Small and Medium - Sized Enterprises in South West Africa/namibia p276]

SUE COLLETTIN SOME RESPECTS South West Africa/Namibia is unique in Southern Africa, if not Africa south of the Sahara. As may beexpected, it has many characteristics typical of other developing economies in Africa - dependence on primary production (andupon a very narrow range of products); marked geographical and economic dualism giving rise to significant inequalities in incomedistribution; a skewed distribution of skills in the labour force; heavy reliance on exports of primary products and imports offinished goods; and so forth. However, there are some important differences, notably those relating to the pressure of population,the development potential, and the necessary degree of economic dependence in comparison with other countries in the SouthernAfrican periphery.In order to demonstrate that the ideas of "small is beautiful" and intermediate technology are particularly pertinent toS.W.A./Namibia, it will be necessary first to outline the structure of the economy itself, particularly with regard to the secondaryand tertiary sectors. This will be followed by an assessment of the development potential of the territory, with emphasis upon theforces giving rise to the need for small businesses, and discussion of some specific possibilities.

I The Structure of the Economy *(1)There has been little structural change in the economy since 1960. The primary sector still accounts for virtually half the output andthe contribution

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of manufacturing has remained relatively static at about 10 per cent. Both agriculture and mining are carried out on a large scale but,in contrast to the fishing industry, have generated few backward or forward linkages. The tertiary sector has yet to develop anautonomous dynamism of its own and has tended to reflect growth in incomes merely as a result of development in the othersectors.Agriculture has long been considered the mainstay of the S. W.A. economy. Although its contribution to both gross domesticproduct and exports has generally been lower than those of the mining sector, it generates income for some 70 per cent of thepopulation.*(2) About three-quarters of the agricultural area is used for commercial stock farming. The bulk of the output isexported. The only arable parts of the country - in the north - are settled by subsistence farmers. Between one-third and one-half ofthe latter are probably underemployed.Mining is the more important revenue-earning foundation of the economy and the production of diamonds, copper and other basemetals and, more recently uranium, generates about one-third of GDP, two-thirds of exports and between one-half and two-thirds oftax revenue. The industry provides employment for about 5 per cent of the economically active population. The fishing industrycentred on the western seaboard had given rise until 1979 to a large fish processing industry which has stimulated the productionof metal containers. The secondary and tertiary sectors will be discussed at more length below. Suffice it to say at this point thatindustry and commerce provide employment for about one-third of the economically active population.

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S.W. A./Namibia suffers from the same factor scarcities as other developing countries, namely internally generated capital andskilled labour, and has the familiar surplus of unskilled labour. In 1977 skilled labour (that is, excluding industrial unskilled, servicesand agriculture) constituted less than 20 per cent of the labour force, compared with 36 per cent in South Africa and 79 per cent inthe United States.*(3) About 40 per cent of the skilled labour force (60 per cent of the highly skilled categories) consists of whites,many of whom are effectively expatriate workers. It appears that there was little or no open unemployment prior to 1970, but thatunemployment currently stands at about 9 per cent of the total economically active population. A further 25 per cent are estimatedto be underemployed. It has been extremely difficult to estimate gross domestic saving and gross domestic investment, but verytentatively, it appears that more than half, and possibly as much as two-thirds of capital requirements has been generatedinternally, primarily from the current surplus of general government. The remainder has consisted of capital inflows largely viamultinational corporations. The degree of foreign participation in the economy has resulted in a large gap between gross nationalproduct and gross domestic product of about 25-30 per cent of GDP.Gross domestic product at current prices has risen by more than 16 per cent p. a. since 1970; real GDP seems to have increased by2,5-3 per cent p. a. over the same period, which indicates only very small increments in per capita real incomes.*(4) Of thecomponents of expenditure on GDP, the growth generators in the 1970s. have been private consumption throughout, public sectorconsumption and exports in latter years, and fixed investment in the early 1970s. However, in the relatively small GDP of

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approximately R1 billion in 1977 at current prices expenditure on and surrounding any one large project, such as the Ruacanahydro-electrical scheme or the development of the Rössing uranium mine, has a marked and immediate impact.*(5)As South West Africa is part of the South African customs area and of the Rand monetary area, there is little information regardingbalance of payments items. None the less, all indications are that in virtually every year since 1960 merchandise exports have farexceeded merchandise imports, resulting in a surplus on the trade account. However, exports consist largely of primary

