When the Department of Small Business Development was formed under Jacob Zuma’s presidency in 2014, it was heralded as a catalyst for economic growth. At the time, it was believed that the state could meaningfully direct all aspects of the economy, and that it had the wisdom and wherewithal to turn small businesses into accelerators of growth and job creation.

However, rather than fostering a thriving entrepreneurial ecosystem, the existence of the department has coincided with a decade of stagnation and decline. Even the government admits that small business survival rates are dismal. Between 2010 and 2019, the sector expanded at a meagre annual rate of 1.6%. Despite billions poured into small business support each year, CDE (Centre for Development and Enterprise) has found little if any information on who receives this money from the state, how they are selected and the actual impact of this expenditure.

The flawed belief that government can create businesses, that officials can pick winners, and that small firms function in a vacuum from the broader economy must be abandoned. A more effective strategy would be to place small business development firmly in the hands of the private sector.

Banks, venture capitalists, and investment funds are far better equipped than government bureaucrats to identify and support promising businesses.

CDE is therefore proposing a bold new initiative. Instead of funnelling R6 billion annually through state structures, at least half of this amount should be redirected to private institutions over three years – R9 billion.

These institutions must compete by demonstrating how they will go about promoting a more dynamic small business sector. Competitive tenders should ensure transparency, with Parliament holding both public and private initiatives accountable every year for their role in fostering entrepreneurship.

Alongside this shift, government must remove the regulatory barriers choking small business growth. South Africa’s labour laws impose costly and rigid compliance burdens that small firms cannot afford. The Minister of Employment and Labour’s authority to extend collective bargaining agreements to small businesses who do not participate in these negotiations must therefore be revoked.

To remove all unnecessary regulatory burdens on small business, an “SME test”– ensuring that the impact of regulations on small businesses are taken into account – should be implemented for all regulations. Oversight for this would be housed in the Presidency and achievements and impact debated in Parliament annually.

The approach to township development must also be reassessed. The Gauteng Township Economic Development Act, which mandates that 40% of procurement budgets be spent on township businesses, is probably well-intentioned but counterproductive.

Rather than encouraging real entrepreneurship, it creates rent-seeking middlemen who drive up costs and lower service quality for residents. Efforts should rather be focused on integrating township businesses into the city (or national) formal economy by improving infrastructure, tackling crime, and enabling genuine market participation.

The government has long argued that its interventions are necessary to correct historical injustices and uplift disadvantaged communities. However, while the goal is admirable, the execution has been deeply flawed. When the government dictates who gets contracts and funding, political connections often matter more than business viability. This distorts markets and results in wasted resources that could have been better spent fostering genuine growth and much more sustainable employment.

The Department of Small Business Development has not delivered the results the country needs. We propose that it is closed down and its essential functions absorbed into the Department of Trade, Industry, and Competition, allowing for a streamlined and more effective approach to economic development.

Small businesses are not inherently superior to larger ones in driving economic growth. While small firms create jobs, it is the transition from small to medium and large enterprises that fuels sustainable development and employment. Policy should not fixate on simply increasing the number of small firms but rather on creating an environment where businesses of all sizes can grow and contribute to the economy.

If the state truly wants to support entrepreneurs, it should focus on fixing the basics: reliable electricity, lower crime rates, and reducing the bureaucratic burdens that make it difficult to run a business.

The state does not need to intervene more; it needs to step back. The private sector is the real engine of job creation, innovation, and economic growth. If South Africa is serious about reviving its small business sector, it must trust markets to do what government has so consistently failed to achieve.

Bernstein is executive director of CDE. This article draws on a new CDE report, ‘Let the private sector drive small business development’, which is the eighth report in CDE’s Agenda 2024: Priorities for a new government series.

This article was published on News24