Potential spark for S.Africa’s economy lies in townships - CNBC Africa

Potential spark for S.Africa’s economy lies in townships

Special Report

by Peter Attard Montalto 0

Montalto believes the spark of development for South Africa will come from a township. PHOTO: Restination/Getty Images

The debate in SA often ignores this microfounded point. Macrolevel growth helps achieve development — but increased security of income and quality of livelihood of individuals over time at the microlevel are what we really mean. 

I don’t think it will come from within an industrial development zone. It won’t come from a heavily subsidised industry that is part of the Industrial Policy Action Plan "managed" by the Department of Trade and Industry. It won’t come from a member of Business Unity SA or similar organisations, nor from a small-business ministry. Although they can all contribute to growth, I doubt they can push it to the next level. 

For me, that spark of development will come from a township. Someone, quite young, will already be running a microbusiness in the informal shadow economy. Their gender is unimportant, as is their level of post-matric education.

They will most likely at some point have had some interaction with non-state education — probably in the charity sector. Such interactions will have given them confidence and equipped them with some basic skills to run a business beyond what the state provides. They will be black. 

Their business may be in services or goods, it doesn’t particularly matter what, but it will be filling a gap in the local market and will be embedded in the local community. But they will be small, pay no tax, have no formal accounts, not be registered, nor grow particularly beyond their locale. 

I think the spark of development comes when such a business moves from the informal shadow economy to the formal economy, when it first hires a worker from outside the family, a neighbour maybe, to help doing unskilled work.

Maybe then a friend that went to university to do some accounts. It then starts negotiations with bigger businesses and a wider consumer base — it starts paying taxes, becomes registered, and starts expanding in size and scope. 

The spark that causes such a leap is far more important than a big business starting to manufacture a new line. The key is that such micro-events have scalability — the potential for replication or leverage — that is the key factor lacking in SA with big government initiatives.

There needs to be a much larger number of very small businesses moving from the informal to formal sector to solve SA’s problems and drive down unemployment. The government can manage the economics of big business interventions but couldn’t possibly hope to at this microscale. 

There are about 2.4-million people working in the informal sector. If every three years, each person were able to gain a new co-worker, SA’s unemployment problem, under the expanded definition, could be solved in 10 years.

Does that sound crazy? It certainly sounds optimistic. Should SA be thinking like this and aiming high? Undoubtedly. Is it possible? That’s the key question. 

The first thing to note is that such a jump would occur not because of government support or involvement in managing the economy.

Yes, the government has a role in improving the business environment, securing macrostability, making it easier for such a company to get registered and minimising the regulatory burdens on it. But ultimately the entrepreneurial risk will be within the private sector. The government does not realise or even understand this point. 

The next point is that this leap of faith will require support from the private sector. This means a private sector that can offer a fresh and different, tangential vision of how to achieve development (and transformation).

Corporate SA has been too half-hearted in doing this. It has publicly welcomed engagement with the government, but privately there has been little progress after such engagements. There is no real attempt to fundamentally shift the "culture" of growth, development and transformation. Solutions-based policy suggestions are needed. 

There also needs to be a culture change throughout SA; a realisation that individuals can be masters of their destiny, provide for themselves and their families and not rely on the government. History, of course, weighs to an extent, and there is a chicken-and-egg problem here: the government needs to make the first move in providing the correct environment for the confidence of individuals to be able to undertake such a view — and then stand back.

Entrepreneurship in its purest form, making that leap of faith and taking a business risk, cannot be taught — it will emerge naturally as individuals seek to better their lot within a more secure business (and social) background. 

Some of the problems were evident during the election this year. The African National Congress (ANC) campaigned on a core message of what black South Africans had achieved during the past 20 years due to the party being in government as opposed to what new freedoms had allowed individuals to achieve of their own volition. The difference in tone is subtle but vital for understanding the structural cultural constraints around growth. 

Will the status quo change anytime soon? I don’t think so. But there are forces at work that make me optimistic over the longer term. I think an appealing argument is that the "tenderpreneur" and black economic empowerment power groupings within the ANC want a more balanced economic policy to allow faster growth and so more rent-extraction opportunities — even in the face of greater political competition from the left.

So I still do not believe that a big shift to the left by the ANC is a done deal. As such, there is scope for a pragmatic policy route under the ANC to be possible over time. 

Equally, it is fascinating that there are so few new ideas from the ideological left. The 1960s was a long time ago and there are only so many times you can rehash the same set of policies. Instead, there appears to be a groundswell of new and interesting ideas at the free market end of the spectrum — and while they are gaining only marginal traction right now, they are starting to attract more interest from deep within the government and the ANC.

These ideas are different from what the ANC is used to — radical changes to empowerment, looser labour laws but still the encouragement of vibrant trade unions, voucher systems and markets for health even for the poor. The key is that the vacuum on the left means that, by a process of attrition, these ideas should very slowly gain traction over time and start to shift the status quo. 

Leadership is needed at every level. The problem at the moment is that good policies bubble up at the departmental level but, without serious leadership from the centre, they end up fizzling out.

I think leadership also means someone being able to take calculated, difficult, political risks to start the process of cultural change, try new policies, create that space for the development spark to be ignited and, from there, get the "payoff" of being re-elected. 

These, then, are the metrics alongside which policy and politics will be judged by investors in the coming period leading up to the ANC’s 2017 elective conference and to the 2019 general elections.

It is not the only way to avoid downgrades and low potential growth, but it is arguably the most likely to succeed, the most sustainable, the most trusting of individual freedoms and potential, and probably the cheapest and easiest for a government to achieve. 

* Montalto is an emerging markets economist at Nomura International. 

First published on BDlive