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products subject to widely fluctuating world markets. In addition, service payments, both factor and non-factor, reverse the tradebalance into a large deficit on the current account. Thus far, capital inflows appear to have comfortably offset current accountdeficits.*(6)The relationship between South Africa and S.W.A./Namibia with respect to public finance was formalized in Act 25 of 1969,according to which company and mining tax, customs and excise duties and sundry smaller items of revenue are collected by theSouth African Government on behalf of the South West Africa Administration and from which expenditure is incurred on a widerange of services. This system fell away with the 1980/1981 Budget, in which all revenue and expenditure is consolidated in oneaccount, controlled in Windhoek. Consolidation of the accounts reveals that direct aid from the South African Government hasaveraged about R15m p. a. since 1965, having accelerated in the mid-1970s, and excluding subsidization of railway and postalservices.These in essence are the structural characteristics of the South West African economy, and they differ very little from thosecommon to underdeveloped economies. However, there are some factors very specific to the territory. First, the dualism is notreally of an urban-rural nature: there is only one town of any size (Windhoek, population 75 000). It is very closely associated withregional demarcations: roughly speaking, the southern two-thirds of the country is well developed and the northern one-third veryunderdeveloped. The northern regions are dependent largely upon subsistence agriculture and the informal sector is widespread,whereas commercial agriculture, mining and the bulk of the secondary and tertiary activities are carried out in the southern regions.There are very significant differences between the two in respect of per capita incomes, availability of tertiary sector servicesincluding social services, physical infrastructure, population density and mobility of the population. Myrdal's forces of "cumulativecausation" are strongly reinforced by geographical factors.*(7)Secondly, the economy is very open and imports and exports account for over 60 per cent of GDP. Fortunately the exports are notentirely dominated by one product, although diamonds constitute a substantial part of the total, with the result that declines in anyone primary product market are at least

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partially compensated by strength in others. Imports include a wide range of foodstuffs and agricultural materials such asstockfeeds and fencing as well as the expected manufactured and capital goods, but are geographically concentrated in that mostcome from South Africa. The overall outcome of the situation is, of course, that the economy is very vulnerable to exogenousfluctuations, particularly those originating in South Africa.This aspect introduces the third problem, that of dependence. Being both a very small economy and a neighbouring territory of theRepublic of South Africa, S. W. A. /Namibia is part of the South African periphery. Thus, part of the lack of development inS.W.A./Namibia may be attributable to the pull of the core some2 000 kms to the south. Transport links are strongly north-south oriented. Some of the export markets are in the Republic, and mostimports come from there. Many of the larger companies have South African parents and the fiscal dependence and monetaryassociation have already been noted, to say nothing of the subsidization of the South African Railways, the Department of Postsand Telecommunications and, by no means least, defence. Further, the country is dependent upon South Africa and othercountries for private capital inflows, for skilled labour, and for technical services. The high degree of dependence is thus theoutcome of the stage of development reached, geographical location, historical circumstances and size.Size is probably the crucial determinant of the territory's development to date and of its further potential.*(8) With a population ofapproximately a million people, the territory ranks with Botswana as among the smallest economies in the world. The averagepopulation distribution is just over one person per square kilometre, but actual distribution increases from virtually zero in thesouth-western part of the country to quite heavy densities in the arable north-east. About 10 per cent of the population consists ofWhites, whose incomes and standards of living compare favourably with those of Whites in South Africa. Another 10 per cent, theColoureds and Rehoboth Basters, are in the low-middle-income bracket relative to the Whites, and the

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remaining 80 per cent are Blacks, a large proportion of whom exist at merely subsistence level. Thus the domestic market is verysmall, and the personal income tax base is narrow. Moreover, the distorted skills structure characteristic of developing countries is

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aggravated by low absolute numbers, and what market there is, is geographically widely dispersed with concomitant increases intransport costs and decreases in the external economies associated with concentrations of population.

