Making entrepreneurship work for South Africa

The above title sounds so compelling and purposeful. One can imagine an army of newly minted entrepreneurs marching off to make new and better products, create jobs, and carry the economy into the future.

Unfortunately, this approach embodies a problem characteristic of most economic development initiatives. Looking to the past, we see a pattern of identifying a phenomenon that appears to be related to economic growth or prosperity, then trying to force more of it to happen.

One of the first of these economic panaceas to be identified was through complex economic modelling – saving and investment. Developing countries were urged to boost savings levels and invest heavily in infrastructure. The aggregate figures for savings went up, but the only evidence of this programme now is the crumbling roads and old infrastructure projects left in some countries – not prosperous economies.

Another big aggregate indicator estimated to have serious correlation with economic growth was education. Millions of dollars in aid were given, and countries were urged to make huge investments in human capital by offering free or subsidised education programmes as a way out of poverty. Although many individuals may have benefited from such projects, there has been very little impact seen in moving developing countries out of poverty.

The most recent studies in economic development have identified small and medium-sized businesses (SMEs) and entrepreneurship as the underlying key to economic development and prosperity. As a consequence, the past years have seen every development agency, and every government creating new programmes aimed at funding, educating, and creating entrepreneurs. In South Africa, a variety of agencies like SETA’s have been established with a mission to foster entrepreneurship and small businesses.

These programmes help identify why the approach of trying to force economic growth by forcing more of a good thing does not achieve its goals – they have unintended consequences. The good intentions of trying to help entrepreneurs in order to make more entrepreneurs or small businesses can be particularly tragic. Not only do they fail in wealth creation, they often hurt the overall economy by diverting existing entrepreneurial talent into unproductive activity. In many cases it is more profitable for potential entrepreneurs to invest time in obtaining available funds than in spending time building a business or working hard to make a product or service better or cheaper.

In trying to make entrepreneurship happen, these programmes succeed. But in many cases they succeed in attracting entrepreneurial efforts geared toward obtaining free funding with the least possible effort, and more work goes into creating an attractive business plan than in planning a business. In a free market, entrepreneurship contributes to economic growth because individuals pursuing their own well-being (or betterment) do in new, and better and cheaper goods and services. In this process, jobs are created, people are made more prosperous, and the economy grows.

The only real way to make entrepreneurship work for South Africa is to try and create the best environment possible for individuals to succeed in making the above process happen. Instead of creating new programmes and spending money to try and force more small business to start up or turn more people into entrepreneurs, we need to remove the barriers to entrepreneurship and the operation of existing small businesses – costly laws and regulations. The Small Business Project’s (SBP) Reducing the Cost of Doing Business in South Africa found that it costs formal sector companies in South Africa R105,175 a year, on average, to comply with regulations. These costs are pure red tape costs – the costs that accumulate because forms have to be understood, filled in, and submitted. The report also noted that small businesses in the informal sector are also being held back from expansion by the high cost of entry into the formal economy.

At the same time that government projects like the SETA are attempting to create more entrepreneurship in South Africa, there are many barriers keeping existing entrepreneurs from creating wealth, jobs and economic prosperity in South Africa. Instead of trying to make entrepreneurship work in South Africa, government should step aside and let it work.

Author: Susan E. Anderson is a graduate fellow at the Mercatus Center at George Mason University. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article/ 07 March 2006 - Policy Bulletin 21 July 2009