Positive Discrimination in the South African Economy
Jared Snyder, Sketches of South African Life,
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MGIMO-University
After Nelson Mandela, the most prominent opponent of apartheid in South Africa, passed away last year, the world has again turned its attention to Pretoria's programs aimed at protecting the rights of the previously oppressed segment of the country's population. In reality, the lofty ideals of racial equality and justice are not something easily implemented, as evidenced by the program Broad-Based Black Economic Empowerment (BBBEE), which is currently being used as a tool for positive discrimination.
After Nelson Mandela, the most prominent opponent of apartheid in South Africa, passed away last year, the world has again turned its attention to Pretoria's programs aimed at protecting the rights of the previously oppressed segment of the country's population. In reality, the lofty ideals of racial equality and justice are not something easily implemented, as evidenced by the program Broad-Based Black Economic Empowerment (BBBEE), which is currently being used as a tool for positive discrimination.
The program Broad-Based Black Economic Empowerment is an integrated socio-economic strategy of the South African government that is designed to overcome the negative consequences of apartheid through achieving racial balance in the economy and providing economic privileges to blacks, Indians and Chinese oppressed under the previous segregationist regime. Adopted in 2003, the BBBEE Act contains a set of requirements for companies operating in the South African market.
- A larger number of company owners among previously oppressed categories of citizens.
- A greater share of blacks and minorities in executive position in companies.
- Employment equality and the reservation of jobs for blacks and minorities.
- An improvement in the professional skill level of workers.
- Preferential placement of contracts for companies owned by blacks.
- Enterprise development.
- Advancement of socio-economic priorities.
Since the share of employable black and minorities in the RSA has remained at 80 percent, their share within the company must also stay at this level. This requirement is difficult to achieve because only 4.1 percent of previously oppressed Africans possess higher education.
If an enterprise meets all of these criteria, it will be assigned BBBEE Partner Level 1 status and receive guaranteed government support and a preferential market position. If only minimal criteria are met, the status achieved is that of BBBEE Partner Level 8, with increasing demands placed on the company in order to make its operations significantly harder [1].
Of special importance seems the principle of employment equality that has been interpreted somewhat differently from the universally recognized approach. Enterprises with over 50 workers or with annual turnover above a certain figure must ensure that the share of blacks at each executive level is proportional to their share in the employable population nationwide. Since the share of employable black and minorities in the RSA has remained at 80 percent, their share within the company must also stay at this level. This requirement is difficult to achieve because only 4.1 percent of previously oppressed Africans possess higher education.
Before 2014, entrepreneurs could evade punishment for unequal racial and gender composition by citing the shortage of skilled applicants. However, in January 2014, the Act was amended to plug this loophole.
Positive Discrimination: a Double-Edged Sword
The UN International Convention on the Elimination of all Forms of Racial Discrimination, which has also been signed by the RSA, obliges its parties "when the circumstances so warrant, to take special and concrete measures in the social, economic, cultural and other fields to ensure the adequate development and protection of certain racial groups or individuals belonging to them". This Convention provides the BBBEE, a tool of positive discrimination, with a solid international legal base.
Men offering temporal employment services
south of Johannesburg, October, 2010
South Africa is not the only country to have adopted this approach. In 2008, Robert Mugabe, president of the neighboring Zimbabwe, signed the Indigenization and Economic Empowerment Act that requires the transfer of ownership of up to 50 percent of companies to individuals who had suffered from the segregationist polices of Prime Minister Ian Smith. Positive discrimination has also been legislatively formalized in India, Canada, Malaysia, Namibia, Nigeria, Pakistan, the United States, Sri Lanka and several other countries [2].
Proponents of positive discrimination promote this idea through the need to restore justice for groups of the population formerly repressed for some reason. Normally, these are religious and ethnic minorities, women and the handicapped. Notably, positive discrimination in South Africa seems rather odd, since preferences and privileges have been extended to the black majority, which also controls most of the powers of the state. In addition, whites make up a mere 8.9 percent of the population.