II The Secondary and Tertiary SectorsThe manufacturing industry in S. W. A. /Namibia is based largely on food processing, which accounts for 66-75 per cent of totalmanufacturing output. Some three-quarters of the food processing has been attributable to the fishing industry centred at WalvisBay*(9) and Lüderitz,*(10) and most of the remainder consists of the preparation and preservation of meat. The products of boththese industries are exported. Of other industries, the metal products sector (about 10 per cent of total output) has been stimulatedby the demand for tin cans for fish processing and for building construction hardware, and all other sectors constitute about 20 percent of manufacturing output. Employment in the manufacturing sector has risen very little in the 1970s, but very crude estimates ofoutput-labour ratios indicate slowly rising productivity and greater degrees of automation in the food and beverages industry thanin the production of furniture and clothing, both of which appear to be relatively labour-intensive. In the early 1970s the averagesize of all manufacturing establishments in the country was 50 employees per firm. As this includes the larger food processingindustries, the rest of the firms are considerably smaller than the average. This is not entirely surprising as nearly all the conditionsfor the emergence of small industry are present.The construction sector, which enjoyed considerable expansion during the 1960s in the wake of infrastructural development, is notunnaturally dominated by building and civil engineering contractors, most of whom are subsidiaries of South African companies.However, the proportion of other contractors has risen substantially in the 1970s, indicating a relatively high growth in the numberof small sub-contractors.*(11) Employment in this sector has tended to remain static since 1971 despite rather low increases inproductivity (just over 1 per cent p.a.).

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The distinction between the formal and informal sector is very evident in the structure and development of the tertiary sector. Theformal or modern sector is, of course, far more important in terms of generation of employment, cash flows and overall activity, andnot unexpectedly the wholesale trade is concentrated in or near Windhoek while the retail trade is widespread throughout thecountry. More than 50 000 people ( 15 per cent of the economically active population) are employed in the sector. As a result of thelimited geographical spread of the modern sector, the incomplete expansion of the cash economy and a population which is for themost part fairly widely dispersed and relatively immobile, the informal sector plays a significant role. A comparison of the formaland informal sectors in the three northern regions of Owambo, Kavango and Caprivi suggests that the informal sector has givenrise to more than double the number of establishments, treble the number of employment opportunities (although there is probablya large component of disguised unemployment) but only half the turnover of the formal sector (excluding government services).Although the analysis is based on estimates that are very tentative indeed, two points can be made. First, the relative size of theinformal sector appears to vary according to the sizes and distribution of the population: the population is considerably greater andmore widely distributed in Owambo where the informal sector is more important. Secondly, there is some evidence that theOwambos are intrinsically more commercially oriented than the other tribes.The distribution of population in terms of markets shows that urban concentrations of tertiary services can, at best, serve 45 percent of the population, assuming that all rural dwellers in the developed areas make use of urban facilities. It is the remaining 55 percent of the population, largely subsistence rural dwellers, that has resulted in the spread and development of the informal sector.Within the formal sector most activity is concentrated within the urban areas and a fuller range of supportive services has emerged.The fairly even spread of population in the developed regions outside the three major urban areas (Windhoek, WalvisBay/Swakopmund, and Tsumeb/Grootfontein) has led to the establishment of towns fairly centrally located within regions that maybe described very roughly as circles with diameters of 100-150 kms. In each town the nature and range of tertiary services offered issomewhat biased towards the agrarian economies of the regions in which they are located.In summary, S. W. A. has a very small population which is widely scattered over a very large area. Moreover, the incomes of thebulk of the population are relatively low. Thus if one considers only the internal market, there is little room for mass productionbecause of the lack of mass consumption: unit

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production costs tend to be high, as do unit sales costs because of the great distances. As a result, competing with South Africanproducers and distributors on South African terms tends to be unprofitable, if not impossible.

