Without Small Businesses, a Nation is Full of Lobbyists and Oligarchs

Access to credit—both in Africa and India—has always been skewed in favour of big businesses. What could change the status quo are state sponsored reallocation, tax benefits, import substitution subsidies and access to some of the long term capital that is available from long-term pension and life insurance funds

Sanjeev Gupta
Updated: Aug 21, 2013 10:56:40 AM UTC

Life even at the best of times, has the uncanny ability to throw up peculiar ironies. Sub-Saharan Africa, which has been the flavour of the season for investors for a long time, seems to have forgotten its essence as it chases big dreams.

Yet, across the Atlantic, the ever mighty US is worried about a 'small' problem. This time around, it is to do with 'small' businesses that are confounding policymakers.The bedrock of US commerce, innovation and employment has been the unheralded and largely unspoken of greatness of the small business. 

Data shows that barely half a million (a 'mere' 500,000) new businesses were created in the US in 2012, which is approximately a 'shocking' 7 percent drop from the year before. To complicate matters, today's small business accounts for less than 8 percent of all American businesses; it is said that in the 1980s, it exceeded 12 percent, which means a drop of more than a one-thirds!

Washington is concerned, and so are the state governors, as this indicates a structural problem that is threatening the very fabric of the great American story. Part of the problem could be the credit crunch 2008 onward, and the rest can be blamed on the general economic malaise.  But the powers truly believe that there could be more reasons!

And this is so different from the world I work in.

AFRICAN SMALL BUSINESSESSub-Saharan Africa should proudly recognize the fact that even when Africa was perceived to be a 'dark' continent and was maligned and forgotten by investors, there were small family-owned businesses which flourished, and provided sustenance and an acceptable form of living to its people.

But the past 15 years has seen a different Africa as the boom in oil, gas and minerals has led to an unprecedented engagement at G2G levels and large corporate levels. Big investments have consequently flown into these sectors and the economies have benefited. Signs of such benefits can be seen in improving infrastructure, glitzy malls and better employment data.

Yet, small domestic businesses don't seem to be growing in tandem. Why so? Where are the jobs that need creating? Are indigenous entrepreneurs finding things any easier?

Evidence points to the contrary.

Businessmen complain about high interest costs, lack of development finance, limited fiscal encouragement, and all this despite historically high levels of domestic liquidity.

Quite a few countries have successfully set up well-funded state and private sector pension funds. Countries now have fairly well-developed life and non life insurance industries. With reforms, most countries boast a secure banking sector which is well-regulated, capitalised and managed well so as to be able to mobilise savings and deposits.

But where are all these domestic funds going?

A significant part of the pension and life insurance funds are going into overseas bonds and equity (In Botswana, you can put 70 percent of your entire fund overseas), while in some countries (Nigeria) myopic policies force billion-dollar plus annual pension contribution flows to go into government bonds and to some extent into local equities with very little allowed into alternative asset classes.

What is the net result?

This situation reminds me of the morbid Indian saying.  At the time of floods, they say, “Water, water everywhere… but a not a drop to drink.”

A REAL EXAMPLE My client in Lagos currently pays a 27 percent interest on his working capital. He is looking to replace local debt with US dollar equity from a PE fund and is happy to accept a non-hedged equity position with expectations of stiff returns for a better shorter-term cash flow.

That pretty much underlines the desperation of the small scale businessman in African markets.

His business has been around for more than five years, employs 120 people, turns over more than $10 million annually and has healthy earnings before interest costs.

Think about the smaller start-up—the guy who wants to set up a shop or a vegetable trading company or a small food manufacturing company with the help of local produce to make local food products? With no land as collateral and little or zero personal capital, these businesses simply fail to take off.

The vicious cycle of dependence on foreign goods, exchange rate related inflation volatility, large import bills on basic goods and zero employment creation for locals seems to continue unabated.

Access to credit—both in Africa and India—has always been skewed in favour of big businesses. What could change the status quo are state sponsored reallocation, tax benefits, import substitution subsidies and access to some of the longterm capital that is available from long-term pension and life insurance funds.

The US quotes that in 2012 the total lending to small businesses was less than 25 percent of what it was prior to 2008. This disproportionate funding has been felt by small businesses which the policymakers are now trying to redeem.

Being ‘structurally rigged’ against the small business is where lobby groups, crony capitalism and weak governments combine to deprive the nation of its fair share of entrepreneurs, competition , service and genuine price discovery.

If the great US is worried that small business is being threatened with its consequential effect on the larger economy, Sub-Saharan Africa should perhaps wake up. It is an established fact that most jobs do get created by small businesses, and in the US, it is also the source of significant innovation and development.

If entrepreneurs do not have access to capital, it creates a nation of bureaucrats, lobbyists and oligarchs.

Someone once told me that capitalism should boost capitalism—not merely a few capitalists. India is regressing because of this phenomenon. Africa must avoid it before the same fate befalls them.

The thoughts and opinions shared here are of the author.

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