Racial risks in entrepreneurship failures

Just as a number of critics predicted several years ago, Black Economic Empowerment (BEE) requirements have been stimulating entrepreneurship among the coloured, Indian, and white minorities, but hampering 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. It comes more than three years after the National Development Plan (NDP) promised regulatory reform to "boost mass entrepreneurship" and so create millions of new jobs. But, says the GEM report for 2015/16, written by Mike Herrington and Penny Kew, the government is itself one of the "major impediments" 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 this country, actual intentions to start businesses dropped by 30% between 2013 and 2015. Red tape, onerous labour legislation, and risk-averse banks are among the main deterrents.

Africans account for most of the early-stage entrepreneurs in the country, but their proportion has shrunk from 85% in 2013 to 68% in 2015. On the other hand, the level of entrepreneurship among the three minority groups has increased. Among Indians it has doubled, while among whites it has tripled.

"This," says the report, "could well be a response to increasingly stringent BEE requirements for corporates, which are making it less easy for skilled individuals in these population groups to find jobs in the corporate sector." Talented Africans, by contrast, are stimulated to seek lucrative formal sector jobs and not to become entrepreneurs  -  despite the fact that there are "countless contracts" available to them.      

Some of the "experts" consulted during the course of the GEM research said that South Africa's low levels of entrepreneurial activity are "heavily influenced by a sense of entitlement and an overreliance on government".

The perverse consequences of BEE and other racial policies implemented by the African National Congress (ANC) were predicted at the time of their introduction by the South African Institute of Race Relations, as well as by people such as Temba Nolutshungu of the Free Market Foundation.

Denied appointment in the government and the private sector on racial grounds, minority groups, so our argument went, would have little choice but to become entrepreneurs  -  even though racial requirements now often mean that they are unable to obtain government and other contracts, which in turn no doubt encourages "fronting".     

The GEM report prompts two observations. One is that this component of the NDP is to all intents and purposes now null and void. Despite the country's anaemic growth performance, there is no visible intention on the part of the ANC to carry out the regulatory form it admits is necessary to stimulate "mass entrepreneurship".

Although the deputy president, Cyril Ramaphosa, a few months ago claimed that the government had embarked on a journey of lowering the cost of doing business and cutting red tape, the thrust of legislation is in the opposite direction.  Mr Ramaphosa's call on entrepreneurs to ignite a revolution in small business suggests that he is ignorant of his government's harmful policies.  

The other observation involves racial risk. Entrepreneurship is what drives successful economies. Coloured 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 a corrupt and incompetent state.

More self-reliance on the part of the minority groups, less on the part of Africans. The gap in entrepreneurial skills between Africans on the one hand and the minority groups on the other will widen. This inequality will fuel resentment. It will be blamed on colonialism and apartheid, but that will not alter the fact that the ANC's own racial policies are perpetuating, and even aggravating, it.

* John Kane-Berman is a policy fellow at the South African Institute of Race Relations, a think-tank promoting political and economic freedom.