Important changes needed to save South Africa’s economy
South Africa’s economy has been hindered by a lack of competition, with calls to ease regulations to facilitate easier business operations in the country.
In particular, global institutions have highlighted supporting the entry of new firms into existing markets as a relatively straightforward way to boost competition, growth, and employment in the country.
The Organisation for Economic Co-operation and Development (OECD) has added its voice to these calls, while also saying the government needs to make it easier for companies to restructure or exit markets.
This call was made as part of the organisation’s latest survey of South Africa’s economy, outlining some of the reasons for the country’s poor economic growth.
As part of its analysis on South Africa’s high unemployment rate, particularly among young people, the OECD explained the importance of establishing a regulatory environment that encourages competition.
“A thriving economy is characterised by dynamic firm entry, growth and exit of companies, all of which are essential for sustaining long-term economic growth, innovation, and employment,” the organisation said.
“Encouraging entrepreneurship and new business creation fuels a competitive environment, which benefits from a strong regulatory framework that ensures fair competition.”
The OECD explained that this has the potential to create a virtuous cycle that can break South Africa out of its economic rut and boost employment.
Equally important to enabling new companies to enter markets and compete is allowing distressed firms to exit markets smoothly and easily. This prevents resources from being locked into unproductive uses.
However, the OECD noted that South Africa’s private sector exhibits low firm dynamism, characterised by large firms that account for a significant share of employment and revenue.
Another element preventing a more competitive environment is the dominance of large state-owned enterprises (SOEs), which also tend to be unproductive monopolies.
As a result, industries are highly concentrated, restricting the growth of small businesses and hindering job creation.
This is largely a product of South Africa’s onerous regulatory environment, which makes it one of the most difficult places to do business in the world.
The OECD showed this in the graphs below, outlining the restrictive effect an onerous regulatory environment has on the country. The first graph shows that South Africa’s economy-wide regulation is the most restrictive among OECD members.
Increasing competition in South Africa
The OECD proposed a two-step solution to South Africa’s uncompetitive economic landscape, with a focus on supporting the entry of firms into new markets and assisting the exit of distressed companies.
It explained that there appear to be structural barriers to entrepreneurship and the entry of new businesses into markets, limiting job creation and economic growth.
The Global Entrepreneurship Monitor survey showed a decline in business entry since the pandemic, with only 8.5% of adults involved in early-stage ventures in 2023, down from 11% in 2019. This is far below the 14% average among OECD members.
Licensing and permit regime
The first step for South Africa to increase competition is to ease the licensing and permit regime for businesses in the country.
In particular, the OECD stated that the country needs to remove uncertainty surrounding the regulation of businesses and reduce the administrative burden of compliance.
It is estimated that it takes around 40 days to start a new business in South Africa, with unnecessary burdens being placed on firms to comply with regulations.
The organisation’s research revealed that no up-to-date public inventory exists of all permits and licences businesses need, while all such licences and permits require periodic review.
Additionally, any delay in the licensing process burdens entrepreneurs because there is no ‘silence is consent’ principle, which grants implicit approval after a specific period.
The burden on new businesses is also increased by the lack of differentiation in the length and complexity of the licensing procedure, depending on the risk associated with the economic activity.
Another complicating factor is that public bodies are not required to adhere to the ‘once-only’ principle, which ensures that data and information only need to be provided once.
Implementing such measures, while relatively simple, would significantly ease the burden of administrative and licensing requirements imposed on firms.
The intense regulation of new businesses entering a market is coupled with a restrictive approach to South Africa’s professional services, such as accounting, law, and engineering, which stifles dynamism.
Entry into these industries is generally more restrictive than in the average OECD country, with only one pathway being available to become a lawyer, civil engineer, or real estate agent.
There are also onerous entrance exams for immigrants who want to enter these fields in South Africa, with locals who studied abroad also having to pass a local test before practising.
It is also a requirement to be a member of a professional organisation, which creates an additional burden.
These high barriers to entry make it more difficult for workers to change occupations and hamper the efficient allocation of labour resources.
Simplifying regulatory constraints imposed on professional services would encourage entry into these professions and enhance access to these services, particularly for small businesses.
The graphs below illustrate the onerous licensing and permitting regime in South Africa, which ranks as the most restrictive among all OECD members, and the intense regulation of professional services sectors.
Enabling companies to restructure or exit
The second part of the equation regarding improving competition in South Africa is enabling businesses to restructure and/or exit markets when they are distressed.
South Africa’s insolvency regime is markedly less efficient than many other OECD economies and is even worse than some of its emerging market peers.
Moving towards a more efficient system could enable the timely exit of failed companies, improving the availability of labour and capital for more productive firms.
Entrepreneurs are particularly hard hit in South Africa, as they are unable to fail quickly and move on to another project or restart their careers.
The OECD said that the time for entrepreneurs to discharge their debt is lengthy, with the process being managed by regular courts of law.
Furthermore, there are limited exemptions for personal assets during this process, which increases the risk for entrepreneurs trying to create a new business.
As with starting a new business, the barriers to entry for companies to enter into business rescue or restructure their operations are elevated.
Creditors in South Africa are also able to initiate restructuring processes, which can help save some companies and ensure they survive temporary distress.
However, South Africa has an indefinite length of stay on assets in restructuring, which can slow asset recovery.
Unlike in most OECD countries, management is also dismissed during the restructuring process, which does not incentivise early corrective action or encourage the entry into business rescue.
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