As a result, the BBBEE is not exactly advancing the rights of the black people, but rather erecting economic and political barriers for the white minority. There appears to good reason to believe that the cause lies in the fear of the return of white power with apartheid still fresh in the minds of many. Hence, there is no escaping the conclusion that increasing black power can be seen as a type of revenge for apartheid, more emotional than rational. As such, the general appeal of the BBBEE is unquestionably high.
To BBBEE or not to BBBEE
South Africa is not the only country to have adopted this approach. In 2008, Robert Mugabe, president of the neighboring Zimbabwe, signed the Indigenization and Economic Empowerment Act.
Due to the opportunities offered to a large segment of the population, the BBBEE initially received broad support. But finally, the mismatch between the promises made by the governing African National Congress and frequently pitiable results of the BBBEE have brought about popular dissatisfaction. Populist slogans and programs are effective only in moderation, since otherwise the electorate soon becomes weary. In 2009, polls gave the ruling party support of 63 percent of the population, while by last January, the figure had dropped to 53 percent.
But why is the RSA population largely unhappy with the results of positive discrimination? The answer may be found in Affirmative Action in the World: an Empirical Study by Thomas Sowell of the Hoover Institution [3]. Having analyzed the outcomes of policies of positive discrimination in various countries, he draws that conclusion that in all cases analyzed privileges go to the small affluent group. The poor rarely enter universities or occupy executive positions, while well-connected rich people receive more opportunities for engaging in corruption and nepotism.
Officially, the South African BBBEE was intended to improve employment outcomes, provide more jobs and level the racial balance within the active population. But the economic benefits are far from certain. The 10-year-old program has failed to decrease unemployment – 26 percent in 2004 and 25 percent in 2012, with the population growing at an average of 1.2 percent annually, which means frustrated hopes for better employment. The very wording of the job creation clause for persons fitting the BBBEE criteria is fairly controversial. In fact, jobs are created only through the opening of new enterprises and employing more workers. But South Africans prefer ousting whites from companies by blacks, which is unlikely to have a positive effect on GDP and other economic parameters.
To this end, a survey conducted by Professor Louis P. Kruger, University of South Africa, who has analyzed how the effects of the BBBEE effects are perceived by national business community, is quite amusing [4]. Notably, most of the respondents are personnel managers for whom the BBBEE is generating most favorable conditions for economic activities (69.8 percent of respondents answered YES to the relevant question, while 71.8 percent insisted they had been previously discriminated against). The survey included numerous questions about the impact of the BBBEE on various economic outcomes (see list below), generating astonishing results:
1) Enterprise competitiveness in domestic and foreign markets – 27.4 percent positive and 55.6 percent negative.
2) Quality of services and client satisfaction – 16.2 percent positive and 71.4 percent negative.
3) Quality of products and services – 18.6 percent positive and 64 percent negative.
4) Labor productivity – 15.2 percent positive and 67.2 percent negative.
5) Impact on entrepreneurship and innovation – 22.8 percent positive and 59.2 percent negative.
6) Impact on financial outcomes (return on investment, dividends, share growth) – 19.6 percent positive and 62.2 percent negative.
As a matter of fact, South African businesses appear to be mostly frustrated by the program that they have to comply with in their everyday activities.
Another aftereffect of the unreasonably fast implementation of the BBBEE has been brain drain. After the apartheid regime collapsed in 1994, over 1.3 million skilled workers left the country, putting in motion a multiplier effect, as the departure of one professional means the loss of jobs for at least ten unskilled workers.
Economic Cooperation between Russia and South Africa: Opportunities and Barriers
Increasing black power can be seen as a type of revenge for apartheid, more emotional than rational. As such, the general appeal of the BBBEE is unquestionably high.
Over the past decade, relations between Russia and the RSA have risen to new highs, due to vigorous engagement both on the bilateral level and within the BRICS and G20. In March 2013, President Putin paid a working visit to South Africa held in parallel with the BRICS summit in Durban.
