By Piet le Roux

Supporters of Black Economic Empowerment (BEE) argue that BEE promotes economic development, reduced inequality, social upliftment and other good causes. Actually, over the last decade, since the adoption of the Broad-Based Black Economic Empowerment Bill in 2003, the true main goal of BEE was the redistribution of capital according to artificial, political aims, at the expense of consumers.

For confirmation that BEE is an attempt to enforce a political blueprint on society, there is no need to look further than the following statement by Trade and Industry minister, Rob Davies: “Black economic empowerment is not just a social and political imperative. We need to make sure that in the country’s economy, control, ownership and leadership are reflective of the demographics of the society in the same way the political space does. That’s why we are saying Black Economic Empowerment remains an economic imperative.”

The act is currently under review, but unfortunately only with a view on giving it teeth. In terms of the bill of November 2012

• A BEE commission will be created to boost BEE compliance;
• Companies on the Johannesburg stock exchange will be obligated to report their BEE status and any information the BEE commission may require; and
• Heavy penalties, including jail time and fines of up to 10% of company turnover, can be imposed if it is found that false BEE information was supplied.

As political blueprint BEE has had consequences quite contrary to the empowerment of black people, economic development and reduced inequality. In fact, it slowed the pace of economic growth as well as the evenness – also in terms of race categories – with which economic wealth spread in society.

Someone who is in favour of achieving the positive aims given in justification of BEE, like economic growth, reduced inequality and increased economic participation by more black people, should oppose the policy of BEE. Measured against these desirable outcomes, the current policy of BEE is counterproductive.

If kept in mind that the main goals of BEE is the transfer of capital according to political processes, then five steps show why BEE is harmful.

1. Wealth is access to goods and services

“Wealth in itself is nothing but the food, conveniences and pleasures of life,” Richard Cantillon wrote in opening sentence of his 1730 Essay on Economic Theory, the first economic treatise. Cantillon’s insight of almost 300 years ago is as valid today: if one seeks to know if BEE supports wealth creation, then one should consider if consumers in general have greater access to “the food, conveniences and pleasures of life” than before.

2. Goods and services come from the capital structure

Goods and services – the conveniences of life – do not fall from the air, but are the end products of complex chains of production. These chains of production – including machines, labour processes, tools, supplies, et cetera – form the economy’s capital structure. The better the economy’s capital structure is put together and maintained, the more and better are the goods and services it renders and the greater everyone’s wealth.

3. The capital structure is managed by entrepreneurs

The updating of the capital structure is the task of entrepreneurs. Entrepreneurs are motivated by the profit motive to make sensible judgments about people’s future needs. In order to provide for people’s future needs, entrepreneurs have to adjust the capital structure in advance, so that the capital structure may produce the appropriate products at an appropriate time.

The better entrepreneurs perform this task, the better the capital structure will be adjusted to deliver the most wealth for everyone.

4. Investors direct money to consumers’ favourite entrepreneurs

In a free market environment the best entrepreneurs are identified in a consumer-led process. In this process, each consumer (in BEE terms: black, coloured, Indian and white people) play a role each time when a consumer buys one item and leaves another on the shelf. In this process that entrepreneurs who satisfy consumer needs best are rewarded, while competitors are not rewarded. Investors (capitalists) direct their investments to consumers’ favourite entrepreneurs – those who make the most profit.

Therefore, the best entrepreneurs (those who adjust the capital structure in a way that serves consumers best) have greater access to capital.

5. BEE replaces consumers’ choices with politicians’ choices

BEE undermines consumers’ choice of entrepreneurs. Instead of entrepreneurs being evaluated daily by consumers according to the wealth they produce, BEE evaluates entrepreneurs according to political measures. Investors are therefore no longer free to direct money to those entrepreneurs who are best able to manage the capital structure and create the most wealth. More capital now lands in the hands of politically favoured entrepreneurs, who create less wealth.

What BEE therefore does is to redistribute the capital structure through a process of political favouring from better to worse entrepreneurs. Afterwards, there is less wealth in the economy and the remaining assets are concentrated in the hands of an elite with the right political friends.

Consumers, for whom all goods and services in the end exist, are harmed by this. BEE cannot speed up economic growth, the reduction of inequality or general black empowerment. According to the true measure of wealth – access to goods and services – almost all South Africans, including black people, are poorer thanks to BEE. The only winners in this process are the politically favoured black elite and other people (including white, coloured and Indian people) who manage to exploit this artificial system.

 

Piet le Roux writes as an associate of the Mises Institute of Southern Africa. He is also a senior researcher at the Solidarity Research Institute.