Opinionista Ivo Vegter 25 February 2013

The Department of Less Government

Everyone crows about how wonderful and important small business is. Everyone has ideas for promoting entrepreneurs, most of which contradict each other. Government utters pretty words, but in practice thwarts start-up companies at every turn. Now we hear proposals for a Department of Entrepreneurship? Heaven help us.

Up to half of South Africa’s GDP is produced by small business. Two thirds of all private sector employment occurs in companies with fewer than 50 employees. Everybody loves small business, in varying degrees, and pins their hopes for economic prosperity on it.

The South African Institute of Tax Practitioners loves it enough to call for the resurrection of the 1996 Katz Commission of Inquiry into Taxation, whose final report was never published.

Sanlam and Business Partners love them enough to sponsor a competition that aims to “celebrate entrepreneurial excellence and make heroes of those who are truly successful.” Accenture and Enablis run a competition for entrepreneurs too. So do Radio 702, the Small Enterprise Development Agency, and any number of other organisations. Sponsoring small business is right up there with educating Aids orphans, funding cancer research and buying pet food for the SPCA.

With luck, Pravin Gordhan, will claim to love entrepreneurs, and throw them some budgetary bones in his Budget Speech tomorrow. Even Jacob Zuma loves small businesses just enough to promise to pay them on time.

There’s nobody who claims not to love entrepreneurs. The problem is that governments do not act accordingly, and big business lies about it.

Government either chooses winners, by selecting who does and doesn’t get taxpayer-backed funding. Alternatively, it subsidises losers by paying incentives to anyone who claims smallness itself as a positive quality. In the first instance, the risk is getting it wrong, and in the second instance, the risk is getting it right. That’s an alarming set of risks for a government to take.

The taxman, of course, does not want to reduce the tax burden. It thinks it is making a generous concession to small companies by allowing them to be taxed on their revenues, rather than their profits. Entrepreneurs might get to trade their own time for their own money, but under no circumstances are they allowed to keep both. This passive-aggressive, love-hate relationship epitomises government’s bizarre approach to small business.

Big business, for its part, makes a loud display of sponsoring prizes, but quietly supports a vast array of quality standards, safety rules and licence conditions, all of which raise barriers to start-up competition. Bureaucratic officialdom is promoted in the name of consumer protection, and if you dare point to the regulatory protectionism from which big business incumbents benefit, you’re accused of caring naught for unsophisticated consumers and their poor little children.

The messages that entrepreneurs get are very mixed, indeed. With one hand, they’re encouraged and incentivised, while with the other, they’re taxed and licensed right back into their place.

Now, several businesspeople are lobbying the government to form a Department of Entrepreneurship. On the face of it, this seems like a good idea. The more you stop to think about it, however, the more oxymoronic it sounds.

Government bureaucrats are very good at making life harder for citizens, but they know little about making life easier. They’re good at earmarking funds for loans and incentives, but bad at choosing who to give them to, or even getting the funds paid out at all. They’re good at making people fill in forms, but bad at delivering the services those forms request.

Piet le Roux, an advocate of free-markets who (somewhat perversely) works for a union, Solidarity, as its senior economics researcher, has an innovative take: “Imagine a ministry of entrepreneurship with only one ability: the power to cancel other government programmes. Now that sounds like something that could really help would-be entrepreneurs.”

Hear, hear! Sadly, the record of governments of dismantling their own programmes is poor, the world over.

Town planning departments routinely engage in forced removals of so-called “informal traders” from high-traffic areas, to dump them in some neglected back lot where nobody ventures. Their only crime is that they have not sought or paid for official permission to practice their trade. For dumping them out of sight, municipalities have the temerity to charge rent.

The police routinely raids those same traders, on the pretext of searching for so-called “counterfeit” or “smuggled” goods. When goods that are suspected to be in breach of import tariff regulations or trademark laws are found, entire stocks are confiscated or destroyed. Either way, however, a little baksheesh can always smooth the wheels of justice.

