South Africa has entered the second year of the Covid-19 pandemic; while the country is likely to be dealing with the health crisis for a long time to come – quite conceivably beyond this year – it will need to keep a clear eye on the measures taken to get the economy onto a growth, investment and employment track. In the language of the day, this is the ‘recovery’.
To achieve this in any meaningful way, South Africa will need to deal with the myriad obstacles that have kept it from achieving proper economic take-off. As destructive as the pandemic has been, it is far from the country’s only challenge. Indeed, the ‘recovery’ is spoken about as though it is an inevitability, but this is at best a partial truth. Absent the health threats and the restrictions imposed to deal with them, (assuming these are in fact removed, and not retained on some pretext or other), there will be some acceleration as more activity is both possible and permitted.
Yet the possibilities of the post-Covid-19 environment will remain constrained by exactly those circumstances that have so hobbled South Africa’s performance for years. One of these is the race-based ‘empowerment’ system.
President Ramaphosa recently declared to an online gathering of the African National Congress’s Progressive Business Forum (PBF) that the coming year would be decisive for these policies. (The PBF is an ANC-linked body, part of whose mission is fundraising. It essentially markets contact with government leaders as its key offering, something whose ethical contradictions even sympathetic commentators have baulked at.)
BEE will be done better, and be targeted at particular economic sectors, it seems.
‘That in my view will be the game changer. Sometimes we talk in broad terms about the economy, we now need to go deeper into exactly what makes the economy work and function, and the participation of black people in all areas of economic activity. We will then see how best we can get black people to participate. This is the year that we should be able to do that and move the needle of economic empowerment for women, young people and black people broadly.’
A policy keystone
Precisely what this means is, like much policy, unclear and might be revealed in due course. But it seems fair to say that Broad-Based Black Economic Empowerment remains a policy keystone, and will be integral to the coming ‘recovery’. Last year, after all, the government resolved that empowerment status would be a determinant for state assistance for distressed tourist enterprises.
This was a breathtaking choice to make, one that attracted some severe condemnation, even among some who might not be unsympathetic to race-based policy. Ferial Haffajee, for example, wrote: ‘All Covid-19 relief is being given on BBBEE lines with applications scored by race, gender, disability ownership instead of by how many people employed, size of business etc for max impact. BBEEE is a vital policy but in an emergency, you have to look at greater good.’
Justice Malala was far more blunt: ‘This is well and truly and totally idiotic. It makes no sense whatsoever at any level. Say goodbye to jobs, GDP growth or a Moody’s or Fitch upgrade any time soon.’
Malala’s comments described the direction of the economy presciently. Reports indicate that over 2 million jobs were lost last year, and that the economy has contracted by over 7%. And South Africa remains mired in junk status. As the fiscus empties, South Africa will find it increasingly difficult to meet its obligations to its people (particularly the roughly 46% of households that receive some form of grant). Borrowing will become ever more expensive, compounding the economic malaise. A situation such as this cannot be sustained, and leads inexorably towards collapse.
A long-standing problem
Yet these dangers predate the pandemic. The imminent ‘fiscal cliff’ was a frequently-voiced concern prior to 2020. So was the imperative of ‘reform’, which was one of the promises of the Ramaphosa ascendency. The president has spoken, quite correctly, about the need to make it easier to do business in South Africa, and in late 2019 told an interviewer in London that this matter was pressing. His recent declaration that the country had run out of money underscores that, if anything, time has run out.
The dogged retention of race-based empowerment policy – combined with increased affirmative-action demands contained in proposed amendments which would see the minister imposing quotas – simply drives this along and brings the denouement closer.
Empowerment legislation has long been a significant hindrance to doing business in South Africa. Not only does it impose administrative burdens and the costs associated with them, but it imposes direct costs in terms of demanding that ownership stakes be ceded. This is a cost that many firms will be loath to pay – especially smaller businesses (whose development is a nominal priority for the government), for whom empowerment legislation is a crippling cost. It raises the costs of investing, and is a disincentive to investment. Research among European firms found that these demands ranked as the most significant barrier to operating in South Africa.
It has been equally questionable as a means of enabling participation. Once again, the impact on small businesses is instructive. Research on small firms has shown that small entrepreneurs (including black entrepreneurs) have found little benefit in the policy. Rather, there are strong perceptions that empowerment policy all too often serves to assist those who least need it – a phenomenon that has been seen in many different contexts globally. At times, this can be extremely cynical and venal – ‘empowerment’ was after all central to the offering of rewards to (predominantly white) businesspeople in the Bosasa scandal.
Moreover, empowerment policy as it exists compromises the very foundations on which a modern economy is built. Eskom, for example, in pursuit of its own empowerment objectives, diverted energy to the latter goals. It lost sight of its core mandate – to provide cost-effective, reliable power – and became ensnared in the pathologies that dog the country’s governance. South Africa has paid a high price for this and will continue to do so for years to come.
