Is BEE holding back South Africa’s growth? - Biznews

Terence Corrigan writes on the concept of Black Economic Empowerment (BEE) in South Africa. Journalist Stephen Grootes suggested that unless the country achieves a 5% growth rate, he cannot see an alternative to the current BEE policy. This article argues that Grootes’ suggestion implies that economic growth is unattainable and that it is a magical feat. Corrigan posits that achieving economic growth of 5% would not require magic but instead basic governance structures such as a stable supply of water and power and a manageable level of crime. Further, it highlights that the focus of the government has become the distribution of economic rewards rather than encouraging growth, and it poses the question of whether BEE is the most productive method for achieving growth in South Africa.

Terence Corrigan

Comments made en passant – which is a pretentious way of saying ‘in passing’ or ‘as an aside’ – can sometimes be very revealing. This occurred to me while looking up an episode of SAFM Sunrise from early November last year.

Discussing race-based empowerment policy – Black Economic Empowerment, BEE – prominent journalist Stephen Grootes said that he couldn’t see an alternative to current policy, unless the country ‘magically’ achieved a 5% growth rate. By implication, he thought BEE would be necessary to distribute the very scarce economic rewards in South Africa’s economy in the absence of the rapid expansion of those rewards: apportioning for a few when there’s not enough for all.

Expanding the pool of those rewards would be a feat of ‘magic’. It’s an interesting choice of words. Magic suggests the manipulation of reality to the will of arcane forces. It is the intrusion of powers from realms and planes not bound by the laws of nature and in defiance of science. It’s the stuff of fable, mythology and the supernatural.

Probably more than anything else, magic is an avatar for the unattainable. To the extent that we may even acknowledge its existence – and I’d be willing to presume that Grootes does not – we see it as something beyond ordinary observation and control. Unknown and unknowable, it is the province of witches and warlocks and superannuated sages standing apart from the pedestrian existence in which most of us move.

Economic growth
So, what does this imply about the very this-worldly-significant matter of economic growth? To apply Grootes’s metaphor, it is unattainable. More than that, achieving it would demand an esoteric cognition denied to ordinary mortals. And if growth is the stuff of magic, it would follow that South Africa’s current trajectory – its miserly GDP growth rate of 1% or 2% a year (the optical illusion of post-Covid recovery aside) – would be the natural order of things. It is a matter to be accepted and accommodated, inter alia, through policies like BEE.

Getting growth going would not in fact require magic. It should not even be especially difficult. That’s at least a start. Last year, Rashad Cassim of the South African Reserve Bank put it to reporters thus: ‘Going from a 1% economy to 3% isn’t rocket science.’ That’s correct. Provided (very) basic conditions are in place. From the point of view of the state, we need something colloquially termed ‘good enough governance’, that is, enough competence to guard against the state becoming a hindrance, and to provide a couple of enablers. A stable (enough) supply of water and power would be one. Keeping crime to a manageable level. Businesses will find a way to do their thing. No incantations necessary.

Getting beyond that 3% mark is the tough part, and the necessary one. To quote Cassim again: ‘Unfortunately, 3% gets the economy going, but it will not bring the unemployment down. To get unemployment down, we really need systematic 5% growth every year and that’s a different debate.’

But a growth rate of 5% would not in fact be a feat of magic; indeed, it is a necessity to make inroads into South Africa’s unemployment crisis. Between 2004 and 2007, growth went from 4.6% to 5.4%, a short but illustrative burst of success. Of course, this was spurred in no small measure by a demand for commodities, but the principle holds: where opportunities exist, and where a robust business community is in a position to seize them – both points raising questions about the role of the state to mediate those opportunities and support business – economic activities can expand, with corresponding growth in the demand for labour.

Incidentally, it was the National Development Plan, not the Grand Grimoire, that envisaged 5.4% growth over a sustained period.  

Nevertheless, the failure to get anywhere near this goal might well make it seem unattainable. This is effectively what Grootes was saying. And it should be said that he is no outlier in holding this perspective. With South Africa having experienced well over a decade of lousy economic performance, the idea of ramping up economic expansion must seem like something magical. It’s also more or less the assumption underlying how the ruling party and the government (the greater part of the country’s political elite in other words) approach South Africa’s political economy.

Divvying up the rewards
Unable to encourage growth, and probably increasingly uninterested in doing so, the government’s focus has become firmly set on divvying up the rewards. What has developed is an apparatus of extraction – intermediaries, fixers, sinecured appointees, 30-percenters, and the like. They represent a common feature of politicised economies, those who have turned political power into pecuniary advantage. This has attached itself to the productive economy, the activities that produce, sell, and distribute things. It is in the latter, the productive economy, that economic growth should be generated; but that is subject to the limits imposed by the former, the extractive system.