Licensing and certification is such an ingrained practice of government that nobody questions it any more. Yet the vast majority of its objectives – protecting consumers from low quality products, unscrupulous traders or untrained professionals – can be provided at least as well by voluntary private certification. That way, consumers can decide whether to pay the price of peace of mind, and which certifying authorities to trust. That way, producers can decide whether the reputational benefit is worth the cost. The risk of corruption of incompetence is no higher than it is with government-run certification and licensing agencies.

Famously, government food and fire safety regulations are stock plot elements in stories about protection rackets, bribery and extortion. The secret to successful competition is often just to keep an eye on your business rivals and report them for one of thousands of possible bureaucratic infractions, then wait for the government to take care of them for you.

In India, the government is so embarrassed that poor people prefer to send their children to private schools that cater to the very poor, that they’re imposing new rules on these schools, making them unaffordable for parents, or entirely illegal.

One of the proposed rules involves setting a minimum on the acreage of land that school premises may occupy, legislating urban schools for the poor without access to state-owned land out of existence on the flimsiest of “quality” grounds. This sort of requirement is typical of the sort of barrier that is raised by incumbents, or the government itself, but has no purpose other than to prevent new competition from emerging.

Left-wing activists often support the government. In this case, Dan Mitchell reports that the lawyer behind the attack on India’s private schools, Ashok Agarwal, said: “We admit our education system has been derailed but we are trying to fix it.” Meanwhile, he argues that the solution is not to place children in alternative schools, but to sacrifice their future to the hope that the government might stop failing one day.

The problem isn’t unique to the developing world, either. In one US state, a start-up commercial transport firm needs an “intrastate household goods certificate”, which can only be obtained with the approval of incumbent competitors. In another, such a company can only qualify for a “certificate of necessity” if it can prove that the business would not adversely affect existing carriers. The legislative intent, as written in the law itself, is explicitly to discourage competition that may be detrimental to existing companies in the state, according to Eric Boehm, writing for Reason.

If this sounds absurd, consider that right here in South Africa, privately operated “tuk-tuk” taxis were recently condemned as “unhealthy competition” by Gauteng MEC for roads and transport, Ismail Vadi. According to Business Day, “he warned that the Gauteng Provincial Regulatory Authority had to ensure that tuk-tuk routes did not encroach on the ‘legal routes’ of other public transport operators such as minibus taxis, metered taxis and buses, to avoid ‘unhealthy competition and conflict’.”

Never mind that there is no such thing as a “legal route” operated by incumbents. If there were, that monopoly would be illegal, and would need to be busted. Government is supposed to prevent turf wars between rival taxi operators, not justify them by helping to protect the monopolies of incumbents.

Competition is supposed to be unhealthy for competitors. Conflict in the market is desirable. Such rivalry is what produces more variety, higher quality, and lower prices for consumers. This is the very lifeblood of economic growth, yet government functionaries seem to think it is poison.

As a consequence of this perverse view, the government will be hard pressed to find qualified bureaucrats to staff a putative Department of Entrepreneurship. If it establishes such a ministry, however, its mandate should be exactly what Le Roux proposes: cancel all government programmes, subsidies, taxes, licences, loans and regulations that prevent citizens from exercising their right to choose their trade, occupation or profession freely, or that benefit some businesses at the expense of others.

Small businesses don’t need incentives, subsidies, or prizes. No outside bureaucrat can tell the difference between a small business that is small because it hasn’t yet grown big, and a small business that is small because it is shite.

As heroic as it is to be a successful start-up in South Africa, with the hegemony of cronyist government and big-business incumbents ranged against you, entrepreneurs don’t need to be patted on the back. Success is its own reward.

They just need to keep that reward, rather than having it confiscated by the so-called “revenue service”. They need to be permitted to be responsive to their customers, rather than comply with government mandates about who needs what product or service in which location. They need to be able to pay attention to their businesses, not to the armies of safety inspectors and tax collectors and licensing officials that pick at them like hyenas at a stray calf.

All entrepreneurs need to thrive is to be free; to be the masters of their own destiny. We don’t need more government for that. A Department of Entrepreneurship should be a Department of Less Government. DM



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