious processes. Likewise, an economy depends on the continuous uninterrupted flow of funds that is totally unregulated in the sense that no entity controls or directs the trillions of individual transactions by billions of consumers (both individuals and enterprises) buying their daily requirements and selling their products and services, either worldwide, or at a lower scale in different countries.

The Bleak Friday data indicates the government’s lockdown punch caused chronically reduced demand.

The SA government has no eye for the intricate spontaneous order that emerges in a market-oriented economy. Their collectivist belief in the saviour of the developmental state that knows best, blinkers their sight from the reality that the enterprise world is a spontaneous order that emerges from uncoordinated decisions to trade or not to trade. Their gospel emboldens them therefore to decide:

• which business sectors are essential and which are non-essential;
• which T-shirts may be displayed and sold and which not;
• which businesses are Covid-19 spreaders and which not;
• on setting targets for racial employment and shareholding;
• on introducing targets for local procurement; and
• when lower prices are to be ignored so that black-owned enterprises could be subcontracted, charging higher prices, with the consumers (the majority of them black) sponsoring this social engineering. 

The government cannot imagine a spontaneous order that has not been planned or devised by any government, national planning commission or national coordinating command council. In fact, they cannot tolerate the idea that something orderly can emanate from uncontrolled actions.

A spontaneous order

The emergence of an order with significant correlations arise from the mass of ongoing unrelated decisions to buy or not to buy, to rent or not to rent, to produce more or to produce less. EOSA refers to it as the enterprise architecture.  In this blog, the focus falls on some spatial implications of the enterprise architecture, namely enterprise space. This is not physical space like a shop, an industrial site or a mall. It is the space available in a city or town due to the demand for products or services of businesses that operate in that locality. 

The number of businesses in any city or town is determined predominantly by two factors:

• The total available household income in that city or town; and
• The presence of special entrepreneurs who produce products and services that attract customers from outside that city or town.

Whilst everyone would acknowledge that the first component, especially, is very obvious, few people realise that the moment one plots the total household income of a town or city on the horizontal axis and the number of formal enterprise manifestations in those towns and cities on the vertical axis, a correlation emerges that is so significant that one can base projections on it. Figure 1 (based on EOSA and StatsSA data for a total of 174 SA cities and towns) reveals a correlation close to 1, namely r = 0,97812.

The implications are stark: if the total household income would contract or rise annually, the number of enterprises would also decline or increase. If the lockdown impact in Bloemfontein would cause the total annual household income to contract by 10%, the number of enterprises is likely to subsequently decline by about 8% from 6755 to 6215. In the case of Paarl, a 15% decline in total household income would cause the number of enterprises to decline also by 13% from 2290 to 1990.

The only factor that could mitigate a decline in the number of enterprises during a period of total household income contraction is the role of special entrepreneurs: those running businesses that attract a substantial portion of turnover by convincing clients outside the locality, of the quality of their products and services, effectively operating “export” enterprises.    

This is a reality largely ignored by the government in its mostly futile attempts to stimulate and promote formal enterprises, especially for “emerging” (read black) entrepreneurs. Shortly after 1994, the government withdrew from the Small Business Development Corporation, a public-private partnership that was funded by both sectors, to pursue its own approach in an unfettered mode through the Khula enterprise development agency, helping emerging entrepreneurs with loans and grants. The private sector continued its involvement through Business Partners.

A track record of failure

The government’s record in promoting business development and growth is dismal:

