Apparently, the idea of an open, free-market economy promises ‘opportunity’, ‘growth’ and ‘competitiveness’, among other things. And from these, the expectation of development arises, at least in so far as the promise of free marketeers suggests. In South Africa, although our economy is predominantly capitalist, rhetoric from officialdom usually speaks of a ‘mixed economy’, where a regulated private sector exists, side by side with a state and public sector.
No doubt, our political economic reality requires a strong and capable state that performs the twin strategic tasks of simultaneously transforming itself, whilst transforming social relations, supposedly in the interest of the poor and the working class.
It is often said that societies that get ahead are those that produce goods and services of all kinds, and at scale. With increased competition for markets, a competitive edge is maintained at two levels: innovation and customer service. South Africa can be proud that we have a thriving services sector, thanks to specialised skills, technology and financial services in particular. However, deep structural challenges remain; thus impacting directly on industrialisation and job creation.
Does the idea of an open, free-market economy really deliver on its promises of ‘opportunity’, ‘growth’ and ‘competitiveness’, let alone development? By way of responding to this key question, the following case study may shed some light:
During the summer break, I visited a small tissue paper manufacturing company, Kahle Soft Rolls CC (Kahle), in semi-rural Mkhuhlu, Mpumalanga. The company took a year to get running, and operations began in mid-2013. In effect, Kahle is a small-medium enterprise (SME) that employs two young people who produce, package and distribute toilet rolls to small shop owners with a long-term strategy to increasingly gain market share in surrounding towns and townships.
Discussions with the owner and manager, reveals that this operation is inspired by courage, and the quest to create employment and of course, profit. For a small firm of its size, to produce and package toilet rolls in packs of 10s and 48s, to fill a medium-sized truck over three days, is quite a remarkable feat compared to other established small producers in the greater Mbombela area, with whom they compete. The company has no financial support from commercial banks. The production machine at the cost of R250 000, the renting of a production site and a bakkie for distribution, are all high risk investments by a young black entrepreneur who invested his savings from other private initiatives simply because he believes in an idea and the youth. He believes in the two formerly unemployed semi-skilled youths, and the idea of supplying a much needed product that enhances human dignity, at an affordable cost to the customer.
The company is not just an endeavour for purposes of profit as it has other important outcomes. Firstly, it has created employment for these youths. With growth and penetration of the local market, the company will require more production capacity, and therefore more employees. In a country where on average, one employed person supports some ten family members or relatives, it represents an important social upliftment initiative. Secondly, it affords ‘on-the-job training’ – tacit knowledge – for youths who have been unemployed for five years. With abundant supply of labour in the country, if labour intensive manufacturing can increase, the challenge will not be so much about education or skilled labour, but lack of industrialisation and diversification. In this regard, China has many important lessons for us. Thirdly, indeed we know that if more people have access to affordable toilet rolls, even though they may not have decent sanitation, their human dignity is somehow enhanced. Could this be regarded as development?
With so much capacity and potential, market conditions and its failures at a systemic level make it difficult for SMEs like these to survive. Firstly, because of their size, experience and initial capitalisation, input costs are high. Recently the unit cost of a reel (320kg of tissue paper) increased from R4,600 to R5,200. This has serious implications for competition, access to markets, and survival. Secondly, linked to the pricing structure from suppliers, there is an allegation that the market is monopolised by an Indian cartel that fixes tissue paper prices. What compounds this challenge is the fact that big suppliers such as Sappi, begin their direct sales at 16 tons of tissue paper and this is clearly unfordable and risky for an SME. Thirdly, marketing is a challenge for a firm of this size as it has no budget to promote the product. The traditional word-of-mouth strategy, and perhaps social media, are virtually the only marketing strategies available. In this regard, reputation management is everything and it will become a key driver in the production and delivery of high quality products, timeously and reliably as well as keeping the toilet paper packs priced competitively.
Taking the story of a cartel to be true, its existence has deleterious implications for Kahle CC. Cartels impact negatively across the manufacturing sector as has been well understood in the bread industry. Firstly, it means prices get distorted; the market is skewed and in favour of dominant players. In this specific case, implications for racial harmony arise, let alone accumulation of wealth and equality. Secondly, SMEs find it difficult to penetrate the market and consequently end-users will be disempowered as they contend with limited choice, and higher prices. Thirdly, prospects for growth, job creation and sustainability shrink, and operational risks rise phenomenally. Finally, the idea of open, free-market economics itself proves to be elusive and unattainable.
State intervention in capitalist development is necessary and unavoidable in a system of imperfect markets. For an SME of this kind, one that produces goods, and attempts to meet a basic human need, what kind of intervention should local economic development provide? What form of comprehensive support packages for value chain linkages are available? How are such firms received by front-line desks at finance development institutions and SME development agencies? In the instance where an SME has base skills and self-capitalisation, what role should the state play in enhancing investment, development, and sustainability of productive ideas?
Whereas government’s policy on SME development and black economic empowerment is well-intentioned with various supporting agencies, contradictions exist which seek to undermine official policy. For example, government departments and municipalities could procure toilet rolls from SMEs such as Kahle CC, but cleaning and maintenance services are privatised, leaving decision-making to outsourced service providers, thereby rendering government powerless, and SMEs vulnerable without reliable a demand side.
In the end, imperfect markets and poor state regulation and support, conspire to keep SME development a pipedream. Assuming that the state is serious about structural change in a ‘mixed economy’, then it has to reform its institutions (policies and agencies) to manage market failures, and intervene in the interests of manufacturing, job creation, and development.
In the meantime, Kahle CC and others, have either to sink or swim in a hostile market environment that requires them to innovate by improving their production methods, diversifying products, engaging in unconventional low cost marketing, improving market penetration, whilst recovering initial capitalisation costs. In simple terms; courage, innovation and customer service only, sustains their operations.
Indeed it is important that state policy focuses on both small and big players in terms of regulation, dealing with cartel behaviour, providing business support, ensuring linkages in the value chain, and procuring directly from small players to ensure stable sales among other interventions. The disciplining and supporting role of the state cannot be outsourced!
I have often wondered if the idea of a free-market is real and whether it leads to developmental outcomes. Could it be that state-led capitalist development is the model to look up to?
David Maimela is researcher at Mapungubwe Institute. He writes in his personal capacity.
*Disclosure: In the interest of good ethics and intellectual honesty, I voluntarily declare that the operations manager is my brother.