III The Development Potential of the Secondary and Tertiary SectorsSince the relationship which the tertiary sector has with the rest of the economy is one of dependence, the factors affecting itsfuture growth and development include the number of consumers and spending power of each, the demand for business services

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by the primary and secondary sectors, the level and rate of urbanization and so forth. Each of these factors in turn is dependentupon the employment and income generated within the economy. As some indication has already been given of the role of smallfirms in this sector, and if it can be assumed that no major structural change will take place within the foreseeable future (exceptinsofar as the informal sector becomes formalized), attention can be more usefully turned to the secondary sector.The outlook for the construction industry will tend to reflect that for the economy as a whole. The expansion of buildingconstruction will depend on social infra-structural development, development of new mines and the growth and movement of thepopulation. Significant activity should be forthcoming in respect of the first. Apart from the expansion arising from the demand forconstruction, some development may follow from the work carried out by local contractors. Thus far no local firm has been largeenough to tender for the major projects which constitute the bulk of the work on offer. Nevertheless there is still ample scope forsmall contractors either as specialist sub-contractors, or for localized small-scale improvements, additions and maintenance. Thispart of the market seems well supplied at the moment, but as its growth will probably follow that of the building construction as awhole, there may well be scope for expansion in the future.The lack of any formal policy regarding industrialization in relation to agriculture, or industrial policy per se, has caused structuralimbalances to remain unchecked. The schematic input-output table contained in Table I is probably the most tentative of a host oftentative estimates. However, it does clarify two aspects already noted. First, there is. a dearth of linkages between the primary andsecondary sectors, and between the secondary and tertiary sectors, except for those that constitute the distribution channels forimported goods. The only internal linkages are the processing of fish and beef and the use of quarry products and some metallicand non-metallic mineral products in construction. Secondly, manufactured goods form an overwhelming proportion of totalimports. Given this structure, future economic potential

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should be enormous, but the size and location of the country impose rather severe constraints.The supply of raw materials is limited to a narrow range of agricultural and mineral products. Even if commercial crop growing canbe established in the northern parts of the country, the output will consist primarily of edible raw materials - the potential for fibresis almost non-existent. The demand for manufactured goods can be broken down into three elements: derived demand from privateconsumption expenditure, commercial demand fromTable I Schematic Input-Output Table for South West Africa in the Mid-1970s*(12)

Distribution ofOutput

compositionOf Output

Forestry and

fishing

Mining Secondarysector

TertiarySector

TotalIntermediate

Output

DomesticDemand

Agriculture, Forestry and

Fishing 2 - 10 - 12 27

(13)Mining - - 5 - 5 -5*(14)

Secondary Sector 8 24 49 17 98 240

Tertiary Sector 10 21 19 36 86 114

Total intermediate Inputs 20 45 83 53 201 376

Adjustment - - - - - 54*(15)

Remuneration 12 31 47 68 158 34

Gross Operating Surplus 53 61 36 47 198 -

Total 85 139 166 168 558 465

other sectors in the economy, and exports. Internal demand for the full range of manufactured goods may have amounted to R350min 1978, of which about 15 per cent was locally produced. It is felt that even under the most optimistic projections this share isunlikely to rise by more than one-third because the full range can never be manufactured locally (except in the advent of overridingstrategic reasons, as in Zimbabwe) and because the South West African market does not now, and will not in the future, supporton its own any large-scale enterprises (such as the South African equivalents of ISCOR, AECI and Lever Brothers) or theproduction of heavy capital goods.

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Exports constitute the third demand sector. Export markets for processed . foodstuffs already exist and could probably beexpanded. Long distances and small scales of production will make competition on overseas markets for many other manufacturedgoods virtually impossible because of costs. However, potential export markets may exist in other underdeveloped countries inAfrica particularly for items adaptable to or specially modified for intermediate technology. This would depend on cost structures,development of transport links (which do not exist at present), and political considerations. Potential export markets are limited formanufactures other than food.One possibility, which would obviate the problems of both supply and demand, is the local manufacture of goods almostexclusively for export using imported materials, as in the oft-quoted case of Volkswagen motor cars in Brazil. However, thefeasibility of this type of project depends almost entirely on cheap factors of production - labour, capital, power, transport and soforth. S.W.A. does not conform to these requirements, as wages are high relative to many other developing countries, low capitalcosts do not outweigh the perceived risks, and the existing transport network may be unsuitable. In all, there are insufficientattractions for overseas manufacturers with this type of project in mind.Unfortunately the prospects for Perroux's "propellant industries"*(16) seem dim as there are no (economic) reserves of iron andcoal on which to base a steel industry, and an oil refinery with an attendant chemical industry would be prohibitively expensive. Asuggestion has been put forward regarding nuclear power but, for a variety of reasons, this is not feasible in the foreseeable future.Despite the pessimism implied in the foregoing, several ideas spring to mind concerning the establishment of specificmanufacturing industries. Of the existing industries, meat and fish processing could be expanded if new export markets are found,and internal slaughtering of stock would stimulate leather-related industries. The internal markets for metal and nonmetallic mineralproducts appear stable, but perhaps a greater range of goods could be produced locally, particularly for the agricultural and miningsectors. Large reserves of commercial forests in the north provide the foundation for the manufacture of wood products and theexpansion of the existing furniture industry. Wool and karakul wool could be spun into blankets and carpets, and some furtherprocessing of metals and minerals may be possible.

