South Africa must end BEE and expropriation

South Africa must stop taxing capital on arrival through its empowerment policies and secure property rights by abandoning expropriation without compensation (EWC) to improve its relations with the United States. 

These policy steps, coupled with a slight shift in South Africa’s foreign policy, could enable the country to secure a favourable trade deal with the United States and attract billions in investments. 

This is feedback from Frans Cronje Private Clients economist and partner Bheki Mahlobo, who recently outlined why South Africa’s relations with the United States have deteriorated and how they can be repaired. 

“South Africa can compete by regulation and by law to attract investment into the country. But, we have actually been doubling down on policies that have inhibited our progress,” Mahlobo told the Free Market Foundation. 

Mahlobo said this is the fundamental issue that South Africa is facing – the country is unattractive to investors who have the capital it needs to grow. 

He further explained that this is seen most clearly in the country’s dealings with the United States, with South Africa yet to secure a favourable trade deal with the world’s largest economy. 

Lawmakers in Washington are increasingly frustrated with South Africa’s inability to meaningfully engage with America’s points of concern. 

“Currently, the most topical theme has been the relationship between South Africa and America, which is deteriorating,” Mahlobo said. 

“Fundamentally underpinning that decline in bilateral relations with the United States has been the issue of BEE and expropriation without compensation.” 

Mahlobo explained that these policy choices have harmed South Africa on the international and domestic levels, with its economy averaging an annual growth rate of 0.8% for the past decade. 

In particular, the policy of BEE has been particularly damaging for South Africa, with it benefiting a handful of connected individuals. 

“Certain individuals have benefitted from this regime and, at a broader scale, South Africa’s investment levels from other countries have declined,” Mahlobo said. 

“These countries, including the US, which has made the point most explicitly, have said that BEE is a form of taxation on the commitment of capital investment into the country. It is not only the Americans that are saying that.” 

South Africa needs American capital

South Africa’s lacklustre growth rate for the past decade can be seen as a function of its low fixed investment rate. 

A fixed investment can refer to a company’s long-term investment in physical assets like land, buildings, and machinery. In other words, it is an investment that drives productivity. 

This type of investment typically results in increased employment and rising productivity, which translates into faster economic growth. 

South Africa has lacked this for the past decade, with fixed investment being only 15% of GDP, compared to 25% in 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. 

“This is a commitment from a business to take money out of a bank account and invest in manufacturing plants, employees, and workspaces.”

“In the absence of a higher fixed investment rate, you have an economy that struggles to grow. If you do not attract that investment through policy, the consequence is the growth we have seen recently.”

The United States is a major source of investment for South Africa and the world, with over two-thirds of investable capital sitting in America. 

By refusing to meaningfully engage with America’s demands, Mahlobo warned that South Africa is effectively cutting itself off from this capital. 

South Africa, as a result of its low level of fixed investment, has been effectively left behind by countries that were once its peers in terms of GDP per capita and global economic clout. 

Investec calculated that if South Africa had just matched the average of emerging markets since 2010, its economy would be R4.1 trillion larger and the state would have collected R5 trillion in additional revenue. 

Effectively, the country would not face the financial crisis it now does, and the lives of its citizens would have vastly improved.