BEE: The extortion needs to stop

Anthea Jeffrey says that the more indirect expropriation is sanctioned and applauded, the more state powers of this kind will expand

BEE Hurts, But EED Helps

If Dumisani Hlophe’s preferred version of black economic empowerment (BEE) prevails, then the black majority will indeed remain “in the economic margins, in the doldrums, poor, and living from hand to mouth” ("Zuma bashing takes our eye off the ball", Sunday Independent 19July 2015).

That is exactly what will happen if BEE is not jettisoned in favour of a much more effective alternative, as I argued in an earlier article that Hlophe comprehensively misrepresents.

Hhophe falsely claims that my “main gripe is black ownership”. This is not so. Through all its long years of opposition to racial discrimination, the IRR has been pushing for policies aimed at fostering entrepreneurship and making business opportunities equally available to all.

As a think tank strongly committed to the free market, we would like to see hundreds of thousands more entrepreneurs building up successful businesses with the help of a fast-growing economy, plentiful electricity, and competitive labour and other input costs.

The IRR’s objection is naturally not to the black ownership of businesses, but rather to the indirect expropriation of existing firms through the 51% BEE deals now increasingly required under empowerment rules.

The more indirect expropriation is sanctioned and applauded, the more state powers of this kind will expand – and the more tenuous will become the property rights of all South Africans, both black and white.

Yet property rights are the foundation for individual prosperity and individual civil liberty. Their absence means increasing dependence on a Government that, in the end, may have enough power to take virtually everything from virtually everyone. This is certainly the end goal of the South African Communist Party, which has a major presence in the Cabinet and is using BEE in its various facets to help bring about a socialist and then communist state in which there will be little room for a middle class of any colour.

In addition, the immediate consequence of indirect expropriation under the rubric of BEE will be to deter direct investment, reduce our already meagre growth rate, and make it harder still for some 8.7 million unemployed South Africans (up from 3.7m in 1994) to find jobs.

Moreover, the current system of BEE benefits only a small elite: roughly the top 15% within the black population. The remaining 85% have very little prospect of ever gaining BEE ownership deals, management posts, preferential tenders, or new small businesses to run.

Worse still, BEE does not simply bypass the 85% majority. Instead, it actively harms that 85% by reducing investment, growth, and jobs and making it very much harder for the poor to climb the economic ladder to success.

BEE – which Nigerian billionaire Aliko Dangote warned against in 2013 – is a key reason why economic growth in South Africa lags so far behind the 5% growth rates notched up in many other emerging countries. Yet if we could attain those growth rates too, our economy would soon double in size. That rising tide would strongly lift all boats. This would do far more to lift all black people from the economic doldrums than the narrow benefits of BEE.

The real challenge is to open up real opportunities for all disadvantaged black South Africans. This cannot be done while BEE puts ever heavier leg irons on the economy. So the country needs a new approach of “Economic Empowerment for the Disadvantaged” or “EED”.

EED would help the poor and emphasise the inputs needed for rapid upward mobility. Six of EED’s essential elements would be:

1 Make rapid economic growth, rather than redistribution, the overriding policy priority. To help promote growth, give firms EED points for all investments made and corporate taxes paid.

2 Re-orient labour laws to help the jobless gain access to employment. Give firms EED points for every job they sustain or generate from year to year.

3 Increase community control over schools, and give parents state-funded education vouchers so they can send their children to the schools of their choice. Give firms EED points for “topping up” these education vouchers or donating to schools.

4 Give school leavers state-funded vouchers for university or technical education at institutions of their choice. Give firms EED points for topping up these vouchers or donating to these institutions.

5 Sell off floundering state-owned enterprises to the private sector to help overcome the electricity crisis, expand essential infrastructure, and bring down costs. Give firms EED points for infrastructure successfully maintained or timeously brought on-stream.

6 Promote entrepreneurship via a venture capital fund with monies from both the state and the private sector. Give aspirant entrepreneurs state-funded vouchers for training in financial management and other essential skills. Give firms EED points for contributing to venture capital funds and topping up these training vouchers.

With BEE replaced by EED, a new dynamism would enter the economy. Direct investment would increase, business and entrepreneurship would thrive, while skills and jobs would rapidly expand. With demand for labour rising, wages would go up as well – not because of government fiat but in response to market forces.

With property rights protected and economic freedom expanding in this way, South Africa could soon join the ranks of the most free countries – nations where annual average GDP per head stands at some R400 000 in general and at around R120 000 for the poorest 10%.

Anthea Jeffery, Head of Policy Research, IRR. Jeffery is also the author of BEE: Helping or Hurting?

A version of this article first appeared in the Sunday Independent.