Western Cape Business News

Send  Share  RSS  Twitter  12 Mar 2012

BUSINESS: Start-Ups Slump To All-Time Low


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The number of new business start-ups has fallen to an all-time low, says Adcorp, the JSE-listed human capital management group.

The group’s February 2012 Employment Index highlights with alarm the closure of 440 000 small business closures over the past five years. The gravity of the situation is emphasised by the fact that 68% of all South African workers are employed by small business employing fewer than 50 people.

Loane Sharp, labour economist at Adcorp, identifies several contributing factors:

  • the 2009 recession;

  • an increased tax incidence that has fallen significantly more on small businesses than on medium and large enterprises; and

  • labour laws and regulations that have been “particularly onerous” for small businesses.

The Adcorp analysis reveals that employment grew at an annualised rate of 1,5% in February, with the economy having created 24 000 jobs compared to the 80 000 jobs created in January.

Most of the jobs – 22 000, or 91,7% of the total – were generated in the informal sector.

In the formal sector, employment growth, at 5,3%, was strongest in manufacturing, construction (4,7%), and wholesale and retail (3,5%). Mining, however, continued to shrink, having shed 3 000 jobs in February.

This is the first time in more than 12 months that job growth in the production-orientated sectors exceeded job growth in the consumption-orientated sectors.”

High-skilled employment grew by a strong 5,3% in February, while the economy’s low-skilled equivalent declined by 1,3%.

Against the background of the small business sector’s role as South Africa’s most important originator of jobs, Sharp draws attention to two “worrying patterns”, one of which is that the number of small businesses in South Africa has stagnated over the past decade.

Between 2001 and 2011, there was a roughly constant number (2 million) of small businesses. The number increased slightly (to 2,4 million) during the economic boom of 2004-2006, but has, since 2006, shrunk by 18,2%.

Since the boom, about 100 000 small businesses have closed their doors each year, bringing the total number of small business closures over the past five years to 440,000. Given that the typical small business employs 12 people (aside from the owner-manager), a revival of this sector could potentially create 5,3 million jobs.”

Sharp’s second worrying trend is that the number of people trying to start their own businesses has fallen to an all-time low. He points out that in 2001, at a given time around 250 000 people were involved in starting their own businesses, whereas in 2011 only 58 000 people were trying to do so – a decline of 76%.

Applying the average ratio of 12 workers per small business, the reduction in entrepreneurial activity over the past five years has reduced the economy’s job creation potential by around 2,3 million jobs.”

He says that if one to view the impact of the 2009 recession on small business commencements optimistically, the decline might be viewed as a cyclical phenomenon likely to reverse as the economic recovery gathers pace.

Alas, however, this has not been the only factor at work.

Between 2003 and 2010, the South African Revenue Service’s tax amnesty for small businesses netted 355 000 new business taxpayers. Over the same period, the number of personal taxpayers (probably including a significant number of unregistered small businesses) increased by 2,5 million or 74%.

Although SARS’s intention in broadening the tax base was to ensure greater equity and fairness in the tax burden, it is likely that the increased tax incidence fell significantly more on small businesses than on medium and large enterprises.”

Sharp cites the recent World Bank’s Doing Business report, which indicated that, in terms of total tax cost and efficiency, South Africa’s ranking had fallen from 18th to 44th out of 183 economies – a drop of 26 places – between 2011 and 2012.

Also, labour laws and regulations for small businesses have been particularly onerous.”

Sharp notes that between 2004 and 2011 the number of cases dealt with by the Commission for Conciliation, Mediation and Arbitration (CCMA) increased from 128 000 to 156 000 a year – an increase of 22%.

Of that statistic, 81% of referrals related to dismissals and 41% occurred in the small business-dominated, labour-intensive retail and wholesale trade and business and professional services sectors.

The automatic industry-wide extension of bargaining council wage agreements, typically reached between a handful of large employers and trade unions, has forced small businesses among other non-parties to pay high wages applicable to the large business sector or, increasingly, to opt out of official dismissal protections and mandatory statutory wages through the informal sector.”

Sharp refers to the World Economic Forum’s Global Competitiveness Report for 2011, which cited labour problems – weak public education, restrictive labour laws, and poor work ethic – as among the most problematic factors for doing business in South Africa.

Small businesses offer the only real prospect of large-scale job creation in South Africa, yet conditions for small businesses have deteriorated markedly. The number of people trying to start their own businesses is a critical indicator to watch in the coming months.”

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