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Entirely new light industries would include food, clothing and household goods. Economic local production of foodstuffs will notbe possible until the raw materials are forthcoming, but once primary production reaches commercial quantities the scope will begreat. Internal large-scale manufacture of clothing is not as feasible for reasons related to demand and costs, but a more positiveprojection can be made for household goods, which are more suitable for batch production. Extension to the production ofmachinery and equipment may prove difficult because of scale of production, but perhaps specialized items of smaller machinerycould be manufactured locally.Inhibitions in the shape of cost and production factors affect most potential producers. Transport costs over the long distancesand the small, dispersed markets have an adverse impact on production costs. In addition, labour costs are affected by the premiumpaid for skilled labour and the fact that wages for unskilled labour are not always commensurate with productivity. Because of thelack of formal training facilities, many firms have to train their own labour at their own cost.

IV The Role of Small Scale EnterprisesIt has already been indicated in passing that many of the possibilities for industrialization in South West Africa are either suitablefor or definitely require small-scale production. Because of both highly differentiated consumer needs and the dispersal ofpopulation clusters, there are a number of small definable markets inside the country which could be exploited. These enterprisescould (and should) be based on simple or intermediate technology and would therefore be compatible with shortages of capital andskilled labour. It is to be hoped that they will be able to overcome the problem of cost differentials because of the comparativelysmall capital requirements and overhead costs, and shorter distribution channels. The major characteristic of such industries is thatthey are intended to serve a small area or produce a specialized product, or both.Several examples spring to mind. Even cursory familiarity with the country reveals that the needs of the sheep farmers in the southdiffer quite substantially from those of the cattle farmers in the north. It may be possible to produce locally in the south the smalleragricultural implements, elementary stockfeeds and some fencing materials required there, while the local manufacture of some ofthe smaller items required by the mines may also be feasible. Some furniture is being produced at the cottage level of industry andthis could well be expanded.The development potential of the northern regions offers quite considerable scope for small industries, such as the making ofsimple clothes (using

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imported materials) for the immobile population which cannot easily reach centres where they can take advantage of chain stores.The production of mohango beer for the urban populations is another possibility and even slight upgrading of agriculturalmethods would provide scope for the manufacture of simple locally adapted agricultural implements and elementarystockfeeds.*(17) It' is difficult to be specific about small industries until very localized needs are identified. However, suchidentification should form an important part of any development plan. No doubt, the deliberate pursuit of industrialization by suchmeans would be hampered and discouraged by the difficulties and disadvantages encountered and experience elsewhere in theunder-developed world. But the range of options open to S.W.A. is much narrower than that open to the larger developingcountries in Africa and South America and the densely populated countries of South East Asia. Planners, policy-makers andadministrators may have no choice but to make small-industry industrialization work.Such a policy is compatible with the existing supplies of factors of production, markets and transport links. A considerable amountof on-the-job training of labour can still take place, and the network of small industries could well become the catalyst by means ofwhich the north-south dualism may be gradually eliminated. If all opportunities are fully exploited, an existing major economicdisadvantage could be put to constructive use.Johannesburg