• EOSA could not find evidence of notable durable successes enabled by Khula loans. When Khula was rounded up in 2009/2010 and incorporated with SAMAF into the Small Enterprise Finance Agency (SEFA), their loan book was not only overwhelmingly in default, it was also incomplete with many agreements missing. The bulk of the loans turned out to be nothing more than grants.
• But SEFA is not a roaring success. In the six years up to the 2018 financial year they disbursed loans of R5.6 billion but ran up “high loan impairments due to clients’ non-adherence to loan obligations,” resulting in a decrease in income and a declining size of the loan book (due to write offs);
• The Small Enterprise Development Agency (SEDA) launched a National Gazelle Programme to identify small enterprises with potential to grow quickly with concurrent job creation. The list of businesses selected to generate growth included a nursery, a guest house, a panel beater, pet food producers and a cement brick manufacturer.
• SEDA incurred R34.7 million irregular expenditure since the Gazelle programme was approved without compliance with the procurement procedures.  EOSA tried in vain to obtain info from SEDA and the Department of Small Business Development (DSBD) on the progress in turnover and job creation generated by the selected “gazelle” businesses.
• The Department of Trade & Industry (dti), and afterwards the DSBD, still continue with the drive to promote cooperatives, despite a start-up failure rate that belongs in the Guinness Book of Records.

We’ll resurrect the economy

The lack of success is because the government operates from the premise that the enterprise world is an empty slate just waiting for them to godlike write upon it. Assuming unlimited unoccupied enterprise space, the government acts as a promotor of new business formation rather than ensuring a market-friendly and safe environment. It effectively views itself as an enterprise factory. The overwhelming majority of enterprises created through the government business factory were, however, of the “run-of-the-mill” kind, thus competing with existing businesses for local household expenditure.

By ignoring the spontaneous order regarding entrepreneurial space, the outcome of these exercises boiled in many instances down to:

• accelerated enterprise churn (a new bakery or restaurant replacing an existing bakery or enterprise), or
• recklessly fuelling the hopes of the “emerging entrepreneurs” but effectively setting them up for failure.

The very same mind-set that underpins the government’s deficient enterprise strategies also informs their decisions on lockdown. They believe the government, not customers, should decide what would qualify as essential services and goods to produce and trade. In addition, they believe that they can resurrect the economy when they decide to lift restrictions and that governmental grants and loan schemes would suffice to get businesses up and running again.

The TERS payments and umpteenth grant and guaranteed loan schemes for businesses to soften and reverse the damage government has done cannot achieve the same flow of funds that not stopping the economy would have ensured.

Support mechanisms in the form of UIF grants and a range of funding lines for businesses were aimed at mitigating the outcomes of the lockdown abomination, conveying the fact that there is still no recognising that deep systemic damage was caused to the economy by disrupting the neurovascular coupling process that resulted in stopping the flow of business oxygen to businesses. 

It is the equivalent of placing Elastoplast on a slight cut on the knocked-out boxer’s cheek whilst he lies unconscious from the murderous punch.

The Economic Reconstruction and Recovery Plan (ERRP) falls far short of addressing the destruction of jobs and enterprises. The implementation mechanisms are the proverbial camel outcome when the committee wanted to design a racehorse. And ominous regulatory control mechanisms are also lurking in the process with “buying local” effectively BEE parading with a Covid-facemask. 

EOSA’s proposals

EOSA proposes the following steps to restore “oxygen” to the damaged parts of the “enterprise brain”:

1. Lift the turnover ceiling for VAT registration to R2.5 million;
2. Deregister all existing VAT vendors with a turnover below R2.5 million in tax year 2019/20 without any burdensome administrative process to see this through. SARS should simply inform these firms they are now VAT exempt.
3. Peg from the 2021 tax year to tax year 2025 the company tax rate for firms with a taxable income of R5 million or less at 5%.
4. Peg port tariffs with immediate effect at 10% below the world average.
5. Suspend BEE until it is thoroughly revised to be growth compatible.
6. Revoke the State of Disaster and all related remaining restrictions and regulations on businesses, restoring their freedom to conduct their activities managing their own anti Covid-19 protocols.   

This will amount to an across the board systemic intervention that will resuscitate and stimulate the flow of funds in the world of enterprise with benefits to end consumers as well. EOSA will in the next blog indicate that this massive stimulus of economic freedom can be achieved without major implications for tax revenue.  And it would free SME owners from an administrative burden so that they could concentrate on attempts to revitalise their businesses.

Johannes Wessels is CEO of the Enterprise Observatory & a member of the Advisory Panel of @EndLockdownSA

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