Myths about small business and jobs

THE GLOBAL economic crisis that

began in 2008 has given rise to much

hand-wringing among ruling elites

and mainstream commentators.

Who would have thought we

would hear a Conservative Party

prime minister in the UK speaking

of the “crisis of capitalism”, or

promising to “make the market fair

as well as free” (“Cameron: We’ll

make the market fair as well as

free”, Telegraph, January 19). We

even had our own Financial Mail

asking “Is capitalism dead?” on its

cover, if somewhat disingenuously.

It goes to show, you might suppose,

that we really have come to the

end of an era. That is the era initiated

in the 1980s under the regimes of

Ronald Reagan and Margaret

Thatcher, and associated with policies

such as deregulation and privatisation

that were supposed to resolve

the global economic crisis of the

1970s. Many of the measures now

being advocated to address the jobs

crisis in SA could have been made

20 or 30 years ago, and in many cases

were.

“Jobs will be created by small

and medium businesses,” writes

Cyril Ramaphosa, a former trade

unionist who now wears different

hats, one of which is deputy chairman

of the National Planning

Commission (NPC). “For too long we

have tended to view large corporations

as the central drivers of economic

growth…” (Sunday Times,

February 19).

The identical argument surfaced

in SA when the PW Botha government

was in power: SMEs (small and

medium enterprises) create jobs. If

only it were possible to create the

right regulatory environment for

SMEs, they could make a “massive

dent” (Ramaphosa’s phrase) in our

unemployment figures.

But what is “the right regulatory

environment”? A bevy of academics

and consultants has devoted itself to

this topic, but apart from surveys

reflecting the perceptions of

business people, it has not produced

any meaningful empirical evidence

of a relationship between regulation

and employment. It has also not

established a relationship between

labour regulation and employment.

Claims that labour regulation is

an obstacle to job creation nevertheless

persist. An article by Herman

Mashaba of the Free Market Foundation,

in the same series of articles,

is explicit. “The most potent way of

improving the hiring capabilities of

SMEs would be a drastic reduction

in minimum wages and compliance

costs involved in hiring and

retrenching…” (Sunday Times,

March 18). In a similar vein, Ann

Bernstein, of the Centre for Enterprise

Development, extols the virtue

of low wage manufacturing. In effect

it is an argument for deregulation.

Already in the 1990s, in the economic

mainstream, there were suggestions

that the notion that SMEs

create jobs was a myth. A muchpublicised

article in The Economist

in 1993 cited a Chicago study showing

that while small businesses

might have created more jobs than

large businesses, they also shed jobs

more quickly, due to their high rate

of attrition. Whatever the merits of

the original study, it makes an obvious

point. To begin to validate any

claims about creating jobs you

would need longitudinal data.

The only way to validate the

claim that SMEs create jobs, in other

words, would be from a historical

perspective. You would think the historical

record of the past 30 years

speaks for itself. Business has had a

freer hand to pursue its interests

than at any point since World War I.

The outcome has been the

unprecedented concentration of economic

power in ever fewer big businesses,

and unprecedented levels of

unemployment (200 million globally,

and rising, according to the International

Labour Organisation).

Wages have also been falling.

An important reason for this has

been that big businesses have

restructured their operations to

minimise the number of people they

directly employ, and maximise the

number employed by intermediaries

in “services”. These intermediaries

are in effect satellites of big

business, employing the workers it

requires, but for which it does not

wish to be accountable. They

include contractors and service

providers in various guises, including

labour brokers. Most of them

could be defined as SMEs.

Much of the unskilled labour big

business requires is provided by

these “services”, and the employment

of workers in these “services”

is by and large unregulated, or ineffectively

regulated. There is practically

no regulation of wages, for

example, bar those sectors in which

there is a sectoral determination. It

can hardly be suggested that the

wage levels set by sectoral determinations

are onerous.

There is in any event a real likelihood

that South Africans would not

work for less, if Bernstein and others

had their way, since social grants for

the aged and the disabled are pegged

at more or less the same levels.

The restructuring of business

operations to externalise employment,

and in particular the employment

of unskilled labour, is the

primary way in which the deregulation

of the labour market in SA has

been achieved. Privatisation is the

equivalent process in the public sector.

I refer to this process as externalisation,

because it is broader than is

conventionally understood by the

term “outsourcing”.

The operation of McDonald’s SA,

of which Ramaphosa (wearing

another hat) is chairman, illustrates

the point. Although nominally the

SME that has a franchise to operate

a McDonald’s outlet is a legal entity

in its own right, economically it is

beholden to the franchisor. The franchisor

is the SA subsidiary of a

multinational, which determines

the business model according to

which this particular SME operates.

Accordingly, it also directly or indirectly

determines how many jobs

the SME is able to create, including

in its supply chain.

It makes no sense from a policy

perspective to talk of an SME that is

to all intents a satellite of big business,

and could not exist apart from

it, as is the case with a McDonald’s

franchisee, or a service provider providing

unskilled labour to a client, as

though it were in fact an economically

viable and independent entity

on its own. This is one reason “small

business” or “SMEs” is not and

never has been a coherent category.

Although it could be argued that

the process of restructuring that

took place in the 1980s and 1990s was

a response to labour regulation, it

cannot seriously be contended that

regulation has played any role in

determining the form it has taken,

except insofar as it has facilitated

the process, or indirectly.

Examples of regulation facilitating

the process are the role of intellectual

property law, in the case of

McDonald’s, in protecting the

integrity of its brand, and the role of

competition law, which is much concerned

with horizontal competition

but hardly at all with the vertical

relationship between a McDonald’s

franchise and its suppliers.

Labour broking is an example of

how regulation has indirectly influenced

the process of restructuring.

Labour broking grew at an exponential

rate in the late 1990s and subsequently,

both because of an essentially

permissive approach adopted

by the Labour Relations Act (now

under review, some 15 years after

the event) and because of the contingent

risks for employers that an

adverse finding at the Commission

for Conciliation, Mediation and

Arbitration represented.

There is also empirical evidence

that SMEs were more at risk of an

adverse CCMA finding than big

business. However, this is not to say

that there is a direct causal relationship

between labour broking and

regulation. The role regulation had

played in the process of restructuring

is a secondary role.

The longevity of the myth that

SMEs create jobs is not hard to

understand in a context in which

ever more power has been concentrated

in large corporations, and so

many SMEs are satellites of big

business. It serves to insulate the

public against the harsh but indisputable

reality that big business has

been shedding jobs over the past

decades, and continues to do so.

In the case of public companies, it

does so to the approval of its shareholders.

When Pick n Pay announced

plans to shed jobs last year, its share

price spiked. But how could SMEs,

operating in the same economic environment,

behave differently from

large corporations?

The “ghastly reality” (to borrow

from PW Botha) is that capitalism

does not create jobs unless there is

profit for it in doing so. A small business

operating for profit is no different

from a big business in this

regard. Bobby Godsell, also a member

of the NPC, put it more convincingly

than I could. “In my several

decades in business,” he states,

“I have yet to meet a person who has

set out to create employment. The

central purpose of business is to provide

goods and services to customers

in a way that generates profit.”

To suggest SMEs could make a

“massive dent” in unemployment is a

proxy for the neo-liberal policies that

have exacerbated the problems we are

now facing, both as a country and

globally. In essence these are problems

inherent in the capitalist system.

. This is the second in a six-part

series. Former trade unionist Theron

is a practising labour lawyer, and is

co-ordinator of the labour and enterprise

policy research group in the law

faculty at UCT.