LETTER: Less BEE (which has failed), and more EED
Economic empowerment for the disadvantaged is what is needed and what will work
It is difficult not to agree with two Nedbank corporate finance analysts when they argue that broad-based BEE (B-BBEE) has “had limited success ... in terms of monetising value and transforming ownership to make historically disenfranchised people active participants in the economy” (Broad-based BEE needs tweaking to really work, December 18).
However, the conclusion reached by Zondi Nduli and Greg Rowan — that better, more clever and possibly more intense BEE is required — suggests they have not properly absorbed the lessons of their otherwise good analysis. Their argument is one observers of SA business encounter on an increasing scale and with increasing intensity as the failure of the BEE paradigm becomes apparent.
B-BBEE commissioner Zodwa Ntuli has argued that the problem is “failure to regulate [that is, enforce] the policy”. Duma Gqubule, director of the Centre for Economic Development and Transformation, has suggested that “quotas may be the answer”. President Cyril Ramaphosa himself, in response to then opposition DA leader Mmusi Maimane’s suggestion last year that BEE be scrapped, argued that “now is actually the time to strengthen it”.
Yet, as Nduli and Rowan show, BEE is a failure even in terms of its core goal — putting capital in the hands of black South Africans. They show that of the R317bn in value generated through BEE transactions by the 100 largest listed JSE companies, only R109bn is “unencumbered”. To put this number into some sort of perspective, in 2019 the total market cap of the JSE was R15.88-trillion. Advocates of enhanced BEE need to ask themselves how much damage has already been done, in terms of lost foreign direct Investment, in return for this petty gain (0.32% of the JSE’s market cap).
BEE is a policy that damages the prospects for all, while compensating a small (black) elite. Inequality in SA has actually widened in the period it has been implemented. Indeed, in a competitive capitalist economy the effectively “free” (to the beneficiaries) transfer of equity, whether by third-party funding or vendor arrangements, has the standout effect of distorting incentives. It encourages the brightest and most entrepreneurial of the designated group to grab a slice of the existing pie rather than creating new wealth on their own.
A new scorecard
This is why the SA Institute of Race Relations (IRR) has advocated a viable alternative: economic empowerment for the disadvantaged (EED). The scorecard we suggest does not simply reward firms that have engaged in a zero-sum game of wealth transfers between designated racial groups, but rewards firms for growing the economy. In our EED model, transfers to the disadvantaged proceed from a growing resource base.
The simple truth is that the SA social order will be more thoroughly transformed if the hurdles to growth are removed and developments allowed to play out “naturally”. The skills demand of a growing economy will alone account for more transformation than any number of years of forced redistribution through the existing BEE paradigm.
Taking a failed policy and intensifying efforts to implement it is a recipe for disaster. In another context, novelist CS Forester demonstrated this in a powerful metaphor directed at the British generals of World War 1. The attacks they directed had repeatedly failed to penetrate enemy trenches in the face of concentrated machine gun and shellfire.
Their solution was to throw more men and more artillery at the problem, with ever more bloody consequences. Forester likened the generals to a technologically unsophisticated group “striving to extract a screw from a piece of timber by main force, assisted by ever more fulcrums and levers while failing to grasp that simply twisting the screw would remove it with a fraction of the effort”.
Intensifying enforcement of BEE would be like using a hammer to drive in a screw. Better to understand the mechanisms of growth and social mobility and recognise the failings of the policy to date. Then replace it with something a bit more clever, like EED.
David Christianson, SA Institute of Race Relations
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