Racial Risk in Entrepreneurship Failures
As many critics predicted years ago, Black Economic Empowerment (BEE) requirements are encouraging entrepreneurship among coloured, Indian and white minorities, but hindering it among Africans.
This is one of the key findings of the latest Global Entrepreneurship Monitor (GEM) report, published last month by the Development Unit for New Enterprise at the University of Cape Town. This comes more than three years after the National Development Plan (NDP) promised regulatory reforms to “foster large-scale entrepreneurship” and create millions of new jobs. But, the 2015/16 GEM report, written by Mike Harrington and Penny Cave, states that government itself is one of the “major barriers” to developing a strong small business sector.
While there has been an “encouraging” increase in the number of South Africans who believe there are good business opportunities in the country, actual intentions to start a business declined by 30% between 2013 and 2015. Red tape, tough labor laws and risk-averse banks are among the main hurdles.
The majority of early-stage entrepreneurs in the country are African, but their proportion has declined from 85% in 2013 to 68% in 2015. On the other hand, the level of entrepreneurship has increased among the three minority groups. It has doubled in Indians, while it has tripled in whites.
“This may be a response to rapidly increasing BEE requirements for corporates, which are making it less easy for skilled individuals in these population groups to find jobs in the corporate sector,” the report said. In contrast, talented Africans are not motivated to seek out lucrative formal sector jobs and become entrepreneurs – despite the fact that there are “countless contracts” available to them.
Some “experts” consulted during the GEM research said that South Africa's low level of entrepreneurial activity is “significantly influenced by a sense of entitlement and excessive dependence on the government”.
The distorting consequences of BEE and other racial policies implemented by the African National Congress (ANC) were predicted at the time of their introduction by people such as Temba Nolutshungu of the South African Institute of Race Relations as well as the Free Market Foundation.
Denied employment in government and the private sector on racial grounds, minority groups, so we argue, will have little choice but to become entrepreneurs – even if racial requirements now often mean they are unable to obtain government and other contracts, which undoubtedly encourages “fronting”.
The GEM report prompts two observations. One is that this component of the NDP is now null and void for all intents and purposes. Despite the country's weak growth performance, there is no apparent intention on the part of the ANC to implement the regulatory framework necessary to encourage “collective entrepreneurship”.
Although Deputy President Cyril Ramaphosa claimed a few months ago that the government had embarked on a journey to lower the cost of doing business and reduce red tape, the thrust of the law is in the opposite direction. Mr Ramaphosa's call for entrepreneurs to spark a small business revolution shows that he is ignorant of his government's harmful policies.
The second observation involves racial risk. Entrepreneurship is what drives a successful economy. Colored people, Indians and whites are acquiring the necessary skills, taking the necessary risks, and learning by trial and error. Africans are being left behind. They are also becoming more dependent on the corrupt and inefficient state.
More self-reliance on the part of minority groups, less on the part of Africans. The gap in entrepreneurial skills between Africans on the one hand and minority groups on the other will increase. This inequality will fuel resentment. Colonialism and apartheid will be blamed for this, but that will not change the fact that the ANC's own racial policies are perpetuating this, and even making it worse.
* John Kane-Berman is a policy fellow at the South African Institute of Race Relations, a think tank promoting political and economic freedom.