The Hindu Business Line : Removing the stumbling blocks within

NELSON Mandela Square is a mall in a suburb of Johannesburg, South Africa, and sports global brand names and world class retail stores. The Gucci outlet, the art gallery, and even the food court have reached a level of standardisation which gives the impression that this could be a mall in any metro anywhere in the world.

Then, on a trip to Gugulethu, a black township outside Cape Town, I met Laura Ndukwana, an entrepreneur struggling to get by. She is not competing for the crowds that patronise the malls of Cape Town, but wants to be given the chance to try.

Ms Ndukwana gave up a corporate job and converted her small home into a restaurant, with a bar and live band. She had to use her own funds as she was unable to get a loan. Although it is over ten years since South Africa abolished apartheid and installed a black government, bankers evaluating client risk do not look favourably on small enterprises in black townships.

As countries race to get a slice of the globalisation pie, there are several who wonder what is in it for them. Others are turning against globalisation as they do not feel included among the beneficiaries of the process.

What can governments do to help the situation? As part of globalisation and WTO strictures, governments dismantle their barriers to trade and investment opening sectors to foreign competition. But equal attention is not paid at home to help their citizens compete.

Broadly speaking, two areas of domestic action that help are (a) building the skills of the citizens and (b) removing obstructions to do business. Developed economies, which see their manufacturing and services moving to cheaper countries, should use the first point to help their people build new skills. Obstructions in business, on the other hand, remain a major problem in the developing world.

Coming out of years of colonisation, many developing economies are still caught in the grip of irrelevant or self-defeating restrictions, which, if eased, will unleash the entrepreneurial and competitive energies of their people.

Brazil, a star among the developing economies of Latin America, has been dropping among world rankings as an attractive destination for investment. A major reason for this is the stifling restrictions placed on businesses.

One estimate has it that Brazil can add half a percentage point to its GDP simply by reducing the time taken for licensing a new business from 152 days to about 27 days.

When restrictions are onerous, they either force entrepreneurs to give up or drive entrepreneurial activity underground. A study by the small business association in Brazil claims that 70 per cent of entrepreneurs just give up rather than complete a process that requires over 100 documents. As businesses go underground, they are not counted in national statistics, they evade taxes reducing the efforts of the state both to raise funds and monitor activity.

Apart from business registration procedures, there are several areas that need to be examined to see if they shackle fair enterprise. Inspections by multiple government agencies place a burden of data collection, report writing and are fertile ground for corruption. Court procedures, hearing delays, and delivery of judgments on cases involving commercial contracts need to be speeded up to help commerce continue.

The tax burden of the average Brazilian is said to be twice that of his counterpart in China or India.

The Economist reports that in Cuba, it is legal to sell prepared food from home but illegal to set up a stall and sell sandwiches in the street. So, in a recent crackdown, the government shut down several businesses!

The World Economic Forum produces a World Competitiveness Report that includes a survey of executives responding to 14 items considered obstacles to running a business. Comparing these results across countries can be quite illuminating. Respondents in Jamaica, for example, list `crime' at the top of the list, but it does not even figure in the list for several other countries. It is high on the list of South Africa too.

A woman entrepreneur who runs a business in a township outside Cape Town that provides pay phones for public use described how her major problem in the running of the business was the safety of her staff who visited the phones to collect the coins. Lowering crime rates would do wonders for small businesses in those areas.

In their eagerness to protect the jobs of those employed, countries often ignore the negative effects this has in creating new employment. Small businesses do not want to grow big because they may come within the purview of industrial legislation that would restrict their ability to lay off workers or shut down poorly performing segments of their businesses. Even in Germany, the government has begun to realise that the labour legislation and protection have resulted in companies cutting back on hiring, which has only exacerbated unemployment.

There is definitely a need for laws that provide proper severance benefits when employees are laid off. However, when the restrictions are excessive, or the process of laying off onerous, then instead of encouraging businesses to grab opportunities when they come by, these restrictions put a damper on expansion and hurt the economy. In addition, pampered labour unions in many countries use their political power to prevent reform and do more harm to the country's growth and employment.

The World Bank, in a study, cites business regulation as cause for the widening gap between the developed and developing nations. The Doing Business' Report, says that it takes 153 days to start a new business in Mozambique as against three in Canada.

Apart from the time and cost it takes to start a company or register a new business, other restrictions looked at in the Report include the ease of obtaining credit, the ability to hire and fire workers, and the protection that the laws guarantee investors.

Ms Ndukwana wanted to help tourists visiting Cape Town overcome their fear of travelling to black townships given the latter's unsavoury reputation after the apartheid era. She has launched a magazine Township Crawling, which lists events and activities in the black townships in order to promote tourism there. And South African Airways has agreed to distribute the magazine on its flights.

Governments spend millions pursuing big businesses and on advertising their country as an attractive location for inward foreign investment. It is time they began paying equal attention to removing the obstacles within their country that thwart their citizens from competing and taking advantage of globalisation.

(The author is professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

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