Economic structures influence social and growth patterns

The Figure above indicates that economic structures impact on economic opportunities and results. The literature is growing its inventory of stories about the ways structured relationships catalyse or constrain opportunities for individuals and firms. Many of these stories centre on the ability of individuals to gain employment through family and business ties.

Research into supply relationships suggests that firms look to engage with other firms they know or have been referred to—even if this means accepting higher cost arrangements. A firm’s opportunities to supply the market are catalysed when they either have an existing presence or know people on the inside.

Industrialisation Policy Action Plan (IPAP) as an attempt to move into a more aggressive growth trajectory. The engagement of an international panel of experts has shown general agreement with Government’s IPAP that such a trajectory would involve adjusting production profiles. IPAP favours a more dynamic tradable, soaking up, the vast pool of unemployed—including discouraged new entrants to the labour pool, and generally opening the economy to emerging firms.

Broad Based Black Economic Empowerment (BBBEE) is a structured way of introducing new entrants, historically disadvantaged, with a need to break into the tightest network of historically built relationships. The biggest structural factor defining how business works, centers on past experience in big, formal business. Very few managers and directors in South Africa’s big businesses have traditionally reached their positions without years of work in the conglomerates, banks or other financial institutions. It has been rare to find a manager or director coming from smaller and medium sized business into these large firms, even though most small and medium businesses have also traditionally been dominated by white people.

Specialized in-house sub networks are evident in various industries where firms allocate management positions only to individuals with experience in the specific firm or its subsidiaries. Similar in-house networking is evident in the composition of many boards. The prominence of in-house relational connection is also evident in the way large firms have organized production and commercial processes.

Large South African firms have typically looked in-house for many services—from production through to retail finance. Owning key suppliers, financiers and retailers in a sector assured preferential relationships for these large firms—tight, controlled network relationships that minimized risk exposure. These relationships allowed capital concentration necessary for heavy industry development and fostered stability and standardization. Where the relationships were not established via direct ownership ties, they involved financing and preferential contracting mechanism.

Smaller downstream enterprises have faced major entry hurdles as a result of these preferential relationship structures, however in industries as variant as furniture, textiles, tourism and in the core metals and engineering sector. Large firms started unbundling in the 1990s and focused on core activities, but in so doing simply traded their horizontal conglomeration for a more intense vertical presence in many industries. A large proportion of mergers have been vertical, increasing control of dominant firms through production chains.

One could expect this kind of vertical consolidation to exacerbate already-low levels of industrial competition in South Africa. There is a need for an organisation or government to establish and connect non-integrated downstream suppliers to deal with controlling conglomerates that make their life especially difficult. The dominance of large enterprises creates many constraints on SMME development in various industry.

Large businesses have been able to establish favourable relationships at many levels, resulting in “closed” markets and “old boy networks” that have successfully kept out new, perhaps more efficient and competitive market entrants. This is major reason why SMMEs in South Africa contribute less to GDP and employment than they do in many other countries.

Large firms constitute less than 5 percent of South Africa’s corporations but account for 60 percent of the country’s GDP, while constituting more than 95 percent of corporate entities between 1990 and 2000, SMMEs employed only 55 percent of the country’s labour and generated only about 40 percent of total remuneration.

These highly concentrated structures have not only limited competition and access by smaller business, they are also the reasons for South Africa’s weak competitiveness. The declining entrepreneurship and competitiveness is reflected in the country’s drop from 19th to 25th place (out of 35) in recent versions of the Global Entrepreneurship Monitor (GEM) indicating that “the country has failed to create a competitive climate in which emerging businesses can grow and thrive.

Youth Entrepreneurship – How to make it work

Entrepreneurship is being promoted in South as a possible source of job creation, empowerment and economic dynamism, and this has seen a migration in policy and the voice of opposition parties increasing attention on the subject. However, despite this attention, there has been no systematic attempt to look at it from an angle of a South African young person with his inherent challenges. 

We tend to incorporate the youth into the general adult population when it comes to some of the policy decision that drive enterprise development and we ignore their efforts to forge a livelihood through enterprise activities. We have stopped very short of understanding the potential benefits of youth entrepreneurship as a means of improving youth livelihoods.

