ANDREW BATEMAN

“You can’t dismiss black economic empowerment. It is required by the constitution. What you need to say is, are there any unintended consequences?” This was finance minister Enoch Godongwana’s response to my question in parliament.

The constitution provides for the full and equal enjoyment of all rights and freedoms, and remedial measures for those disadvantaged by unfair discrimination, but it does not prescribe how this vision should be realised.

The minister of finance is thus confusing means and ends, but his call for an analysis of the effects of BEE is well received.

BEE has enriched a small set of politically connected elites, provided fertile ground for corruption and squandered billions in overpriced state contracts. It has focused on dividing the pie, but not growing it. It has resurrected race-based legislation, entrenched double standards in the workplace and undermined our social cohesion.

The more important criticism, however, may be how many South Africans are locked in poverty and unemployment, or locked out of opportunities for advancement, as “unintended consequences”.

Our economic data should give us pause for thought. Investment has been persistently weak, growth has been pedestrian, and GDP per capita stagnated or declined over much of the past decade and longer.

The additional costs do not add to production, and so they undermine profit, investment and expansion. This slows job creation and can push vulnerable businesses to close

Unemployment has climbed, leaving SA with one of the highest jobless rates in the world. While many may have benefited from BEE, the goals of BEE have not translated into outcomes for the vast majority.

In this context, the single greatest problem with BEE may be that, on balance, it is hurting those it is intended to help by reducing employment opportunities.

The key question is how this happens in practice and what are the causal links?

At the level of individual businesses, BEE adds a layer of costs for measuring, reporting and auditing, ownership restructuring, preferential procurement and employment. The additional costs do not add to production and so they undermine profit, investment and expansion. This slows job creation and can push vulnerable businesses to close.

These costs accumulate across supply chains, driving up prices and eroding the ability of South African companies to compete in international markets. We export less. We import more. Our companies shrink. Jobs are lost.

Investment capital that would otherwise have contributed to growth is often diverted to South Africa’s competitors. BEE functions in some respects like an additional tax on operations and on growth, raising the cost of doing business and reducing expected returns on investment.

Added to already high tax rates, this drives away investment. Though firms more often cite infrastructure and access to finance as binding constraints, International Monetary Fund analysis drawing on World Bank Enterprise Survey data shows burdensome regulation is also among the factors constraining investment and job creation. Lower investment means slower economic growth and fewer jobs.

Smaller businesses have the greatest potential to create jobs, but they are hardest hit because they can least afford the costs of compliance. They grow more slowly and employ fewer people. Some do this intentionally to remain below the revenue and employment thresholds at which BEE rules intensify. Corporates with their own legal and compliance teams become entrenched, protected by a moat of compliance.

Redress is constitutional and essential. However, we must confront the uncomfortable truth that BEE is excluding in the name of inclusion

In the public sector, weaker tax revenue growth holds back the number of new jobs which are created. Furthermore, because BEE can result in government overpaying for projects, goods and services, and fewer public sector jobs are created with the remaining available funds.

SA is paying for BEE in lost job opportunities, repeatedly and at scale. This not only affects the unemployed but also those seeking opportunities to advance their careers. The pool of available jobs is too small to meet the demand.

At the same time, BEE risks weakening genuine empowerment programmes such as education, which President Cyril Ramaphosa has described as the most effective tool in bridging the chasm of inequality.

This is because weak economic growth undermines tax revenues and BEE procurement rules can inflate the cost of goods and services, meaning fewer projects are delivered and fewer public sector jobs are created with the same budget.

The most critical needs for genuine empowerment are:

a growing economy creating work opportunities at pace; and
a world-class education system to maximise the potential of every South African.

These two factors — job creation and quality education — will have the greatest impact on the most people.

This is not where empowerment ends, but it is surely where it must begin. That is why it is so tragic that BEE may be subverting both, depriving South Africans of work opportunities and undermining education and training.

Redress is constitutional and essential. However, we must confront the uncomfortable truth that BEE is excluding in the name of inclusion. Instead of addressing poverty, unemployment and inequality, BEE may be entrenching them.

If we are serious about broad-based progress, it demands a decisive break from the current approach towards policies which prioritise growth, job creation and broad-based opportunity at scale.