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Endnotes1 Reliable Statistics on the South West African Economy are Scarce And, for the Most Part, Unpublished, Non - Comparable andNon - Continuous. the Basic Data Merely Constituted a Framework for Extensive Fieldwork in S.w.a. by the Author in Late 1977 and1978, in the Course of Post - Graduate Research. Despite Substantial Assistance Given by a Number of People Both in GovernmentOffice and in the Private Sector, a Significant Part of the Analysis Consists of Interpolations, Extrapolations and Assumptions, andin Consequence the Results Must Be Regarded as Very Tentative. the Most Readily Available Published Accounts of theEconomy Are: South West Africa Survey, 1967. Department of Foreign Affairs of the Republic of South Africa (Pretoria Government Printer, 1967). South West Africa Survey, 1974 (Government Printer, Cape Town, 1975). Thomas, Wolfgang H., Economic Development In,namibia Towards Acceptable Development ,strategies for Independent.namibia(Munich: Kaiser Grunewald, 1978).

2 2 Despite this dependence, the S. W.A. economy is relatively less agrarian than many in Africa, which is one crude measure of thelevel of development.Comparisons of Contributions of .Agriculture to GDP in Selected Countries, 1973

Percentage

Contribution

South West Africa 14

South Africa 8

Zimbabwe 14

Botswana 32

Nigeria 36

Zaïre 16

Zambia 13

Source: United Nations Statistical Yearbook, 1976. P. 663 ff. for countries other than South West Africa.The table shows that S.W.A. compares very closely with other economies in Africa in which mining also plays an important role,notably Zimbabwe, Zaïre and Zambia. Secondly, the proportion of commercial to subsistence agriculture is probably morefavourable in S.W.A./Namibia and Zimbabwe than in Zambia and Zaïre.

3 3 The figures pertaining to S.W,A. are my own extrapolations from Department of Labour Manpower Surveys. Those for theRepublic and the United States are quoted by Parsons, J. A., in "Population in Southern Africa - A Resource or a Burden?", SouthAfrican, Journal of Science, Vol. 72, March 1976, pp. 68-72.

4 4 Very considerable difficulties were encountered in estimating the GDP deflator, but the results emerging from various alternativesseem to fluctuate within moderately narrow parameters.

5 These statements are based upon my own estimates of the national accounts which represent only a first approximation.

6 6 Several attempts have been made to estimate the balance of payments, or parts thereof, and the results differ substantially. Myown estimates tend to be among the more optimistic.

7 7 Myrdal's thesis was, of course, expounded in terms of international trade in Economic Theory and Underdeveloped Regions(London; Duckworth, 1957) and is applicable as such to S. W.A. since the export sectors of commercial agriculture and mining aresituated in the southern part of the country. However, the tendency is compounded by inter-regional trade in the territory.

8 8 Development problems specifically associated with size were first deliberated at the International Economics Association

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Conference in 1957. (Editor, E. A. G. Robinson.)Economic Consequences of the Size of Nations (London: Macmillan, 1960) and subjected to rigorous statistical analysis byChenery ("Patterns of Industrial Growth", American Economic Review, Vol. 50, September 1960, pp. 624-54) and Chenery andTaylor ("Development Patterns: Among Countries and Over Time", The Review of Economics and Statistics, Vol. 1, No. 4,November 1968). In terms of these analyses, S. W.A. is small, even by small-economy standards. A more recent summary of thedebate is that by Percy Selwyn in his introduction to Development Policy in Small Countries (London: Croom Helm, 1975). Time andspace considerations prevent a fuller discussion here of the advantages and disadvantages of size.

9 Walvis Bay is territorially part of the Republic of South Africa.

10 The fishing industry has suffered a severe reversal since 1978.

11 Indeed, fieldwork throughout S.W.A. brought me into contact with a number of such small concerns, usually serving only a verysmall local market.

12 Totals and sub-totals may not add up because of rounding.

13 Totals and sub-totals may not add up because of rounding.

14 †Drawdown of inventories.

15 Due to difficulties with the estimation of inventories which have not yet been resolved.

16 Perroux, F., "Notes on the Concept of Growth Poles" in Livingstone, I. (ed.), Economic Policy for Development (Penguin, 1971).

17 Very simple tractors have been designed in Swaziland for small-scale farmers who have had little or no contact with thingsmechanical. This principle of specially adapted implements and machinery could no doubt be extended further.

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