The cost of BEE

How a policy built for inclusion risks taxing the very growth it needs

Over the next three weeks, I’ll be running a short series on the economics of black economic empowerment in South Africa. Today’s piece looks at the cost of BEE; next Friday’s will ask how it might end, and in two weeks I’ll consider an alternative for BEE. All three will be behind the paywall – if you would like to read the full series and support this work, please consider a paid subscription.

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The debate about Black Economic Empowerment is changing. In late November, Minister of Trade, Industry and Competition, Parks Tau, announced a ‘short-’ and ‘long-term’ revision of B-BBEE. ‘Any policy requires constant review in terms of its efficacy, its implementation plans, and the progress that you are making’, he said. For most of the last two decades, BEE has been treated as a fixed feature of the economic landscape – imperfect, perhaps, but untouchable. That mood is ebbing.

In November, Fani Titi, chief executive of Investec, asked on LinkedIn: ‘To B-BBEE or not to B-BBEE?’ He reminded his readers that ‘growth without inclusion is neither just nor sustainable … economic inclusion without growth is a non-starter.’ A few days later Sim Tshabalala, CEO of Africa’s largest bank, warned in a CurrencyNews column that Standard Bank must comply with ‘literally hundreds of regulations, many of which are now too old to be relevant, and some of which are at cross purposes. We would be considerably more efficient and profitable – and better able to serve our clients and support transformation and inclusive growth – if these rules were modernised.’When the heads of giant, well-lawyered corporates begin to ask whether the current framework is still fit for purpose, it is a sign that the politics around BEE are loosening. That creates an opening for something we have had far too little of: a serious look at the costs and benefits of empowerment policy.

No one disputes the importance of black economic empowerment to redress the inequities of the past. ‘Apartheid was created by the state’, Nobel Laureate James Robinson told me in a podcast last year, ‘So if it was created by the state, it had to be unravelled by the state.’ But how to actually implement it as policy? The founding documents of BEE outline its purpose: ‘to substantially and equitably transfer and confer the ownership, management and control of South Africa’s financial and economic resources’, and to ‘ensure broader and meaningful participation in the economy by black people to achieve sustainable development and prosperity.’ Thirty years into BEE’s existence, it should be fair to assess the policy on these merits.

BEE has done some important things. It has helped create a black professional and managerial class, opened some boardrooms that were once exclusively white, and encouraged the formation of black-owned firms and investment vehicles that might otherwise not have emerged. Yet even these claims rest more on stories than on statistics. We have little rigorous work that attributes the rise of the black middle class, or the appearance of black entrepreneurs, specifically to BEE as opposed to broader growth, migration, or education.

We know even less about the costs. That is remarkable, given that these policies are now woven through almost every major transaction in the economy. BEE has not been the catastrophe that its loudest critics predicted, but it has clearly fallen short on the thing that matters most in a country with mass unemployment: it has not generated enough work, income and security for those at the bottom. Worse, it has likely weighed on the growth that would have widened their opportunities.

One way to see why is to take a step back into public finance theory. In the early 1970s, economists Peter Diamond and James Mirrlees proved a deceptively simple result: if you want an efficient tax system, you should never tax intermediate goods – the inputs that firms buy from one another in the process of production. You can tax final consumption; you can tax labour income or capital income; but taxing goods and services that are used as inputs, and are traded between firms, always distorts production decisions in ways that reduce total output.

But why should a decades-old theorem matter for black empowerment in South Africa today?