In 2003 Thabo Mbeki, then president of SA, described the country’s economy as being like a two-storey house. The top floor was quite plush, with all the fittings packed neatly together. He referred to this as the modern, diversified economy within SA. Below that level, however, was an informal economy, where the poor were trapped in poverty, with little or no skills.
Mbeki’s analogy went further: there was no interconnecting staircase between the two floors. In effect, SA had two economies and there was no bridge between them.
What Mbeki was describing is a common problem in developing countries, including Zimbabwe. My colleague Baldwin Guchu and I recently conducted research on an initiative in Zimbabwe that is trying to address the problem. In the paper we examined the role intermediaries are playing in connecting formal and informal economies in the country. SA can learn from this.
Since 1994 SA has built on the existing two-storey infrastructure without paying much attention to a stairway. At least not one wide or sturdy enough to encourage upward movement. This poses a serious developmental problem, one shared by many developing economies.
Academic research typically labels this as being a function of dualism and the lack of institutional connections between these dual economies: though institutions establish the “rules of the game” governing economic activity in each of these economies, the institutions do not bridge the two disparate economies and so they coexist, but in isolation.
How often do we hear the refrain that big business does not do business with small business?
The result of this missing link is that the two economies struggle to engage with each other, leading to inefficiencies and substantial lost opportunities. Worse still, it entrenches social and economic divisions, and deepens inequality. We see this manifest in various ways in SA.
The country has deep and liquid financial markets, with a highly functioning and well-regulated banking industry, which means our top-floor financial system measures well against any of the leading economies in the world. Access to capital should therefore be widely available.
But it’s not. Swathes of small businesses fail to meet the criteria set for top-floor financing. In developed economies small businesses have a range of alternatives for financing from banks or other capital markets, including secured and unsecured options.
How can this be fixed? Claiming “it’s the government’s job” ignores other players who have the ability to play a more innovative intermediary role.