High growth is the only way to make the poor richer

In recent months, following its annual conference and Trevor Manuel’s budget, the ANC has declared black economic empowerment (BEE) and economic growth as its two most important policy pillars. However, there could be serious contradictions in the simultaneous application of these two policy positions, depending on what legislation is implemented to attain BEE. Firstly, the current declared and mandated BEE policies are unlikely to achieve anything more than selective black enrichment, so it is inaccurate to regard them as beneficial to the broader black population. Secondly, the economic growth that is so essential to the material upliftment of the majority of blacks could be harmed by the interventions implemented in pursuit of BEE. The very people who are supposed to be the beneficiaries could pay a heavy price for the benefits that accrue to the few.

What is black empowerment after all? The debate surrounding the notion continues to be highly emotional, yet an open and honest debate is crucially important if the correct policies are to be selected by government. The participants in the debate must at least agree on the meaning of the words used. For example, is the word ‘black’ synonymous with those people who were denied active economic participation in the past, and who now have poorer incomes and opportunities because of it? If so, when we say ‘black’ do we really mean ‘poor’? But if we use the word ‘black’ literally, we are asking for assistance to be based purely on the colour of a person’s skin, which would include wealthy millionaires, educated at private schools, with university degrees and business school training. BEE surely does not have this meaning and most people would probably agree that it should not.

So we move to a broader term, perhaps ‘historically disadvantaged’? But the problem with this term is that it doesn’t mean ‘currently disadvantaged’. Are we then to continue to uplift those members of the struggle who were historically disadvantaged but are doing rather well right now? Or do we overcome this problem by introducing some mechanism to stop giving people legislated privileges under BEE when they reach a particular stage of affluence, so that further benefits can be reserved for those who remain truly disadvantaged?

As a first step, therefore, we need to develop a common understanding of what black empowerment is intended to mean. One suggestion is, ‘an increase in incomes of people disadvantaged today by laws of the past’. Perhaps this will give us a better idea of the goal, which will in turn help us choose the right policies to achieve that goal. But we must be careful not to take wrong turns along the way. One of the clichés we hear frequently is that government must establish ‘a level playing field’, but what does the phrase mean? Do we mean a legal framework within which no man or woman is favoured over another, something that is already guaranteed by our constitution? Or do we mean fiddling with the economy, Soviet fashion, in a vain attempt to engineer equality of outcome; an economic programme we know full well is incapable of success.

If our politicians do resort to a process of wealth redistribution we need to evaluate whether such a process would be effective in achieving its objective. In doing such an evaluation, we could look to the rest of the world for empirical examples of 'empowerment' success. Unfortunately, we would find attempts at such exercises have not turned out very well at all. Thomas Sowell - a black American economist – has written extensively on affirmative action policies in the United States and has concluded that the application of these policies seriously retarded black American incomes. In carrying out his study he compared the incomes of black Americans with those of other low-income groups such as Asians and Hispanics whose incomes continued to rise during the height of the affirmative action era of the 60s and 70s. Only during the Reagan era, when affirmative action policies were cut back significantly, did the growth curves of black American incomes regain their positive 1950s shape.

We then have to face economic reality, which tells us that if the government wants to achieve the greatest good for the greatest number, and especially if it wants to uplift the poor, BEE as it is currently understood is not the way to improve per capita incomes in South Africa. One of the problems behind the economic thinking of the BEE strategists is that it appears to be based on fallacious “zero sum” assumptions. It assumes that in any economic transaction one person’s gain is another person’s loss. So, in order to improve conditions for the poor, all they have to do is to go about causing economic losses for those who happen to be more affluent. Fortunately, economics in a free society does not function on a zero sum basis.

When transactions are based on voluntary exchange everyone gains and everyone becomes richer. Government coercion, on the other hand, never achieves satisfactory results, causes unnecessary dissension, and slows down economic growth. History has many examples to prove that human beings do not function well when they are threatened, fined, over-regulated, over-burdened, over-taxed, deprived of opportunity, and have their property confiscated. One of those examples is the crime of apartheid.

In conclusion, the government’s “go for growth” option should be seen as a far superior BEE strategy that will deliver infinitely better results than artificial redistribution through coercion. For its growth option to succeed government needs to adopt policies that will encourage all productive individuals in SA, such as investors, workers and managers, to exert themselves to the utmost. If the incentives are sufficiently great, and disincentives reduced to a minimum, all the people can have a stake in the economy, increase GDP rapidly, grow per capita incomes and reduce the worst effects of poverty. Even the trade unions would learn to be pro-growth as the best means of rapidly improving workers’ wages. An added bonus would be that South Africa, in addition to becoming wealthier faster, would have a truly happy and harmonious society.

Author: Neil Emerick (Freelance writer). This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and they are not necessarily shared by the members of the Free Market Foundation.

FMF Article of the Week\17 June 2003 - Policy Bulletin / 04 August 2009