Can youth entrepreneurship be promoted as a viable career option? What obstacles stand in its way? And what policy measures and strategies can be initiated to support it?
The need to encourage Youth entrepreneurship cannot be understated and below are some of the reasons why it should be encouraged:

• Employment: Enterprise has the potential to create employment opportunities for both the self-employed youth and other young people 

• Redress: it has a less centralized platform to bringing the alienated and marginalized youth into the economic mainstream 

• Socio-economic Solution: it has the potential to impact on some of the  problems and delinquency that arise from joblessness including crime and drug abuse. 

• Innovation: Youth   resilience is associated with innovation 

• Local economic development: it has the potential to revive and revitalize local community 

• Accessing fast paced economic opportunities: Young entrepreneurs may be particularly responsive to new economic opportunities and trends 

• Skills development: Enterprise helps young women and men develop new skills and experiences that can be applied to many other challenges in life. 

This article was born from attending an Entrepreneurship Week, where all efforts were around the development of youth owned enterprises. Naturally the irreplaceable value of experience and post graduate education has meant that naturally youth owned business will have the following inherent challenges. (Excuse me for generalizing, but SEDA or a similar South African institute should commission a study to verify):

• Youth businesses face problems of access to resources such as capital, especially if it is to be loaned, given the South African strict loan regiment under the National Credit Regulation (NCR). This is particularly more challenging for young people from impoverished communities, who do not have alternative sources;   

• The result is that young people will start their enterprises with lower levels of initial capital and will operate very small businesses that are more survival level (from hand to mouth as affectionately referred); 

• The biggest challenge with a low capital business includes lower market value or lower inventory book. This has played into the hands of heavily invested foreign subsidized small businesses, especially in the retail sector (a train vegetable vendor vs. a 500 product tuck shop)  ; 

• The result then becomes that youth entrepreneurs are engaged in a narrower range of activities. They tend to operate from homes or streets (lack of access to space); 

Given that in South Africa we have the National Youth Development Agency, and I hesitate to be critical of their efforts to promote youth entrepreneurship. I would like to remain true to the objective of this blog and share Ten (10) cardinal rule that can drastically improve this sector:

1.  Clear Objective. Any programme that promotes youth entrepreneurship should not attempt to combine social and economic objectives. Many youth enterprise promotion programmes fail because of a multiplicity of objectives. Someone in a position of prominence like the NYDA should identify a future sector of growth and shape the development of youth entrepreneurs to fulfill the market demands of that growth sector. Preparations for the world cup in 2010 were way advance before we realized that we had a shortage of welders (artisans) and I believe that this was an ideal opportunity to have groomed at the announcement of the bids’ success, a model for owner managed artisan youth enterprises. These businesses would be instrumental in helping Transnet and PRASA today with their Capital programmes, which are estimated in the multiple billions. Unfortunate this bus has left the port and this competence will sourced internationally. 
2. Commercial Orientation. A development agency (NYDA) has the responsibility to instill and enthuse a sense of professionalism and commercial will. It is not a welfare’ or social services, this will mandate the agency to develop a professional capability and technical competence that is critical to the success of youth enterprise support programmes.
3. Adequate funding. Available literature shows that youth enterprise support programmes in many developing countries fail due to, among other factors, inadequate funding. NYDA is a well-funded organisation and has adequate funding to help its clients. 
4. Well-trained and properly supported staff. The agency requires staff with professional capability in their operations. Given how competitive the labour market is in South Africa, this should also be established with staff retention programmes in place. Staff should be trained and properly supported in their work. Lack of technically competent staff and/or staff that lack entrepreneurial experience is a major factor that explains the failure of youth enterprise support programmes in many countries.
5. Flexible and adaptable operation style. Rigid administrative procedures are a factor in the failure of youth enterprise promotion programmes in many countries.
6. An ‘integrated’ package for youth. The Agencies support for young people should not only be limited to the resources that the youth can gain from the Agency like credit and voucher services. Such a minimalist approach has a danger of limited development with similar beneficiaries going through the system over and over with new ideas every-time. The birth of the Tenderpreneurs in the past decade is an example. The agency should provide a wide range of services to youth, including skills training and advice. This is based on the recognition that young people pass through various stages of transition and therefore tend to face problems specific to those transitions.
7. Customer-centered loans. The treatment of the youth as mere beneficiaries is the key challenge in this area and hence the reason why all loans are treated to youth owned businesses are treated the same. Firstly I believe all loans should be issued condition to a viable business plan and accepting a mentor.  Secondly, all youth entrepreneurs should be treated as clients as opposed to beneficiaries. Thirdly there should be a shift from standardized programmes that are not sensitive to the needs of individual youth and therefore have little impact on youth entrepreneurship promotion. For example, a young professional who has just graduated from University and after realising that he had no prospect in the employment sector and they started business. Statistics tells us that this is the most successful entrepreneur currently in SMME sector in South Africa (SMME's ran by Professionals). Currently as things stand this guy cannot be loaned money by the NYDA unless he had surety from someone who is employed. This is the case even when such a professional has a contract with a reliable third party and they only require bridge financing. The strength of the contract and the success of the sector of business they have venture into do not count for much in their credit rating.  
8. Proper targeting and selection. Young people are not a homogeneous, and thus the Agency needs to make an attempts to identify variations amongst young women and men in their skills, experiences, status, needs, aspirations and capacity to obtain resources – all of which influence their ability to establish and run a small business successfully. This is the blueprint that we lack in South Africa, on how we can help young people from school going age to choose Entrepreneurship as a career. The difference from reading a Robert Kiyosaki book and being nurtured in to the profession is the intelligence we are able to build as a country on the subject. The motivation of foreign Business heroes like the Donald Trumps and Richard Branson are different from that of a South African rural youth.
9. Mentoring. NYDA needs a strong and highly effective mentoring programme that is designed to provide young people with informal advice and guidance on how to properly manage their businesses. This will help youth entrepreneurs to overcome the constraints of limited business experience, contacts and skills. Through mentoring and other business support services, young people will learn to deal with the risks that they face in running their enterprises.
10. A supportive policy environment. Favourable changes in the regulatory environment can have a positive impact on the provision of business development support to the youth entrepreneurs;

