Education to enable industry development

Our industry in South Africa is constantly complaining that their workers have the wrong (or low) skills. Yet based on my own experience, many manufacturers prefer to appoint people from the street and then train them in-house on the job. This saves the business money and bargains the wage down, but at the same time makes it very difficult for the enterprise to respond to technological change. And when all your workers are at a low skills level, the technological advancement of the firm is almost completely dependent on the genius (!!) of the entrepreneur and the middle management. This is a risk for our industry as we do not embrace learn-by-doing enough as our competitors are doing because we do not trust the ability of our workforce.

The South African government itself acknowledge the importance of jobs intensive growth, especially aimed at lower skilled workers. I sometimes wonder if our government has given up on its education system, but then the large and continued investments in the overall education system seems to suggest otherwise. The education policy has a strong focus on vocational training, but learners still prefer to queue at our Universities despite the best attempts of the minister to highlight the value of Further Education Colleges and the recent investments into the vocational system in the country.

While the importance of making sure that our large numbers of low skilled workers do get some form of employment and further education, I wonder if we do not need a stronger dual focus on other forms of education and more skills intensive job creation.

Also, I wonder if we do not need to strengthen our ongoing education aimed at people currently employed. I know the Skills Education and Training Authorities (SETAs) are supposed to do this, but from the businesses that I work with it seems that this is a frustrating option – the skills levy is basically treated as a tax. The SETAs are also focused very much on basic skills and not on deep technological skills.

As long ago as 1987, Lawrence and Schultze criticized the European education system with its focus on apprenticeships that provides rather specific skills to rather standard and mature technologies. These technologies become obsolete very fast in times of rapid technological change. Furthermore, these skills do not help our enterprises to get ahead, they simply help the lower productivity part of the economy to catch up. Many other scholars have come to the some conclusions about Europe’s education system, advising them to follow the US model of equipping graduates with a more generic education that helps people to adapt to a more dynamic work and technological environment.

For in case you wondered, South Africa is undergoing huge technological change. With the energy problems this technology intensification is accelerating as enterprises try to upgrade to lower energy manufacturing technology.

To get ahead we need to invest more in creating middle and higher skills capacity, more or less what the learners are sensing. From an economic policy perspective, we need to support the enterprises that are in the more knowledge intensive industries. They still absorb lower skills workers, but at least in these enterprises their development paths are more varied and more secure. While at the job-intensive low skill industries these lower-skilled workers are vulnerable due to South Africa’s poor cost competitiveness on many basic manufactured goods. At the same time, we have to continue and even expand upgrading our workforce with vocational training, if not for any other reason than to give people a deeper sense of pride and dignity.

References

Lawrence, R., Schultze, C., 1987. Overview. In: Lawrence, R., Schultze, C.(Eds.), Barriers to European Growth: A Transatlantic View. The Brookings Institution, Washington, DC.

Supporting business that creates wealth and growth should be our main priority

I see that in the USA there is a similar debate as here in South Africa about whether government should support small firms or growing firms.
Andrew Hargadon wrote a brilliant post on the debate that was brought to my attention by Tim Kastelle. Hargadon argues that hindsight is often mistaken for foresight. He explains that many small firms stay small for many years before they grow, and that it is hard to predict which will grow, which will just survive and which would fail. From my own business and consulting experience I support his view and have seen on many occasions that it sometimes takes a change of ownership or management to get a small enterprise onto a growth path. But sometimes we are so obsessed with the romantic idea of an entrepreneur fighting an honorable fight against market forces and the onerous framework conditions that we miss the bigger picture. Some people are good at starting enterprises, others are good at growing enterprises, other good at maintaining an enterprises. Some will just never be able to do it no matter how much support you provide (or waste). Most people will make better employees than entrepreneurs.

The myth that small enterprises drives growth and employment is an old one, one that is firmly in the rooted in minds of policy makers and development practitioners here in RSA and in our region. There seems to be a confusion between correlation and causation. Even if statistics shows that 60% of people in RSA are employed in small enterprises (thus a correlation seem to exist between small firms and employment) it does not tell us anything about causation (does small firms create employment, or does more employment lead to more small firms being created). Research by many reputable scholars have shown that small enterprises hardly drives growth, but that it often responds to growth; it is more likely that larger better resourced companies will drive growth and efficiency in the economy, with ecosystems of small firms emerging around them providing specialized and also some general services.

For instance, the reputable scholar Thorsten Beck argues that the dynamism of enterprises is more important than the size of small firms in the total economy. I first came across Becks work while doing my PhD research (he has since moved from the Worlbank to Tilburg University). Beck has done many cross-country micro economic studies and argues that:“Policy efforts targeted at SMEs have often been justified with arguments that

(1) SMEs are an engine of innovation and growth and

(2) they help reduce poverty because they are labor-intensive and thus stimulate job growth, but

(3) they are constrained by institutional and market failures.

