Job creation: it’s simple, but not
IT IS a given that SA’s priority is to create more jobs. Employment is the powerful tide that will improve lives most profoundly. It’s also the area where SA is most lacking. But how much does it cost to create a job? And is SA overpaying or underpaying to generate jobs?
This is a very hard question to answer, but on the basis that some kind of estimate is better than nothing at all, consider the following: two recent large-scale investment projects have been announced and the remarkable aspect of both is the high cost of job creation. These projects hardly constitute a representative sample, but they demonstrate some hard realities about the job- creation process.
The first is the project by the China Motor Corporation, which has announced plans to build a $1bn vehicle factory outside Harrismith in the Free State, ultimately creating 2500 permanent jobs. Consequently, every job will cost about R3m to create.
The second large project is the manganese smelter at the Coega Industrial Development Zone to be built by Kalagadi Manganese at a cost of about R4,2bn. It will create about 400 permanent jobs, excluding those in the construction phase. Jobs in this project therefore come at a cost of R10,5m each.
These numbers seem high, but how do they compare with the international norm? This, too, is an impossible question but some loose estimates are available. Research in the US by Scott A Shane, a professor of entrepreneurial studies at Case Western University, starts from the opposite direction: it asks how much every entrepreneurial job costs. To find this number, he asks, first, how much money it takes to motivate someone to begin an entrepreneurial process. Second, what proportion succeeds? Third, what proportion of those successes employs anyone? And fourth, how many employees are created on average? The short answer to these questions is, respectively, $15000; one third; one in five, and 5,6. The bottom line is the cost per job is $31169, or about R200000. This is much cheaper than the two examples above. What should we make of this difference?
Perhaps the first thing to note is that the comparison is unfair. Both South African examples involve industrial projects with very high capital requirements. Yet, despite this difference, the comparison remains significant, because the government’s job-creation schemes tend to focus on these types of mega- industrial efforts. The comparison shows that the job-creation benefits that might arise from encouraging entrepreneurship rather than mega- industrial projects are not only potentially larger in terms of job creation, but also a lot cheaper.
By comparison, consider this calculation. The g overnment has targeted the creation of 5- million jobs in five years. Using mega- industrial projects, the capital investment required to achieve this target would be about R20-trillion, eight times the size of the South African economy. Using the "boost an entrepreneur" method, the capital cost would be about R1-trillion; still large, but not unachievable.
Another question is whether SA is spending enough to achieve this result? The short answer is "no".
For example, in the about eight years that Coega has been operational, it has, according to its own website, helped create only 2435 permanent jobs. There are presumably many reasons for this modest return, but it does at least suggest that SA’s investment incentives are too low to attract the kind of investment necessary to achieve the targets set.
The main conclusions of these figures are at once obvious yet very profound: jobs on the scale SA needs cannot be bought through the grand industrial schemes the government seems to favour; there is simply not enough money.
They have to be built, progressively and gradually, through individual entrepreneurship supported by a business-friendly environment. It’s that simple. And it’s that complicated.
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