Can we look at Infrastructure Development as a key economic tool

The establishment of the Presidential Infrastructure Coordinating Commission (PICC), and the subsequent lamenting of the pace of infrastructure development as lagging behind what the country needs, has placed a demand on South Africans to embrace the process as a necessary economic tool. In Economic theory, infrastructure can positively impact on economic growth, in the following five ways:

· Infrastructure as a factor of production

Infrastructure may simply be regarded as a direct input into the production process, like the creation of Power generating plants to fuel more industrial process.


· Infrastructure as a complement to other factors

Infrastructure may be regarded as a complement to other inputs into the production process, in two senses. Firstly, improvements in infrastructure may lower the cost of production. Inadequate infrastructure creates a number of costs for firms, who may have to develop contingency plans against infrastructure failure or even build infrastructure themselves. Inadequate transport infrastructure, for example, incurs potentially massive costs for firms who must seek alternative means of transporting both inputs and finished goods. Conversely, good infrastructure generally raises the productivity of other inputs in the production process.

· Infrastructure as a stimulus to factor accumulation

In particular, infrastructure, in the form of schools, roads used to access schools and electricity provided to schools, is likely to be an important factor in the human capital production function and it classified as Stimulus to factor accumulation.

· Infrastructure as a stimulus to aggregate demand

Large infrastructure projects typically involve significant expenditure during construction and potentially also during maintenance operations, increasing aggregate demand. Governments have, for example, often used large-scale infrastructure projects as stimulus policies during recessions or in order to achieve particular growth targets. E.g 2010 Soccer World Cup.

· Infrastructure as a tool of industrial policy

The last channel focuses on the potential for infrastructure spending by government to act as a tool of industrial policy. Government might attempt to activate this channel by investing in specific infrastructure projects with the intention of guiding private-sector investment decisions. A road construction project in a rural area may be intended to facilitate integration of that area into the regional economy and hence promote private sector investment and economic growth. This thinking has been a key element of the rationale behind the Maputo Corridor and the Coega Development Corporation.

Let's redistribute the wealth, if we know how?

There are patterns in Economics, which have a significant influence in the make-up of society. An Italian engineer-turned-economist named Vilfredo Pareto, discovered one such a pattern, when he developed the distribution of wealth array in 1897. Different nations have varied resources to yield different kinds of products. Some rely on agriculture, while others may relay of natural resources or technology. Coupled with the fact each nation’s population has different backgrounds, skills, and levels of education, Pareto’s discovery made the distribution of wealth appear as universal as the law of gravity.