This is a large part of the reason the country is now faced with the catastrophic failure of its electricity supply, why swathes of local government are governance basket cases, why South African English gifted the language the word ‘tenderpreneur’. South Africa is not an attractive place to do business; that the business community endures is a testimony to its resilience. But resilience is a virtue that ideally should not be required.

It’s in this context that the more important question about BEE should be asked. Not whether there is an ‘alternative’, but whether we can afford the system we have. If growth of the order of 5% is an objective, a more productive line of inquiry is whether BEE furthers that goal. If not, it is difficult to justify its existence.

BEE is typically described as a means of economic inclusivity, for bringing black people into the economy – which will have the direct and intended effect of expanding the economy as a whole. It’s a policy that seeks to be judged by its intention, and this is often how it is judged. It is interesting that its record is seldom scrutinised.

Multiplicity of crises
This may partly be because it’s not an easy thing to study. South Africa’s economy is labouring under a multiplicity of crises, of which racial ‘empowerment’ policy may be a factor. With or without such a policy, we’d probably still be in trouble. But the very fact that the country’s economy has signally failed to approach its growth objectives would be reason enough to reflect on those policies intended to help it on its way.

Yet it seems indisputable that the policy has imposed costs on the economy. Where premiums are paid to ensure the appropriate racial provenance of goods and services, this is inherent in the policy. From time to time, this problem is voiced by prominent people within the state. In widely-reported comments at an event in 2012, Minister Gwede Mantashe called on ‘BEE firms’ to quit seeing the state as their cash cows and to stop demanding inflated prices and providing substandard products. (There’s probably some irony in this…)

A more serious problem has been the use of BEE as a tool for extraction. BEE has been a great justification for passing resources to those with appropriate political pedigrees. This has come to be an effective tax on the country and a malign influence on its institutions. Warnings about this were issued back in 2007. As one study – by Daron Acemoglu, Stephen Gelb, and James Robinson – commented: ‘In discussing the benefits of BEE we included the social benefit of the avoidance of populism and noted that individual firms could not benefit from the whole extent to which they helped to provide a social benefit. In addition to social benefits however, there may be social costs of BEE. A clear one is that [Narrowly-Based] BEE via the forging of links between firms and politically connected people may lead to rent-seeking and the introduction of regulations and policies that favour existing incumbents. This can reduce market competition and innovation and it can also distort government policy. This may appear as benefits on firms’ balance sheets because it increases profits, but it is obviously a cost for society and likely reduces economic growth.’

These themes were revisited at the Zondo Commission, which pointed to the manner in which the policy has been used and abused to undermine the common interests of the country. It was clear: ‘Ultimately in the view of the Commission the primary national interest is best served when the government derives the maximum value-for-money in the procurement process and procurement officials should be so advised.’

This brings to mind another remark by Grootes in his broadcast, that the ‘vast majority’ of people benefit from BEE. It’s not apparent how this could be supported, though it certainly contradicts to a substantial degree polling evidence. In fact, IRR polling in 2015 and 2016 asked respondents directly whether they had personally benefited from a BEE deal. Some 14% said they had benefited from an ownership deal, and no more than 12% from a BEE-influenced tender deal. Hardly a majority by any definition.

Business think tank SBP found in its enquiries around small business growth that very few small entrepreneurs – this included black people – felt that they had gained much from the policy.  It was in fact an encumbrance on their businesses. Rhetoric aside, it offered very little to small businesses.

William Gumede, Associate Professor in the Public and Development Management Department at the Graduate School of Business Administration at Wits University, has argued that BEE deals had transferred some R1 trillion. But this, he said, had been to the benefit of ‘a handful of politically connected politicians, trade unionists, and public servants.’ Far from expanding the economy, this  ‘had crowded out genuine black entrepreneurs and killed the development of a mass entrepreneurial spirit in black society.’

In this view, the policy is not only failing to help, but is positively damaging to the country, its people and its prospects. It contributes to putting that 5% growth rate out of reach. There is nothing magical about this, merely the logical outcome of policy choices and their implementation.

Perhaps the only magic being cast around this issue is the dogged faith that BEE is sacrosanct and cannot be abandoned or even substantively reformed.

*Terence Corrigan is the Project Manager at the Institute, where he specialises in work on property rights, as well as land and mining policy. A native of KwaZulu-Natal, he is a graduate of the University of KwaZulu-Natal (Pietermaritzburg). He has held various positions at the IRR, South African Institute of International Affairs, SBP (formerly the Small Business Project) and the Gauteng Legislature – as well as having taught English in Taiwan. He is a regular commentator in the South African media and his interests include African governance, land and agrarian issues, political culture and political thought, corporate governance, enterprise and business policy.

https://www.biznews.com/thought-leaders/2023/03/06/south-african-economic-growth-feat-magic

This article was first published on the Daily Friend.