BEE made Ramaphosa a billionaire but South Africans poorer

Pressure continues to mount for the South African government to drop the current form of black economic empowerment (BEE), which continues to benefit a small, privileged elite.

From economists to researchers, political parties and even The Economist, the calls for change have been growing louder and louder as South Africa’s unemployment continues to increase, and growth stagnates.

Broadly, the empowerment law enacted in 2003 created a scorecard system that encourages companies to hire and promote black people by offering them tax breaks and access to lucrative government contracts.

Over two decades later, the law framed to improve the lives people left disadvantaged by decades of white minority rule has had the opposite of broad-based redress.

Unemployment is five times higher for black people than for white people and income inequality is the worst in the world, according to the World Bank.

Inequality among black South Africans has exploded, with the top 10% of black earners having seen their incomes more than triple.

This is while those of the bottom 50% have fallen slightly, primarily because of high joblessness, which reflects persistently low growth.

Recently, economist Dawie Roodt said that BEE in its current form does not empower the broader black South African population.

Rather, he said that its objective is to merely take from white businesses and give the proceeds to already ultra-rich black billionaires.

He told Biznews that he is in favour of BEE and the transformation of the economy in South Africa. However, not in the way it is currently done.

“The way BEE is implemented in South Africa is to take from white people and give to an elite group of black people. We have black billionaire empowerment,” he said.

Political economist Moeletsi Mbeki said in a recent interview with BusinessTech that BEE, while framed as addressing historical injustices, primarily serves to enrich “a small political elite within the ANC.”

He contends that BEE “does not create new wealth. It does not create new entrepreneurs” but rather incentivises becoming “parasitic on the existing companies and at the same time to become parasitic on the state.”

These comments align with research from Professor William Gumede of the Wits School of Governance about black economic empowerment.

His research found that R1 trillion has been moved between under 100 people since 1994. The same people have been empowered and re-empowered over and over.

Making big bucks

Gumede said that “South Africa’s BEE model has created a model of corruption because people set up companies just to get a contract.”

“These BEE beneficiaries, beyond overnight becoming fabulously rich, have injected very little value into the economy, nor created new businesses or new markets.” “No country, certainly not South Africa, can afford this kind of wastage of resources.”

In his interview, Roodt took aim at President Cyril Ramaphosa, who amassed tremendous wealth during his time in the business world.

Ramaphosa, whose net worth was estimated at R6.4 billion when he took office in 2018, went from an anti-apartheid activist and trade unionist to a negotiator, politician, businessman, and then into the Deputy and Presidency positions.

The Efficient Wealth Chief Economist said that Ramaphosa did not create any productive business to make money. Instead, he received stakes in other companies which wanted to become BEE compliant.

“He was a union leader who facilitated numerous empowerment deals, which made him a very wealthy man,” Roodt said.

“He did not create a real business or add to the wealth of South Africa. He merely participated in the redistribution of wealth.”

Meanwhile Ramaphosa said that he “finds it very worrying that we continue to have this notion that broad-based Black economic empowerment” is holding the economy back.

“It is the partial and exclusive ownership of the means of production in our country that is keeping this economy from growing,” he told Parliament.

“What do you want to see happening? Do you want to see black people continuing to play the role of labourers, drawers of water, Hewers of wood and consumers only?” he asked.

The Economist wrote that “Mr Ramaphosa is wrong. A policy that made him rich is making his country poorer. It should be scrapped.”

South Africans have generally gotten poorer, as demonstrated by declining real GDP per capita over the last decade and a half.

Scrap BEE for economic growth

“Black economic empowerment, arguably one of the most wasteful, costly, and ineffective redistribution strategies, devised in any post-colonial society since the end of the Second World War, should be immediately scrapped,” said Gumede.

He added that genuine South African entrepreneurs who are not politically connected do not benefit from black economic empowerment funding.

“R1 trillion could have been spent more effectively on things other than enriching a small group of connected individuals,” he added.

Economist and partner at Frans Cronje Private Clients, Bheki Mahlobo, argues that BEE should be scrapped to revive South Africa’s economy.

He said South Africa should stop taxing investment capital on arrival through its current BEE scheme, especially as it relates to the United States.

Over the past decade, the South African economy has averaged an annual growth rate of 0.8% compared to the emerging market average of 4.5%.

The main driver of this stagnation is the country’s low fixed investment rate, which accounts for approximately 15% of GDP, compared to around 25% for faster-growing emerging markets.

“This is effectively a reflection of the commitment by businesses to set up shop in South Africa and invest in growing in the country,” Mahlobo said.

“The fixed investment should be much closer to 25% of GDP, which is the norm. That is where the country should be.”

Real empowerment and transformation in South Africa

Roodt said real empowerment is where you create an environment and give people tools to improve their financial and economic situation.

He said the most obvious tool to empower people in a modern economy is to provide them with the skills they need through quality education.

However, he says that South Africa’s education system, which is used to develop skills, is poor.

“The education system in South Africa is horrible. I would like to see a dramatic improvement in skills development in South Africa because that is how you get out of poverty and empower people.”

However, that is not all. The state also has to create an environment that empowers people. This includes good infrastructure and safety.

“Give them a pavement. Give them electricity and water. Give them a safe place to work and live,” Roodt said.

He said the combination of skills development and creating a safe and good environment is what should be done to empower people.

“The state cannot empower anyone. The best the state can do is to create an environment where people can empower themselves.”