Small business: The (underdiscussed) land question

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Getting South Africa onto a productive growth path is an existential issue for the country’s future.

Central to getting this right in every official strategy since 1994 – in fact, going back even further, into PW Botha’s presidency – has been the growth of small business. Small companies have been held up as an opening for entrepreneurship, as a strategy for wealth and job creation, and a counter to poverty.
Meanwhile, over the past few years the issue of land and property rights has come to occupy an outsized role in our politics.
Neither has been well handled.
Although not typically seen as conjoined issues, the intersection of the two has been the subject of a recent report by the Free Market Foundation (FMF), Laws Affecting Small Business: Land. The message is that how land issues are handled will have significant implications for the prospects for small business.
Elementary economics regards land as one of the ‘four factors of production’. But it is equally a factor in production. Land provides not only premises to carry on a business, but also an asset that can be leveraged to make doing so possible. It’s in the latter sphere that the legal environment works against a great many aspirant entrepreneurs.
Owing in large measure to the pre-democracy regime of property rights, millions of South Africans have some form of landed asset, though not the legal recognition and protection that would allow them optimally to use it. Post-1994, the attitude of the state towards property rights has been ambivalent, and although a great deal of effort has been put into, say, the provision of housing, the transfer of actual property to the beneficiaries has been resisted. This applies to land redistribution schemes too.
For those on traditional land, a rather non-transparent system of holding and allocation exists.
This is compounded by onerous land use and planning regimes overseen by a rickety bureaucracy – a dreadful conjunction of excessive regulation and deficient administration.
The result has been that many in South Africa are left in a state of perpetual semi-exclusion, where their homes cannot be used to raise capital for a modest business venture (and yes, this does come with risks), where farming operations are never really theirs and their ability to hold onto a premises might be under question. The option to dispose of their holdings – to sell in other words – might not be available at all or might have to be done through an informal market.
Where commercial aspirations are on the table, this reality imposes outsized burdens on small and nascent firms and entrepreneurs. There is something tragically South African in this: a putative commitment to small business development is undermined by an impulse for control and regulation.
The denial of secure property rights has a distinct impact on women. This is attested to in a large volume of work on Africa. As one study put it: ‘Land rights create greater investment in agriculture, water, and sanitation, which subsequently improves food security and health. Property rights give women and children a secure place to live, as well as rental and entrepreneurial income, bringing physical and financial security that benefits child health.’
So, what needs to be done?
At its most basic, the importance of property rights needs to be acknowledged. These are not a nice to have, nor something of value only to the wealthy. Indeed, a strong case could be made that they are especially important to the poorer parts of society whose modest assets can attract predatory interests.
It also means recognising the links between property rights and entrepreneurship. Any investment is predicated on the assumption that it will be protected. This is all too often denied by the state – and the latter’s commitment to truncating property rights through expropriation without compensation can only damage this potential further.
South Africa should rather be upgrading rights where they exist, with titled ownership as the ultimate goal. The FMF’s report, for instance, suggests that in some cases – formal townships – pre-democracy land and housing rights could be converted to title ‘automatically by operation of law’. The same might be done in rural areas in instances where land parcels are held by individuals (under ‘non-communal’ systems), but not yet titled.
Along with this, the regulatory environment around land usage should be liberalised by simplifying land-use controls and relaxing requirements around the founding of formal settlements. The essence of this would be to deal with the very real capacity constraints afflicting many if not most of South Africa’s municipalities: their role should be limited to what is essential, and to what they can reasonably manage. A heavy state hand in the regulation of land use and housing is one that not only threatens to constrict people’s opportunities but also one that can enable serious malfeasance.
South Africa needs a vibrant small business and entrepreneurial culture. The obstacles and blockages to getting there must be removed. Keeping this in mind when contemplating ‘the land question’ would be a good place to begin.

Source: Free Market Foundation

Terence Corrigan is Project Manager at the Institute of Race Relations. He was featured speaker at the launch of the Free Market Foundation report Laws Affecting Small Business: Land

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