Cross-country, country-level, and microeconomic studies, however, do not support these claims. One study shows that, although faster-growing economies have a higher share of SME employment in their manufacturing sectors, it is not the size of this segment that drives growth“.

The full report can be found here

Here in South Africa development practitioners have the challenge that we have to pursue objectives that are in conflict.
Everyone seems to agree that we should create more employment, as the waste of human capital in our country is just socially not sustainable nor justifiable. Yet, we are constrained in that we cannot always support those firms that are more likely to create employment because of the race of the owners, or for other demographic criteria or preconditions. Sadly, many entrepreneurs that can help us absorb the unemployed have left, or have shifted into industries where they don’t have to rely so much on low skilled workers. Many have simply taken up jobs in the corporate or service sectors (people like me and many others I know). The current legislative environment just does not make it easy or attractive enough for people to start new firms or expand existing ones. In fact, many people that have the capacity to start medium sized firms are investing their money elsewhere. Now don’t get me wrong, I am not against the principle of equity enshrined in our constitution, I strongly support this. I also believe that labor should be paid fairly in a just relationship. The current labour and BEE environment just does not make for an environment where people will start firms or spin-offs that will address our primary problem of unemployment.

I believe that having a job goes a long way to equipping (black or white, male or female, young or not-so-young) employees to start a business at some point when they have gained sufficient technical AND market experience. Employment experienced and education will still do much more for sustainable black economic empowerment than any other measure. Furthermore, a focus on employment (no matter what the profile of the employer is) will also increase our tax base so that we can do more to develop our country. I will not get into my feelings about too few taxpayers supporting a too big social spend and government here.

Whether big or small, I put my money behind family owned businesses (Yes, I have a small bias). They somehow have the ability to consider both short term but also long term priorities at the same time. Even if they don’t make decisions fast, or if they sometimes appear to be conservative, I found family owned businesses are more likely to continuously invest in better equipment, in developing capacity, and in securing new markets. Family owned businesses makes for more stable employment, and generally they are more aware of the social needs of their employees. But these are also the kind of firms that are least likely to give up shares and management positions if it does not make long term business sense, thus Black Economic Empowerment policies and many conditional support incentives actually undermines this (often unrecognized) backbone of our economy.

What most people choose to ignore is that 3 drivers of costs of business are escalating very rapidly. These are:

  1. cost of raw materials. We buy smaller volumes and pay more compared to other international markets, with many countries even subsidizing access to raw materials.
  2. cost of energy. Our energy cost has increased faster than firms could upgrade, so we are far from efficient and thus at disadvantage. Municipalities further charge double and triple digit margins on top of the official electricity rates. Lastly, those that want to expand often cannot secure or afford access to electricity due to more than a decade of underinvestment in the grid at municipal level
  3. cost of labour. Many other factors are making wages too low for workers to live on (like the cost of transport), while raising the cost component of labour in business without increasing productivity resulting in South African enterprises being uncompetitive. Most employers when they do agree to wage increases simply reduce their staff, because other types of productivity improvement simply takes too long to yield results.

There is only one way that I know of to overcome these 3 cost drivers, and that is innovation at all levels of the enterprise (product, process and business model innovation). We also need social innovation, especially with regards to finding better ways at training, re-training or current workforce and the unemployed.

I can see in many sectors that those entrepreneurs that can create businesses that mainly employes skilled or educated employees are able to compete domestically and internationally. Those enterprises that depend on low skilled workers will simply struggle to compete, their costs are just to high and more and more of them are failing. Larger firms with access to capital and debt are more likely to be able to balance the investments in capital and labour that is required to be profitable in our economy, while smaller firms are struggling to balance this while raising capital and exploring new markets at the same time. The transaction costs for smaller firms to experiment until the find a workable business model in many instances is just to high. This is visible in the popularity of franchises where an entrepreneur buys into a proven business model and where the costs of experimenting with the business model is shared by many franchisees. (I wish we had something similar in manufacturing).

From my research over the last 3 years into innovation in industries I can say with confidence that our smaller manufacturers are hardly investing in Research and Development, mainly because they are under such strong cost and competitive pressure. Those smaller firms that do innovate formally often do this on contract, meaning they are paid by larger firms to do so. Larger firms that are active internationally are more likely to pay for R & D in order to drive down costs while creating new markets and new products. In doing so they support a wide range of smaller firms that provide experts services, specialized components or other intermediary inputs needed by the larger firms.

In the end, we have to direct our funds to those that can create employment, create wealth, create new markets and create new kinds of jobs. We should assess which firms we support by looking at the multiplier effects and the spillovers. We should support those firms that optimally and responsibly use existing resources, whether it be financial, natural or human resources. We must try to support the areas where dynamism already exist to start with, and then we have to try and support dynamism elsewhere. But we should not assume that our large and established smaller enterprises are able to develop all by themselves. The current focus is too much on small and not enough on multipliers and dynamism in the whole economy.

