Perverse incentives of BEE create ultimate trickle-down fantasy - Business Day, 2nd September 2013.

John Kane-Berman, the CEO of the Institute, says that Broad Based Black Economic Empowerment (BBBEE) is the "ultimate trickle-down fantasy".

Legislation to tighten up black economic empowerment (BEE) and employment equity laws ignores key factors. One is skills. Of course, the country suffers from an overall skill shortage, but the shortage is worse among Africans. Despite this, Africans are supposed to provide enough qualified people to fill racial quotas at all levels of skill and in every economic sector and subsector.

To take one example: the previous human settlements minister, Tokyo Sexwale, said it was unacceptable that only 5% of the country’s 40,000 estate agents were black. But if the demographic proportionality principle underlying our racial preferencing policies is applied, then somehow the African segment of the population must produce 30,000 estate agents.

Add in land reform targets, and Africans must also produce enough new farmers for 30% of the country’s commercial land. Plus, they must generate large numbers of accountants, quantity surveyors, judges, bankers, bureaucrats, academics, army brass, pilots, managers, mining engineers, or whatever.

The ideology of demographic proportionality implies that 2.66-million of South Africa’s 3.55-million top jobs (managers, professionals and technicians) must be filled by Africans. However, only 992,000 Africans (4.1% of those aged 20 and older) have completed post-school education. This leaves a shortfall of 1.67-million qualified Africans.

The fact that Africans with scarce skills are able to command salary premiums testifies to how thinly trained expertise is spread.

Further evidence is the fact that a relatively small number of Africans sit on dozens of company boards.

Criticism of the wealth that the supposed "usual suspects" are able to command ignores the fact that business is willing to pay a huge price for scarce company directors and/or black economic empowerment partners.

Economic success is often built upon specialisation. Those who thus adorn company boards are indeed specialists of a sort in this niche market. Some no doubt bring much expertise and insight. What particular skills they all bring is less clear.

In this and other countries throughout history, particular ethnic groups have come to dominate particular trades or professions because they have been able to specialise. Sometimes denial of other opportunities has forced them to specialise. They have thus often succeeded in turning a disadvantage into an opportunity. Jews, Indians, Greeks, Portuguese and others have all done this. By contrast, an African in South Africa is expected to be a jack of all trades.

Not only does South Africa’s racial preferencing legislation discourage successful specialisation, but it also creates perverse incentives. Among these is the incentive not to risk entrepreneurship on one’s own account: supplying the needs of white business requiring BEE points for government or other contracts is a safer option.

The opportunities for blacks opened up by the racial targets that white businesses are required to meet may be one of the reasons for this country’s lack of enthusiasm for grabbing entrepreneurial opportunities. Earlier this year, the Global Entrepreneurship Monitor reported that entrepreneurial activity in South Africa was lower than in many comparable countries, including countries in sub-Saharan Africa, and also on the decline.

There is irony in the persistent belief that somehow BEE can become "broad-based". This has long been one of its key objectives.

Critics of "neoliberalism" have always derided demands for faster economic growth as simply assuming that the wealth thus generated will "trickle down".

In fact, BEE itself is the ultimate trickle-down fantasy.

In the years since the Broad-Based Black Economic Empowerment Act of 2003 was passed, the labour market participation rate among Africans has dropped from 55% to 52%.

Such wealth as has found its way into the hands of the poor, has come not via BEE but by the extension of social grants and other components of the South African welfare state.

When all the latest anti-investment legislation has been imposed, tax revenues will decline, and the poor will be left truly high and dry.

First published in Business Day on 2nd September 2013.