FMF Paper
Summary
The SME study presented is concerned with small and medium-sized enterprises (SMEs) and whether the Promotion of Economic Activities Bill is supported by theoretical and empirical evidence that SMEs have suffered particularly over the last ten years or so. While the analysis tentatively agrees that SMEs may often be more vulnerable to regulation and red tape than enterprises with larger balance sheets, it is also argued that a closer look is required to understand what distinguishes an SME from a large enterprise and to tackle the question whether a simplistic look at firm size does justice to the complexities of today’s economic systems.
When regulatory rules and red tape go off the rails, the entire economy takes a knock. Financially strong companies might have more resources to protect their operations, but this comes at costs which could have been employed more fruitfully, for instance to procure more services from SMEs. Likewise, when sectors become deregulated or governments cut down on bureaucracy, the entire economic system benefits.
As to firm size, it must be understood that most large enterprises are commercial constructs that mainly consist of many SMEs under one legal umbrella. Most bank branches of South Africa’s top four banks employ far less than a hundred employees. Supermarket chains are a collection of local stores whereby procurement power is bundled and a national brand can be built. As employees or freelancers, we are all running our own SME. There is hardly an economic difference between being on the payroll of a large company and providing the same services as a subcontractor. In some industries, branches of large companies are based on franchise contracts. Legally-speaking, all McDonald’s outlets are SMEs owned by franchisees.
Perhaps, the essential premise of this study is that people always work and consume at a particular place. The effects of regulatory provisions and red tape, of failing public services and corruption, are always felt by flesh-and-blood people on the ground. It is in the nature of GDP numbers, labour market statistics, or national budgets that microeconomic results get lost in the aggregate. Yet, even when statisticians dig deeper, artificial distinctions along legal criteria rarely reveal the full picture. Is the loss of income in a small town run down by an incompetent city council bigger when a small branch of a large supermarket chain closes down as opposed to the independent grocer?
This study argues that an analysis of regulation and its harmful effects must be devoted to understanding municipal governance structures and the degree of financial autonomy. It must look at those services that are crucial for every business, in particular the core infrastructure services of electricity, water, sewerage, and telecommunication, the first three of which are provided by public monopolies. Expecting municipal representatives to be accountable to their citizens when they have no local tax revenues and, worse, have all their funds allocated as grants from the national government is either naïve or ignorant.
As to promoting higher economic growth of SMEs (as well as larger enterprises), the best deregulation policy is to allow people take matters into their own hands. As we speak, resident associations have taken over the operations of water and sewage infrastructure. Such “take-overs,” it is argued, are the first steps to liberate South Africa’s economic system from its destructive infrastructure monopolies. In sectors where the state has created a monopoly to provide affordable universal infrastructure services to all, such mandates can be defended—provided they succeed. If not, they must be abolished. The energy, water, railway, port, and postal sectors need competition in all areas of the value chain. Perhaps, some of these entities can emulate Telkom if private capital induces the necessary commercial discipline. If not, others will operate the assets that have been financed by taxpayers after all. What can be achieved is demonstrated in the telecommunication sector, not only by mobile carriers but also by other players in the industry, such as submarine cable, fibre, data centre and other providers.
The Promotion of Economic Activities Bill proposed by the Free Market Foundation is in fact a cure for the entire economy. The best way of removing legal and bureaucratic restrictions is to make market contestable and let consumers decide what are the best offerings. Not only do local entrepreneurs often understand better what their 1 fellow citizens need; the fact that they are a part of the local social fabric also means that a firm’s success depends on treating consumers and its employee base well. When private citizens serve private citizens without escape mechanisms such as government bailouts and grant funding, a culture of true accountability can grow.
Contributors
