Clem Sunter

Parallel Economic Universes

2012-07-25 13:30

Clem Sunter

1. Introduction and Definition of U1/U2

Sadly, South Africa has two economic universes which are light years away from one another. The first universe is the formal part of the economy which for the purpose of this article I shall call U1. It is the one inhabited by government, large to medium-sized businesses, the trade unions and all the employees involved in the public and formal private sector. U1 transactions can be large as in new power stations or small as in purchases at a retail chain. The growth of the U1 economy relies on an increase in size and frequency of those transactions.

The second universe, or U2 economy, is what we normally refer to as the informal sector. It is entirely populated by small to micro business, experienced and new entrepreneurs alike, social entrepreneurs who have opened up NGOs and of course all those who work for them where they have employees. Transactions in the U2 space tend to be small unless an entrepreneur strikes it lucky. Rather, it is the number of transactions and velocity of circulation of relatively small amounts of money that determine the viability of the U2 economy.

2. International Examples of U1/U2 Economies

America has always been a hybrid U1/U2 economy on account of the importance placed on the role of entrepreneurship there. The culture of individualism has also meant that many Americans want to do their own thing in the U2 economy in preference to working for someone in the U1 economy. Britain in the early stages of the Industrial Revolution was a U2 economy, but over time it has evolved into a fairly uncompetitive U1 economy because of socialist policies and the barriers created by the class system. The gaping holes left by the disappearance of such industries as coal mining, steel and ship-building have never really been filled by new U2 entrants in the regions affected.

Japan and Germany are interesting. Having been flattened in the Second World War, neither of them suffered from the dominance of a U1 economy in the aftermath. Their resurrection was due to a balanced resurgence of both their U1 and U2 economies working in conjunction with one another. That relationship propelled Japan into one of the top three global economies and Germany to be the champion of present-day Europe. The dismal failure of many of the other European nations shows the disconnect between the U1 and U2 components of their economies.

Turning to the New World, India has basically been a U2 economy since its independence. It was shackled by an over-protective bureaucracy for a long time but has more recently been liberated. Voila, the annual economic growth rate of India soared from 2% to 8% and now large family businesses are making their presence felt in U1 economies worldwide. Brazil and Chile are notable exponents of granting greater status to their U2 brethren while guarding their U1 mining industries.

In Africa, the U2 revolution is occurring in virtually every sub-Saharan economy other than South Africa. The most powerful example of U2 economcs is Nigeria with Lagos being tipped to take over from Johannesburg as Africa’s leading city. The Nigerian film industry which is still very much in the U2 stage has recently ascended to No2 behind India – the ranking is Bollywood, Nollywood, then Hollywood! The sheer entrepreneurial frenzy of the streets of Lagos is in direct contrast to the empty streets in Sandton other than people crossing the road to catch the Gautrain. Lagos currently resembles Hong Kong or Bangkok in its display of U2 businesses in every nook and cranny around town.

Which brings us to the Far East. The success of the Asian Tigers like South Korea, Singapore, Malaysia and Vietnam bears testament to the strength of their U2 economies and the fact that this lays the foundation for a growing U1 presence in industries like cars, computers and smartphones. The showcase of them all is China. As one Chinese woman whose father is closely connected to the Politiburo said to me the other day: "Westerners completely miss the principal driving force behind China shooting up 98 places in 33 years to become the second largest economy in the world. It is not foreign investment or state-owned enterprise though both played their part. The real reason was that Deng unleashed the entrepreneurial spirit of our country in 1978 and constructive economic anarchy has prevailed ever since." In South Africa, every town has its U2 China shop and the latest figure for Chinese-owned small clothing businesses across all provinces is 10 000. Elsewhere in Africa, the pattern is being repeated.

3. The History of U1/U2 in South Africa

When all those 19th century diggers were around in Kimberly and Johannesburg prospecting for and extracting diamonds and gold, South Africa was a U2 economy. With the consolidation of the mining industry and the formation of large state-owned corporations, we rapidly turned into a highly centralised U1 economy. Apartheid completely stunted the growth of the U2 economy as black entrepreneurs were severely restricted in the geographical areas in which they could do business.

After 1994, over-regulation and sheer ignorance of the workings of a U2 economy have substituted for apartheid in destroying any potential for growth. At the recent ANC policy conference in Midrand, nationalisation dominated the debate which is all about changing the ownership of the U1 economy. Apparently, little if nothing was said about fostering the growth of enterprise in the U2 sector. The SACP has never given the idea of small worker co-operatives the passion it deserves as a key component of the U2 economy. The National Planning Commission document is totally U1-oriented with its recommendation of boosting infrastructural projects. Entrepreneurship was hardly given a mention which is not surprising as nobody on the NPC has experienced the U2 world.

Black economic empowerment has concentrated solely on changing ownership and management structures in the U1 universe. Even when BEE was converted to broad-based empowerment, it was still restricted to U1. Generally speaking, big business has utter contempt for the parallel universe of U2 and in particular uses its authorised vendor programmes as an excuse to pay the defenceless U2 suppliers and service providers months after the goods or services have been provided. Big business also gouges unreasonable discounts out of smaller enterprises using its superior negotiating clout.

The only company I know of which actively incorporates U2 players in its supply chain is Anglo American through its Zimele programme. Please tell me if there are other examples. The banks steer clear of the U2 sector given that transaction costs overshadow the interest payable on micro loans and they have no way of evaluating the risks. I would bet you that not a single bank economist could tell you what the growth rate of the Sowetan economy was last year or which township economy in South Africa performed best.

Lastly, the financial media in this country is totally focused on the U1 economy whether we are talking about newspapers, the internet, TV or radio. It is as if the U2 economy does not exist. But then they would not get the readership, viewership or listenership if they devoted too much time to the U2 champions. The exception is 702 with its Lead SA initiative.


So there you have it. We are a totally U1-based economy even though many of the great businesses in this country began their life as U2 gambles. If we are to meet the target of creating five million jobs by 2020, it will largely be as a result of creating one million new businesses in the U2 economy. We must do everything to find out more about it and then nurture the animal spirits – as Keynes would say – which make entrepreneurs bet their life and their money on new start-ups.

Steve Biko would agree with every word in this article because he believed that life was about people doing it for themselves. That is real empowerment and China, India, Brazil and Nigeria are great examples to follow in terms of a U2 revolution here.

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