South Africa’s worst nightmare about BEE is here

Black Economic Empowerment (BEE), introduced with noble intentions, is now in the hands of those who use it to advance their own interests at the expense of the country.

This should not come as a surprise. Milton Friedman, who won the Nobel Prize in Economics, warned that this was the inevitable outcome of such policies.

When the democratic government took over in 1994, it inherited an economy where the black majority were not a meaningful economic participant.

For decades, the black majority was systematically excluded from parts of the economy, including selected asset ownership and skilled employment.

To integrate the black majority into the mainstream economy, the ruling ANC introduced Black Economic Empowerment.

The goal was to turn the heavily skewed system into one that reflected the country’s actual demographics.

It aimed to transfer ownership and management control of enterprises, land, and resources into the hands of historically disadvantaged individuals.

It also sought to foster new, black-owned small and medium enterprises (SMEs) by giving them preferential access to state tenders and corporate supply chains.

Black Economic Empowerment policies were first introduced as a voluntary framework in 1994, which saw a flurry of BEE deals over the next decade.

The South African government passed the Broad-Based Black Economic Empowerment (B-BBEE) Act No. 53 of 2003, which officially came into effect in April 2004.

The new BEE Act helped the government to enforce BEE policies and broaden the efforts to transform the South African economy.

What happened was that a small group of connected individuals became extremely wealthy, without much benefit to poor black South Africans.

IRR executive director Gabriel Crouse said BEE has made poor black South Africans poorer and caused an increase in unemployment.

He highlighted that the raw number of unemployed black South Africans has almost doubled since 2007. “BEE is obviously not helping poor black people,” Crouse said.

BEE becoming a tool for enrichment was predictable

The inevitable evolution of BEE to become a tool in the hands of politicians and connected individuals to enrich themselves.

Milton Friedman, one of the most influential economists of the 20th century, explained the outcomes of policies such as black empowerment and affirmative action.

His book and 10-part series broadcast on public television, Free to Choose: A Personal Statement, explained the situation.

Friedman warned that using state power to force equal outcomes destroys both liberty and the very equality it was trying to achieve.

“A society that puts equality, in the sense of equality of outcome, before freedom will end up with neither equality nor freedom,” he said.

He added that the force to achieve equality will destroy freedom, with dire economic consequences for the country.

“The force, introduced for good purposes, will end up in the hands of people who use it to promote their own interests,” he said.

This is what has happened in South Africa. B-BBEE has shifted from a tool of historical redress to an extractive system.

Professor William Gumede from the School of Governance at the University of the Witwatersrand explained the problem.

“The former majority ANC government’s BEE strategies have largely benefited a small group of well-connected black and white individuals,” he said.

“47 largely politically connected individuals secured 60% of all the BEE mining, becoming billionaires or multimillionaires overnight.”

The impact is severe. Gumede said corruption, mismanagement, and the manipulation of BEE contracts are key reasons for South Africa’s water crisis.

“Manipulation of BEE has also been a key reason for the lack of service delivery in the health sector,” he said, citing the Tembisa hospital scandal.

“If BEE was supposedly successful, it has been successful for the few, not a broad-based success, as it was intended to do.”

Cyril Ramaphosa and the ANC defend BEE

Despite the devastating effect and widespread criticism of BEE, President Cyril Ramaphosa and the ANC say it is here to stay.

Ramaphosa said that Broad-Based Black Economic Empowerment has helped open industries to those who were previously excluded.

He cited the mining industry, explaining that many black people now work in this industry, both as mine workers and owners of mining companies.

“Today, that industry has more black entrepreneurs. Black mining companies, some of them are the biggest,” he said.

The President went so far as to say that those questioning the positive impact of BEE policies and those who call for their abolition should be ashamed of themselves.

The defence of BEE by the political elite was also predictable. The book, Why Nations Fail, by Daron Acemoglu and James Robinson, explained it clearly.

They wrote that extractive political institutions and systems, like BEE, concentrate power in the hands of a narrow elite.

These extractive economic institutions and systems are designed to strip wealth from the majority to enrich the elite.

True economic prosperity requires innovation, free competition, and secure property rights for all.

However, innovation brings what Joseph Schumpeter called creative destruction. New industries replace old ones, and new economic leaders emerge.

Ruling politicians deliberately block these advancements because creative destruction threatens both their economic monopolies and their political control.

Simply put, they prefer a larger slice of a smaller, impoverished national pie, rather than a smaller slice of a massive, prosperous pie that they cannot fully control.

This is exactly what is happening in South Africa. The country’s citizens are getting poorer while a small, connected elite is becoming insanely wealthy.