For me all other priorities come second to the objectives of growth and wealth creation, as we cannot achieve all of our countries many priorities at the same time. Growth will absorb more people, will attract more investment, will create new markets, new skills and new opportunities. Wealth creation is as important for employees as it is for investors, entrepreneurs, managers and also the government.

We have to send a strong message to ALL entrepreneurs that we value their investment, their energy and their attempts to create new markets. But we cannot help all of them, and by assisting some of them based on social criteria will not take us toward our countries biggest crises, the unemployed youth, nor will it allow us to optimally leverage the wisdom and experience of our older generation of technicians, engineers, managers and academics no matter what their demographic profile.

Supporting business that creates wealth and responsible growth should be our main priority.

How competitive is South Africa?

Hopefully my international readers are not following the news in South Africa. Over the last few months we have been blasted with negative and mixed messages from the government. It sometimes seems like the government is fighting itself.

But to be honest. Actually, the mood here is not so positive everyday, and for the first time in my professional career I am being asked by industry associations and by local enterprises on practical ways to move parts of their business out of the country. That is one of the main reasons why I have not blogged much in the last weeks. As a positive leader I felt that I did not have anything optimistic to say because I was feeling depressed about the situation.

But the recent long weekend we had gave me some time to reflect.

Firstly, I spend a lot of my time interviewing and visiting businesses to find innovative and competitive enterprises. Take my word, we have some fantastic business people out there. And not all of them are big. Not all of them are famous. Not all of them are white. Many enterprises just get on with it. While some get the basics right, others get the extraordinary right. Unfortunately I also know (like they do) that many enterprises can do better, they can create more wealth and they are all able to absorb more labour. But then the reasons why they don’t is out there in the press. And I understand this reasoning.

Secondly, I agree with an excellent article by Cindy Mauigue about our competitiveness and the reasons for our declining rankings. I would argue that South Africa can make up for the loss in its international rankings of the WEF and the World Competitiveness Reports by being smart (and by setting some priorities that may not be popular). On many of the areas we are in deep trouble, and with the current power of the unions I am not sure that the cluster of indicators around labour market flexibility and competitiveness will be dealt with soon.

But there are also some “low hanging fruit”, indicators that we can address in the next few years. Some of these deal with technical issues like extending and lowering the costs of internet connectivity (can we please have some decision making on this soon?). If you look at how we perform on the criteria of the WEF then you see that we are ranked very high on many of the economic and technological indicators. In fact, we are frequently ranked in the top 10 or 20 on several of the 12 main areas.

So according to the rankings we are falling behind our peers with every year, but as I have just argued, there are some things that our country can do in the next two or three years as well. Unfortunately not many of these issues are described as urgent or important in the planning that our government is busy with (National Planning Commission and the New Growth Plan, to cite just two).

To improve our rankings would require that the senior leaders of our country make up their minds about the image we want to project inwards (to our local investors, entrepreneurs and young people wondering what to do with their lives) and outwards (foreign investors and people with skills thinking of moving here). If we do not clear up the signals then entrepreneurs will keep their cash safe (probably by moving it out of the country), will take fewer risks, and in general our economy will struggle to absorb more people into the labour force. We have to find ways to harness the creativity and the resources of more South Africans to solve the problems and explore the opportunities that we face.

While I agree that we are sitting on a ticking time bomb caused by unemployment in our country, I do not believe that our main intervention point should be “job creation”(this to me is more a result). There are many other things that must also happen, and the government must acknowledge that they have to happen at the same time, or that sometimes we need some things to happen first. I wonder what would happen if we made “quality education from beginning of school to end” the highest priority? Would that not also create sustainable jobs in the long run?

I do believe that we should focus on getting our existing businesses to invest and grow as a first priority, with economic empowerment as a second priority and job creation as a result. The expanding gap in our gini coefficient is not caused by equity disparities, it is caused by differences in education.

I wish I could drive my kids to school without seeing the posters of the newspapers. We are being poisoned by a lack of clear and consistent leadership on many important economic points in this country that will greatly affect us in the short and the long term. And often it is not about leaders not making up their minds, it about lacking a will to take action. It seems like government leaders are afraid to upset their social partners, or to upset anybody out there!

It reminds me of the saying of David Maister that the essence of strategy is deciding when to say “no”! Just what exactly are we saying no to in South Africa.

My wish is that we say “yes” to some of the issues that MUST be addressed to strengthen our economy and unleash the entrepreneurship that we have (regardless of race, age, gender or social status). Let us get our entrepreneurs to be excited about this country and its potential. But let us also all work together on the huge social challenges that remain. And let us acknowledge that some people will make profit from this, but let us focus on getting the systems to work for our country.

In concluding. Our country is more competitive than we think. Please don’t believe everything you read. Come and visit some businesses with me if you need to be convinced. For now I am staying here, and I am investing here very carefully. But I am constantly evaluating my options.

For my business readers: You have to do whatever it takes to grow and expand your business, and to secure your ability to earn returns today AND tomorrow. The risks in South Africa is high, but the returns are higher.

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