In the coming months, an expensive and logistically complex vaccination process will be undertaken (provided, of course, the vaccines can be sourced). The state aims to place itself at the centre of the effort, but according to Rapport, the president has said to the PBF that it will offer ‘opportunities’ for BEE. The prospects for something ‘going wrong’ are serious, although – given the stakes involved – these are probably dwarfed by the consequences of this happening.
Indeed, at times figures in government have acknowledged what is obvious. As minister Pravin Gordhan once said, ‘BEE policies have not worked and have not made SA a fairer or more prosperous country’.
Logically, the country should step away from this. But for the government and the ruling party, BEE is a matter of ideological conviction – not to mention a chronic failure of imagination.
No doubt the response would be to pledge that it will be done better, that the mistakes made would be taken on board. This would, no doubt, be supported by many of the country’s intellectuals – South Africa saw this in the condemnation of the Democratic Alliance’s rejection of BEE, although it was notable that this condemnation was accompanied neither by much defence of the policy, nor much empirical argument as to its popularity. (Survey evidence shows at most a general ambivalence towards such measures.)
Cannot be ‘done better’
The reality is that BEE cannot be done better, and will not produce substantively better results. It rests on the faulty assumption that preferences and ‘support’ will be decisive for – in the official lexicon – ‘black’ business. This would be unlikely in a well-resourced and well-managed system; in South Africa it is laughable. The controversy around BEE-based Covid-19 relief rightly focused on the use of a dubious policy to determine state assistance – but it was largely overlooked in the commentary on the grounds that what was available in any event was severely limited. State contracts, state pressure and preferential licencing conditions are simply not a sufficient means to assist a whole new class of entrepreneurs to come into their own (and that is so even if politically favoured people are not primed to take advantage).
Rather, this relationship must fundamentally be reshaped in policy and in governance priorities. Before any ‘support’ has a hope of success, minimal enabling conditions need to exist. Think about security, reasonable infrastructure, institutions that function. These are often woefully lacking. When an entrepreneur cannot be certain that his or her assets will not be stolen or vandalised, when infrastructure must essentially be self-provided (think generators) and when public utilities like the Post Office cannot reliably deliver their services, the implications are extensive and dire. The distant prospect of a state contract (for which timely payment is uncertain) is not a substitute.
Getting the environment right is critical. South Africa’s current community of entrepreneurs is small and vulnerable. The shock findings of a study by the Small Business Institute and SBP put the number of small firms at just 250 000 in 2018 – far smaller than had previously been thought. None of these is expendable, and while the government cannot ‘support’ them, it can and must avoid undermining them.
If the government is serious about the participation of the hitherto (and currently) excluded in the economy, it needs to recognise that this will not be possible without a growing economy. For this, it must acknowledge the indispensability of every entrepreneur and the imperative of seeing more emerge – irrespective of their demographics. There is no other possibility of expanding the pool of employment and business opportunities.
Existing empowerment policy will, if anything, make this impossible. There is an irony in this: in seeking, at least nominally, to promote inclusion, it is ensuring continuing exclusion. As GetBiz CEO, Andile Ntingi, has written, BEE stands in the way of real and productive empowerment: ‘A progressive solution must be explored to either scrap or suspend the policy, and replace it with a strategy that prioritises growing small businesses and creating jobs.’
BEE must be ended in its current form. Race as a factor should be removed, and replaced by such support for entrepreneurial endeavours as is possible. This should be carefully targeted for maximum impact. There is a need to understand the differences between different parts of the economy (perhaps the President is on to something there…), and different streams of economic activity. The baleful influence of ideology must be removed, such that regulatory impact assessments are taken seriously and the destructive impact of bargaining councils limited. The notion that a utility like Eskom should be tasked with anything other than producing and distributing cost-effective, reliable electricity should have no place. And so on.
As formal policy, with a social objective in mind, BEE must be replaced by one that incentivises business to grow and invest, and to take on social functions for the benefit of society’s less affluent. This is what we at the Institute of Race Relations have termed Economic Empowerment for the Disadvantaged. It would seek consciously to assist the less affluent in society – irrespective of race or any other ascriptive characteristic – so as genuinely to offer upliftment to them, rather than pretending that this will follow from the ‘empowerment’ of a small elite of insiders.
All of this is possible; South Africa could have a chance at growth and socio-economic upliftment, but not with BEE as it exists, and not with the ideological and policy assumptions beneath it. ‘We need to be able to say in a few years’ time that the empowerment of our people is now becoming a reality,’ says President Ramaphosa. That will, of course, depend on what choices he and his government are prepared to make.
[Picture: Donovan Parks from Pixabay]
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