The Economist - Why South Africa should scrap Black Economic Empowerment

Key topics:BEE enriches a small elite, failing to reduce black inequality.Compliance costs and quotas hurt growth and deter investment.Policy fuels corruption, discourages entrepreneurship, and divides society..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..From The Economist, published under licence. The original article can be found on www.economist.com© 2025 The Economist Newspaper Limited. All rights reserved..The Economist.Some months after Nelson Mandela was released from prison in February 1990, he told businesses that South Africa must “deracialise the exercise of economic power”. Such words unnerved the conglomerates that had prospered under apartheid. Mandela’s African National Congress (ANC) then thought that nationalising industries was the best way to uplift black South Africans. To help convince the ANC of the merits of capitalism—before it won power in South Africa’s first all-race election in 1994—the firms proposed “empowerment deals” instead. Discounted assets were sold to members of the new elite, including Cyril Ramaphosa, today one of South Africa’s richest men—and its president.What began as ad hoc inducements has become the most far-reaching state-sponsored attempt at racial redress in the world. Black Economic Empowerment (BEE) requires firms, in effect, to have a minimum share of black investors, to hire and train black staff and to buy from black-owned suppliers. Despite criticism of BEE from President Donald Trump, who cites it to justify 30% tariffs on South Africa, Mr Ramaphosa has called it “not just a policy choice but a constitutional imperative”. He says there is no trade-off between racial “transformation” and economic growth.Mr Ramaphosa is wrong. A policy that made him rich is making his country poorer. It should be scrapped.BEE is meant to reduce South Africa’s stratospheric levels of inequality. But the main beneficiaries have been a tiny group of new Randlords. By one conservative estimate around 1trn rand (more than $50bn at today’s exchange rates) has been transferred to fewer than 100 people, many of them returning again and again to strike BEE deals. This is oligopoly, not equality. Under the ANC, inequality between black South Africans has exploded. The top 10% of black earners have seen incomes more than triple. Those of the bottom 50% have fallen slightly. This is mostly because of high joblessness, which reflects persistently low growth.One reason is BEE. Meeting ownership requirements and paying extortionate transaction costs is an inefficient use of capital. De facto quotas reduce productivity. Forcing firms to buy from black suppliers, even if they are more expensive, squeezes profits. A recent estimate puts the costs of complying with BEE at 145-290bn rand per year, or 2-4% of GDP. This helps explain why South Africa is last for “ease of doing business” on a list of 49 countries compiled by the World Bank..Read more:.Unmasking South Africa’s BEE billionaires: Who’s in the power circle? - Viv Vermaak.Larger firms can more easily pay for consultants that advise on BEE, shielding them from competition. The policy repels foreign investment. It also discourages genuine black entrepreneurship. Why start a firm when you could get a piece of someone else’s? All this helps explain why the rate at which firms enter and exit the market is a third of that of other middle-income states. Worse, BEE begets graft: when the state must procure based on race, not cost, it makes deals with cronies easier.Supporters of BEE say that scrapping it is impractical. Even if that were true, the government could stop it from getting worse, for instance by ditching plans for a 100bn-rand state-run “transformation fund” paid for by a tax on firms.They also argue that abolishing BEE would prevent dealing with the sins of the past. But to improve the lot of poor South Africans it would be better to focus specifically on poverty, not on race. Since the vast majority of the poor are black people, they would be the main beneficiaries of pro-poor policies.There is an argument that the elite bargain of the 1990s helped keep the peace in a fractious country. But today it aggravates social tensions by fostering inequality and keeping the salience of race high. In a large poll this year pluralities of South Africans, including black South Africans, said that BEE reduces economic growth and is “outdated and divisive”.Mr Ramaphosa should take these views seriously. It is becoming ever clearer that BEE is not the solution to South Africa’s problems, but a cause of them.

The Economist - Why South Africa should scrap Black Economic Empowerment

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