Will Townships Germinate S. African Economic Development?

Written by Dana Sanchez

Where will future economic development come from in South Africa?

Will it come from government-subsidized industries that are part of a government action plan? From an industrial development zone? From a small-business ministry or chamber of commerce?

None of the above, says economist Peter Attard Montalto.

“Although they can all contribute to growth, I doubt they can push it to the next level,” Montalto said in a CNBCAfrica guest editorial.

South Africa’s future development will come from small businesses in townships, Montalto said. They will be enterprises that start as one-person operations and then grow — businesses that are scalable, and that break out from the informal economy to become part of the formal economy.

About 2.4-million people work in South Africa’s informal sector, Montalto said.

Montalto is an emerging markets economist at Nomura International, a Japanese financial holding company that does not directly run member companies, rather it keeps a controlling stake and manages financial assistance among member companies which help to deflect hostile takeovers.

The debate in South Africa often ignores microlevel growth, Montalto said. Macrolevel growth helps achieve development — but increased security of income and quality of livelihood of individuals over time at the microlevel — that’s what he’s talking about.

In his opinion, South Africa’s future development will look like this:

From CNBCAfrica

“Someone, quite young, will already be running a microbusiness in the informal shadow economy. Their gender is unimportant, as is their level of post-matric education.

“They will most likely at some point have had some interaction with non-state education — probably in the charity sector. Such interactions will have given them confidence and equipped them with some basic skills to run a business beyond what the state provides. They will be black.

“Their business may be in services or goods, it doesn’t particularly matter what, but it will be filling a gap in the local market and will be embedded in the local community. But they will be small, pay no tax, have no formal accounts, not be registered, nor grow particularly beyond their locale.

“I think the spark of development comes when such a business moves from the informal shadow economy to the formal economy, when it first hires a worker from outside the family, a neighbor maybe, to help doing unskilled work.

“Maybe then a friend that went to university to do some accounts. It then starts negotiations with bigger businesses and a wider consumer base — it starts paying taxes, becomes registered, and starts expanding in size and scope.”

The spark that causes such a leap in a small business is far more important than a large business starting to manufacture a new line, Montalto said in the CNBCAfrica report. The key is that such micro-events have scalability — the potential for replication or leverage, he said. These are the key things missing in South Africa’s large government initiatives.