South Africa flushes R226 billion down the drain because of BEE

South Africa loses out on over R200 billion a year in lost economic activity from forced compliance with Black Economic Empowerment (BEE) regulations. 

These losses stem from missed investments, funds lost to compliance, and the significant human resources required to comply. 

If the country had not implemented BEE, its economy would be significantly larger, and unemployment would be around 17% rather than the current 32%. 

This is feedback from the head of the Solidarity Research Institute, Connie Mulder, who explained how the negative impact of BEE has compounded over the past two decades. 

“There are costs to any policy. There are costs to having an army, but there are benefits to most policies as well, but we are struggling to see the positive benefits here,” Mulder told BizNews. 

“We wanted to try to find out the actual cost of BEE. What does it cost companies to comply? How does that impact the economy? The results are shocking.” 

Mulder explained that the research was conducted using publicly available information from Statistics South Africa, the BEE Commission’s reports, and data from JSE-listed companies. 

“We found that the costs of BEE, conservatively estimated, are between 1% and 3% of GDP every year,” Mulder said. 

“This is what companies are spending on complying rather than investing because of this increasingly burdensome regulatory system.” 

While the financial costs of BEE are clear, Mulder and his team also found that there are other impacts that are more nuanced and difficult to quantify. 

This includes lost employment opportunities resulting from slower economic growth, stagnating living standards, and declining service delivery. 

These all ultimately have economic impacts, but are equally pernicious on a personal level, with individual quality of life declining. 

Mulder previously suggested that the primary redistributive policy in South Africa should be a needs-based or, at a minimum, an age-based system to aid those affected by youth unemployment. 

“If you remove BEE and its surrounding legislation, you will see much faster economic growth because you are removing burdens of compliance from companies and they can then invest in the economy,” Mulder said. 

“If we can get economic growth to 3% or 4%, suddenly most of our problems disappear. The focus should not be on redistributing a shrinking pie. It should be on how we can grow this economy.”

What if? 

South Africa’s economy would have grown significantly faster over the past decade were BEE not implemented at its current scale. 

The local economy has significantly underperformed its emerging-market peers since 2010, growing at an annual rate of around 1%. In contrast, the average emerging market has grown at 4.5% per annum since then.

The difference may seem small, but compounding over 15 years makes a significant difference. 

Mulder explained that if the South African economy matched the emerging-market average for economic growth, it would be R5 trillion larger. 

This growth would have created around four million extra jobs at South Africa’s current job coefficient, which would significantly improve the country’s unemployment rate. 

“This is the penalty we have paid for using a race-regulated system. Unemployment would have been around 17%. Not ideal but far better than where we are,” Mulder said. 

“Now the question has to be, what does this policy actually do? What we have seen is that it does not work on any of the metrics that it says it should.”

Mulder said BEE has not reduced unemployment for black South Africans and has not reduced poverty. South Africans are poorer than they were 15 years ago, and fewer people are employed. 

“Who has benefited? Only a small elite have gotten very rich on the back of this policy. When we look at this, as Solidarity, we have to say that when you are in a hole, stop digging,” Mulder said. 

Solidarity’s research appears to be backed up by that of Investec Wealth & Investment International strategist Osagyefo Mazwai. 

Mazwai estimated that, in a higher-growth environment, South Africa’s unemployment rate would likely be between 15% and 20%, not the current 31.9%.

“In real terms, this translates into between 3.2 million and 4.4 million fewer unemployed people, or as many as 4.8 million additional jobs in the economy,” Mazwai said. 

Had employment outcomes improved under stronger economic growth, younger South Africans would have been the primary beneficiaries. 

“Instead, an entire generation has entered adulthood amid chronic joblessness, limited skills transfer and diminishing economic confidence,” Mazwai said.