BLACK ECONOMIC EMPOWERMENT IN SOUTH AFRICA: A HISTORY OF AMBITION AND SHORTCOMINGS
Since the end of apartheid in 1994, South Africa has faced the daunting challenge of addressing economic disparities between racial groups. Black Economic Empowerment (BEE) was introduced as a policy framework to integrate historically marginalized communities into the mainstream economy. In this month’s Financial View we look at why, despite noble intentions, BEE has largely failed to achieve its goals. Instead of widespread economic upliftment and economic growth, it has often resulted in an elite benefiting from state-sponsored deals while leaving the majority of disadvantaged South Africans with limited economic prospects.
The Apartheid Legacy and Economic Disparity
Apartheid-era policies systematically disenfranchised Black South Africans by restricting their ability to own land, run businesses, or receive quality education. As a result, when South Africa transitioned to democracy in 1994, wealth and economic power remained heavily concentrated in the hands of White South Africans.
BEE was initially conceived as a means of correcting these imbalances. This was well received by business and early policies focused on corporate ownership transfers, requiring companies to sell equity stakes to Black investors and promote employment equity. This changed racial polarisation in business and resulted in a more mixed middle class. Over time, BEE evolved into Broad-Based Black Economic Empowerment (B-BBEE), aiming to benefit a broader segment of society through elements such as enterprise development, socio-economic investment, and skills development.
Whilst there was a need for redress and a closing of the economic disparity it is clear that BEE did not work as envisioned. Despite its intended noble goals, BEE has actually inhibited South Africa reaching its economic potential.
It has, in fact had the opposite effect. The Institute of Race Relations in their document titled “Breaking the BEE barrier to growth” detail just why it has had the opposite effect when they write, “Over the past 25 years, damaging and frequently shifting BEE rules have become major obstacles to investment, growth, and jobs. This has greatly harmed the great majority of poor black South Africans. By contrast, the benefits of BEE have gone solely to a small and often politically connected black elite. BEE has thus worsened inequality, which is now often greater within the black population than it is between whites and blacks. This largely explains why the country’s Gini co-efficient has risen from 59 in 1994 to 63 in 2022.”
So, BEE has worsened inequality and the reasons for this are quite easy to detail. We’ve chosen the five most obvious reasons and discuss them below.
Benefit for a Small Elite Rather Than the Wider Population
One of the most persistent criticisms of BEE is that it has largely enriched a politically connected elite rather than fostering widespread economic inclusion. Many high-profile BEE deals have involved established Black business leaders securing significant equity stakes in corporations, while ordinary South Africans see little improvement in their economic conditions.
Corruption, Fronting, and Exploitation
BEE compliance has often been manipulated through “fronting” practices, where companies appoint Black directors or partners in name only while maintaining existing ownership structures. Additionally, BEE-linked procurement policies have created opportunities for corruption, where politically connected individuals secure lucrative government contracts without necessarily delivering quality services.
Negative Impact on Investment and Business Growth
Critics argue that BEE has deterred foreign investment and entrepreneurship in South Africa. Some companies struggle to meet compliance requirements, leading to inefficiencies and reduced competitiveness. Others avoid the South African market altogether due to uncertainties surrounding ownership regulations and government interference.
Inadequate Focus on Education and Skills Development
While BEE emphasizes ownership and employment equity, it has placed insufficient focus on fundamental economic drivers such as education and skills development. Many South Africans still lack the necessary qualifications to participate meaningfully in a modern economy. Without a well-educated workforce, economic empowerment efforts are limited in their effectiveness.
Poor Job Creation and Economic Stagnation
South Africa’s unemployment rate remains alarmingly high, with youth unemployment exceeding 60% in some estimates. The BEE model has failed to drive sustained job creation at a grassroots level. Instead of fostering entrepreneurship and business expansion, it has often led to inefficient resource allocation and slowed economic growth.
South Africa’s high unemployment and declining GDP per capita are statistics that give a clear indication that something is wrong.
What would be Economic Empowerment
In Magwitch’s opinion Broad Based Economic Empowerment would be when the majority of the population have a job. BEE policies have discouraged foreign investment and hindered business growth, and hence growth of the economy, which has had a direct impact on employment and the number of available jobs.
The Solution to BEE
The Reverend William Boetcker lectured around the United States about industrial relations at the turn of the twentieth century. He famously stated:
• You cannot bring prosperity by discouraging thrift.
• You cannot help small men by tearing down big men.
• You cannot strengthen the weak by weakening the strong.
• You cannot lift the wage earner by pulling down the wage payer.
• You cannot help the poor man by destroying the rich.
• You cannot keep out of trouble by spending more than your income.
• You cannot further brotherhood of men by inciting class hatred.
• You cannot establish security on borrowed money.
• You cannot build character and courage by taking away man’s initiative and independence.
• You cannot help men permanently by doing for them what they could and should do for themselves.
A lot of the above seems to be the opposite of how the BEE policy has been applied to date.
We look at the problem of BEE as being a dilemma of the “carrot” and the “stick”. The phrase “carrot and stick” is a metaphor for when two different methods of incentivisation are simultaneously employed; the “carrot”, referring to the promising and giving of desired rewards in exchange for cooperation; and the “stick”, referring to the threat of undesired consequences in response to noncompliance or to compel compliance.
We would argue that the carrot always works better than the stick. The BEE policies to date have been that of the stick. Our solution for the problem of transformation is thus the carrot – reward for cooperation, don’t penalise for noncompliance.
A lot smarter brains will come up with some meaningful ways to incentivise compliance with transformation. The one that we like is to create a discount in tax rates for companies that comply with transformation. Have a fixed corporate tax rate for all corporates. Those that comply can get a couple of percentage points off their tax say 2 % – which makes it quite the incentive for business owners and managers to accelerate the pace of job creation and transformation. The companies that do not comply will pay the normal tax, and the extra 2% they pay could be allocated to a fund that encourages entrepreneur’s and people that are prepared to take risks and start and grow business.
While BEE was introduced with the goal of addressing apartheid-era injustices, its implementation has not led to widespread economic transformation. Instead, it has been plagued by inefficiencies, corruption, and unintended negative consequences. As it stands the biggest beneficiaries of BEE are those that are already rich. The poor have been continually neglected through the current policies and all of us are financially worse off. We don’t believe that foreign companies that would like to operate in South Africa should be excluded solely on ownership. We therefore think it would be better to offer some alternatives and like the idea of Equity Equivalents that result in training and education of staff. Make use of incentives to encourage companies to invest to achieve economic growth.
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