The parties signed a Joint Declaration on the Establishment of a Comprehensive Strategic Partnership and a number of documents on cooperation in education, science, transportation, energy and other sectors, with a Russian trade mission to be opened in Johannesburg before the end of the year.
The potential for Russia-RSA economic cooperation is still untapped. In 2013, bilateral trade was at USD 1.72 billion. As such, Russian exports were at a mere USD 291.4 million, quite low in terms of partnership within the BRICS. The reasons behind this to a great extent lie in the countries' similar economic structures which somewhat hamper an acceleration of bilateral trade.
At the same time, despite the comparatively low turnover, bilateral investment cooperation may serve as a basis for successful economic interaction. Russia's Renova, Norilsk Nickel, Evraz Group, Renaissance Capital and Severstal are all currently operating in South Africa and there are several South African firms present in Russia.
Our South African partners are eager to obtain more Russian investment in the RSA economy and create more joint ventures, while the South African establishment is ready to assist Russian businesses. In 2006, the Russia-RSA Business Council was set up to bring together entrepreneurs of the two countries and assist them in identifying partners interested in joint projects, contacting appropriate South African authorities, and extending advisory services. More support comes from the Joint Intergovernmental Committee on Trade and Economic Cooperation created in 2002.
However, these efforts have been badly hampered by the requirements of the BBBEE and limitations that effectively prevent Russian firms from building up their presence in the RSA. The employment of numerous unskilled blacks is fraught with risks and negative consequences; as a result, Russian businesses are cautious about entering the South African market. The situation is quite controversial. On the one hand, the RSA government and businesses are working hard to attract Russian money, while on the other, these attempts are being killed off by the ВВВЕЕ that effectively makes the life of investors much harder.
Forecasting
Jobs are created only through the opening of new enterprises and employing more workers. But South Africans prefer ousting whites from companies by blacks.
Serving as a trump card for the government, the BBBEE is likely to penetrate other spheres of South African society. But the program is developing too fast and might cause a severe economic slowdown, among other things due to the lack of capital as foreign investors leave the country and low domestic demand.
In turn, this downturn would affect employment, primarily among young people (now at 51 percent according the World Bank, who might constituent a responsive check on the radical left.
With socio-economic tensions on the rise, Julius Malema's Economic Freedom Fighters [5] are gaining ground with their demands for nationalization and placing forcible pressure on the government.
Due to its economic weaknesses, the RSA is gradually losing its hold on regional leadership. Currently an African integration engine, South Africa is active in the African Union and the Southern African Development Community [6]. A weaker RSA would not only slow down integration processes but also politically emasculate the entire African continent and rule out the solution of regional problems by Africans.
As for economic relations with Russia, positive discrimination is likely to retard their advance due to the barriers created for doing business, as companies will have to sacrifice their profits and interests to the requirements of the BBBEE. Hence, only major corporations will survive, for example Russian extractive companies. Russian small and medium enterprises are facing grave difficulties and are not rushing into the South African market, which is only holding back trade and economic cooperation between Russia and RSA.
Literature and Notes
1. See the BBBEE requirements at http://www.bee.co.za/content/Information.aspx
2. T. Sowell. Affirmative Action in the World: An Empirical Study / T. Sowell. – Yale University Press. – 2004. – P. 1-22.
3. Ibid. P. 166-190.
4. L.P.Krüger The Impact of Black Economic Empowerment (BEE) on South African Business: Focusing on Ten Dimensions of Business Performance / L.P.Krüger. - Southern African Business Review. - Vol. 14, 2011. - P. 42-69.
5. Economic Freedom Fighters is a radical left organization headed by Julius Malema, former President of the ANC Youth League, who demands the 60-percent nationalization of South African enterprises.
6. Southern African Development Community is an organization of fourteen Southern African states working to liberalize trade and economic links.
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