Is Black Economic Empowerment a South African Growth Catalyst? (Or Could it Be…)

Literature › Works

Matthew Andrews (2008). Is Black Economic Empowerment a South African Growth Catalyst? (Or Could it Be…). CID Working Paper No. 170, Center for International Development, Harvard University (CID South Africa Growth Initiative). Center for International Development, Harvard University.

Type	working paper
Scope	Post-1994 South African economy
Method	mixed
Period studied	1994–2007
Regions	South Africa, Malaysia (comparative)
Themes	transition post apartheid, business and state, inequality poverty unemployment, labour markets wages, education human capital, comparative theory, manufacturing industrial policy
Citation key	andrews2008

Argument

Andrews asks whether Black Economic Empowerment (BEE) can catalyse growth as well as racial transformation. Drawing on organisational and network theory, he argues that South Africa's concentrated, closed, vertically controlled corporate structures, inherited from the mineral-based economy and apartheid, constrain both black access and economic dynamism. Proposition 1 holds that BEE will catalyse growth if it opens these structures; Proposition 2 holds that entrenched elite structures will resist change. A 25-firm study of JSE-listed companies, based largely on annual reports, finds firms responding actively but within static structures, recruiting owners, directors and managers from trusted elite networks. This leaves BEE closer to Proposition 2, though firms that build vertical bridges to small black enterprises show high payoffs. The paper closes with policy ideas: an emerging-values emphasis, decision space, self-set targets, a focus below the top of the economy, and a sunset clause.

Evidence and method

Secondary literature on corporate concentration and networks; JSE ownership and BEE-deal statistics (Who Owns Whom, Ernst & Young, EmpowerDEX, BusinessMap); SAICA chartered accountant statistics; annual reports (mostly 2004 onward), SENS reports, financial statements and web documents for 25 JSE-listed firms, supplemented by a limited number of interviews and media reports; comparative material on Malaysia's NEP/NDP and US health desegregation.

Findings

• Control of the JSE has historically been highly concentrated in a few conglomerates, though it has declined. (p. 15)

  Five companies have enjoyed control over much of the Johannesburg Stock Exchange (JSE) since the 1980s—at a high of 82 percent in 1987, dropping to 71 percent in 1996

• Black ownership of the JSE collapsed after the late-1990s deal wave and has stayed low. (p. 44)

  Black ownership figures on the JSE were assessed at around 9 percent in 1997 and 1998 and dropped to about half that in 1999.

• Firms choose BEE ownership partners from established elite networks rather than genuine new entrants. (p. 59)

  Not one firm in the sample truly introduced a new entrant.

• Black directors in the sample are drawn overwhelmingly from elite professions and big-organisation backgrounds, so boards change in race but not in network profile. (p. 62)

  Seventy-five percent of the black non-executive directors and eighty percent of the black executive directors were from elite professions—Chartered Accountants, MBAs, Lawyers

• The small pool of black chartered accountants makes Code targets unattainable and drives up skilled-labour costs. (p. 66)

  The number of black CAs increased from 259 in 2002 to 857 in June 2007. This is a growth of 230 percent in the five and a half years

• Firms favour low-change procurement responses (insourcing/outsourcing, existing suppliers changing status), so new entrants are not reached. (p. 72)

  It appears that most companies prefer outsourcing and insourcing and having existing suppliers change their status. These options have been described as ‘low hanging fruit’.

• Where firms build real vertical bridges to small black enterprises, as with Cargo Carriers, the payoff in jobs and new enterprises appears high. (p. 99)

  The payoff seems very high in these initiatives, especially those at the bottom of the economy, where gains are felt in ‘found’, trained and screened talent, new jobs and new enterprises.

• Inequality rose during the early BEE period, especially within the black population (disputed Gini figures). (p. 46)

  Disputed Gini coefficient figures increased from 0.56 in 1995 to 0.64 in 2005. The rise in the national figure was driven by the widening income gap within the black population

• Large firms dominate output while SMMEs are numerous but marginal, and networks shape hiring. (p. 21)

  Large firms constitute less than 5 percent of South Africa’s corporations but account for 60 percent of the country’s GDP

• Policy conclusion: BEE should reward job creation and new-entrant engagement and include a sunset clause. (p. 100)

  Government should increase the number of points it rewards firms for doing BEE deals with new entrants.