Ramaphosa says BEE, which blocks many international investments, is good for the South African economy

President Cyril Ramaphosa has celebrated the positive impact of the ANC’s Black Economic Empowerment (BEE) framework on South Africa’s economy. 

Ramaphosa said that the framework has ensured that black-owned businesses can grow and hire more people, as opposed to claims that BEE holds back the country from faster economic growth. 

This is despite numerous analysts and economists explaining that the policy blocks investment from companies in South Africa by taxing capital on arrival. 

Many companies, such as Elon Musk’s Starlink, are unwilling to give up a significant chunk of ownership in their business for the privilege of being able to operate in South Africa. 

Instead, the capital that could be invested in South Africa flows to other economies where there is less friction, no demands for ownership changes, and conditions are conducive for private-sector investment. 

Responding to questions in the National Assembly, Ramaphosa said that those who believe that BEE holds back economic growth should hang their heads in shame. 

“This is because they only want white people to control the economy. We are not going to allow that,” Ramaphosa told parliamentarians. 

Ramaphosa explained that it is a fallacy for people to believe that BEE impedes economic growth when there are many examples of the opposite. 

One such example is the mining sector, Ramaphosa said, which is full of black-owned businesses growing their operations and creating jobs. 

“Many more black people are invovled in mining today. That industry now has more black entrepreneurs who are expanding their operations and creating more jobs,” he said. 

This overlooks the fact that the output from South Africa’s mining sector has declined steadily over the past three decades of ANC rule. 

While black ownership has increased, it is of a smaller pie, with the mining sector being a shadow of its former self. 

The Fraser Institute now ranks South Africa as among the worst mining jurisdictions in the world, when it previously would find itself at the top spot of the rankings. 

BEE also weighs on the profitability of South African companies and results in billions of rands worth of economic activity being lost. 

The Free Market Foundation and the Solidarity Research Institute estimate that BEE costs the South African economy R290 billion in direct compliance costs and lost economic activity. 

Taxing capital on arrival is a bad idea

The main issue that many analysts have with the current BEE framework is that it taxes capital on arrival, which puts up a huge barrier for investment in South Africa. 

This makes the country uncompetitive on the global stage, where capital follows the path of least resistance. 

Political analyst Frans Cronje lists the removal of these taxes on capital invested in South Africa as one of the three key things that can reignite faster economic growth in the country. 

This is done through misdirected empowerment and scorecards that do not measure outcomes with regard to jobs created, money invested, or value added, but rather force ownership changes. 

“You should not even tax capital as it leaves your economy. We tax capital as it comes in through the door,” Cronje said. 

“If you wish to have the privilege of investing in our economy, you have to give up around 30% to a specific set of shareholders. This leaves very little left in terms of return for investors.” 

Relative to what is on offer in the rest of the world, this makes South Africa significantly less attractive as an investment destination. 

“It is this reason, as much as anything, that explains why the fixed investment rate is sitting at half of the emerging market average,” Cronje said.

For the South African economy to grow at a rate that will make a meaningful difference to the unemployment rate, it would need fixed investment to rise to 25% of GDP. 

Currently, fixed investment in South Africa sits at 15% of GDP, which is half the emerging market average, and is the main reason its economy grows at 1% per annum compared to the 4.5% average of its peers. 

“That is something that will deliver the jobs South Africa needs and, on the record of the past twenty years, will bring down the political temperature and stabilise politics,” Cronje said. 

Economist Bheki Mahlobo explained further that taxing capital on arrival is one of the main drivers of deteriorating relations between South Africa and the United States. 

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.”

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.”