The concept goes something like this: If we took a list of all South African’s who are worth say, R10,000 and built on a list by adding additional groups of other members of society with many other levels of wealth, both large and small, and we plot the results on a graph. The result will be a sliding graph, where many individuals are at the lowest end of the scale and fewer and fewer are higher up as we progress along the graph toward higher levels of wealth. However painfully obvious this could be to everyone that we have fewer rich people than we have impoverished ones. It was the discovery of a Pareto’s principle, which essentially says 20% of the people own 80% of the wealth of a given country, that recent calls for Wealth redistribution have found relevance.

The concept of Redistribution of Wealth is seldom argued through an Economic Tetris that places a level of comfort that as a society we are striding towards an economic turnaround. Redistribution of wealth is defined as the transfer of income, wealth or property from some individuals to others caused by a social mechanism such as taxation, monetary policies, welfare, nationalization, and so forth. It is often a progressive redistribution, from the rich to the poor.

Countries would chose to use the mentioned tools to redistribute wealth for ethical, sociological, or economic reasons. Firstly, at an ethical level, any society needs to be altruistic with how it cares for its poor. Secondly, taxing the wealthy at higher rates will not affect their life chances, compared to taxing the less wealthy, particularly the lower and working classes, at equal rates. Thirdly, to prevent revolt on the part of poor, who may feel excluded or exploited. Fourthly, to ensure workers can buy goods and services that are produced, as house hold consumption has a bearing on the success of businesses and wealth creation. Fifthly, to even the playing field, because wealth breads wealth and rags to riches cases are a rarity. Lastly, to avoid corporate subsidies that are extreme and taxing the wealthy at higher rates is one way to offset these subsidies.

 In 2010, the ANC Youth League brought up the subject Nationslisation of mines as wealth redistribution mechanism, and subsequently commentator such as Desmond Tutu have suggested concept such as rich people tax. What are the alternatives Wealth Redistribution instruments that have yielded economic turnarounds for other world economies? And can we suggest these for the necessary economic transformation in our economy? Are the current commentators talking out of turn or is there some merit to their comments? Let’s explore two cases, where Wealth redistribution is taking a mutually beneficial framework.

Ireland 90’s Success Story

Beginning in the early 1990’s, unprecedented economic growth saw the level of Irish real GDP double in size over the course of a little more than a decade. There have been many reasons advanced for Ireland’s success over this period, including a concept called “co-ordinated social partnership agreements”. The first of these agreements, involved the labour market accepting moderate increases in wages in exchange for the long term development of various industries. In return both government and business remained committed to labour unions to honour them once the targeted growth is achieved.

In November, Kumba Iron Ore announced the final results of its spectacularly successful Envision employee share ownership plan: a R2.6 trillion distribution to 6 029 workers. After tax, the distribution was as much as R345 000 a worker. This and many other Employee Share ownership (ESOP) schemes are examples of how the private sector could be trusted to honour long term commitments to the labour sector, as labour allows business to survive economic recessions.  

Malaysia Economic Transformation Blueprint

Malaysia has been an economic darling of the Asian-Pacific region for many years with a sustained 8% GDP growth from the 80’s to the 90’s. Perhaps their most exemplary programme for South Africa is their transformation blueprint. The plan recognizes the role played by the private sector in the development of the Economy. A platform for investment was created with 92% expected from the private sector. The sector was involved in the planning of this transformation blueprint in partnership with government. Collectively the partnership identified 12 National Key Economic Activities (NKEA). From NKEA the partnership has identified 131 entry point projects, which will be prioritized in government planning and funds allocation. Policies will be amended to facilitate fast track implementation of such activities, including liberalizing the market and removal of bottlenecks.

Economic transformation is needed in South Africa to accelerate growth and help overcome challenges of income inequality, where South Africa is ranked in the top 10 countries in the world. The gap between the rich and poor has grown by 4% from 0.66 to 0.70, between 1993 and 2008. As income continues to be concentrated on a few, we need to approach wealth distribution as an investment opportunity and not a hostile transection. The global economy is converging ever closer with each passing day, the ominous challenge being a south Africa that reacts to economic changes, instead of a forward thinking country.