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Here’s exactly how SA needs to change to encourage entrepreneurs

Photo credit: dweekly / Foter / CC BY
Photo credit: dweekly / Foter / CC BY

A number of global indices have shown that the environment in South Africa does not necessarily encourage entrepreneurs to thrive. However, there are some relatively simple changes that we could make to make the country more hospitable to entrepreneurs. Below is an edited version of and address by Herman Mashaba at the Inaugural Herman Mashaba Lecture on Entrepreneurship at Central University of Technology, Bloemfontein on Wednesday 5 November 2014 (you can read the full version here). In it, Mashaba shares some of his thoughts on the matter. – FD

Entrepreneurship, in particular the promotion of small business development, is something I have dedicated the latter part of my life to.

Something I hope my country South Africa will accept and embrace, is the fact that true entrepreneurship happens in free market economies.

Entrepreneurs are innovators and they cannot function in a constricted, highly regulated environment. They need the freedom to try new things, to experiment, and to challenge entrenched methods of doing business. In order to function properly, they need a free market economy.

A free market economy is a well-structured environment in which individuals can function fully and freely, enjoy maximum personal choice, without unnecessary limitations, as long as they respect the right of others to enjoy the same rights.

I think you will agree that the free market environment you will provide the best circumstances for entrepreneurship to flourish. Sadly, in South Africa today, this is a business environment that we dream about.

There are some specific issues that I see as most detrimental to entrepreneurial development in South Africa. There is too much political interference in the economy. “Policy bombs” are constantly being released on the economy, creating great uncertainty and making it difficult for business people to do proper forward planning. The granting to politicians and government officials of discretionary powers that allow them to transfer huge amounts of taxpayer’s money in the form of tenders and other privileges to people who are reliant on government business, licences or concessions, is the source of large-scale corruption.

Apartheid left behind many problems that had to be dealt with by the new democratic government in 1994. Initially, the policies that were adopted were aimed at helping people to help themselves. Had this policy carried on we would today see many more entrepreneurs active in this economy.

Unfortunately government policies were changed, which increased people’s expectations of government hand-outs and led to a mentality of dependency and entitlement. At the same time labour laws were introduced that increased the job security of employed workers and at the same time increased the cost and risks of taking on new employees. Taken together with the decline in the quality of schooling, this has led to the mass unemployment we have today, with 8.3 million unemployed, and tragically most of them being young black people.

In radio and TV debates labour union representatives constantly warn against exploitation. They sit with big business on Bargaining Councils and agree on wages and conditions of employment, which they instruct the Minister of Labour to extend to the rest of their industry, including non-participants. The Bargaining Councils, as implementing agents, then impose these high wage levels and conditions of employment on the entire industry, including the smallest businesses, imposing penalties on those that are late in complying. In this process many small businesses are forced to close down because they cannot afford to meet the higher wages or conditions, and their workers become unemployed.

When I was Chairman of the Free Market Foundation, we instituted a constitutional challenge against section 32 of the Labour Relations Act. My motivation is simple. I cannot stand by and watch small businesses and jobs being destroyed by the collusion of big business and big labour.

Minimum wage law is another mechanism that is proposed by labour unions, and implemented by government, which destroys jobs and small businesses. Their motivation is given as reducing “exploitation” and ensuring that people have “decent jobs”.

Whatever their motivation might be, there can be no doubt that a minimum wage makes it illegal to employ anyone for a lower wage. The result is that many people are denied the right to decide for themselves about job opportunities.

In all the debates that I have had on these issues the labour unions and government representatives never talk about the unemployed. They never put forward proposals as to how 8.3 million unemployed people will be absorbed into the labour force as rapidly as possible doing productive jobs. It is clear that in the end it is the private sector that has to provide these jobs. It is entrepreneurs, especially small businesses, who have to find ways and means of employing them. Government’s role is to create the right environment and there is no better way for them to do that than to move towards a more free market economy as rapidly as possible.

We need as a country to urgently revisit all race-based policies, in particular economic ones. We have had twenty years of our democracy to test their impact on the country’s economy and majority of our citizens. The negative results are there for anyone to see. These policies are totally against the spirit of our constitution, and unfortunately preclude certain members of society to participate without interference. I know some people will be against this proposal, but I would like to warn them, if we insist on pursuing such policies, the results will never be different to what we are currently experiencing. I do not believe that South Africa fought and defeated the evil system of apartheid to replace it with another form of discrimination. Yes, we need to address the ills of the past, but let us be creative about how we do it.

The role of the entrepreneur is crucial in all economies. They are the ones who come up with new ideas and ways of doing things more efficiently. Economist Israel Kirzner described the typical entrepreneur as displaying “vision, boldness, determination and creativity” and alertness to available opportunities for profit.

Economist Joseph Schumpeter wrote of the “creative destruction” that resulted from the activities of entrepreneurs. Both regarded these roles as important for economic growth, the innovations that make positive changes to the lives of consumers on the one side, and on the other side pushing out the old and making them redundant. On the one side creating the motor car and on the other destroying the horse and cart business.

There are two major South African problems that could benefit from the attention of entrepreneurs.

The first is our schooling system. Entrepreneurs could do an excellent job of gathering up valuable knowledge and transferring it to young people in a way that is not possible with conventional teaching. They could do that by assisting teachers rather than by displacing them. The most important people in this equation are the young people. The benefits to the country of substantial improvements in the quality of education of young people would be massive. Government would need to make space for entrepreneurs to perform this vital function.

The second major task that entrepreneurs could perform is to get the unemployed into doing productive work in ways that none of us could even begin to imagine. Instead of seeing 8.3 million unemployed people as a problem, they would see the jobless as a resource that can be used productively and profitably.

Government would need to create the necessary environment to allow the entrepreneurs to operate outside the restrictions of the laws and regulations that currently prevent the unemployed from getting jobs but not outside the bounds of safety and the common law.

What I am saying is that the entrepreneurs should be set free to solve the problems we have in our economy. Given greater freedom of action there is no problem that cannot be solved by entrepreneurs looking to make profits from finding solutions. I am sure the graduates of this university could make a great contribution in this regard. I urge all of you to see the massive opportunities presented by our current challenges. But, these opportunities can only be fully exploited when the country adopts free market economic policies. The power is in your hands, as members of civil society, responsible enough to act appropriately, to create such an environment.

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