To BEE or not to BEE discriminatory?

What is Black Economic Empowerment (BEE) for? The BEE Commission's draft charter suggests that BEE should aim 'to redress the imbalances of the past by seeking to substantially and equitably transfer and confer the ownership, management and control of South Africa’s financial and economic resources to the majority of its citizens.'

The charter asserts, I think incorrectly, that we can't have sustained high economic growth without deliberate State action. That is, State intervention to include black people in the economy on a massive scale and increase black incomes. A National Black Economic Empowerment Act is suggested, to define BEE and set guidelines to deracialise private business ownership and build black business capacity.

But what about what our Constitution calls South Africa's founding values of non-racialism and non-sexism! These values point no further than equal opportunity. So let's scrap all discriminatory State regulations, 'level the playing fields' and let all South Africans go forward without interference from new statutory discrimination.

No, clearly the Commission thinks past imbalances would not self-correct (or not quickly enough). So the economy would not grow faster. So big wise government should discriminate massively to reach target, and maybe also to stay permanently on target.

We've had discrimination against most South Africans. Do we want more? Should a democratic majority discriminate against minorities?

American economist Thomas Sowell examined discrimination in the jobs market. He saw how benign contempt for a group that is clearly on the bottom can turn into more active hatred when group members start rising and threatening others' jobs or status. But he didn't think you need improved goodwill for advancement. Animosity often accompanies progress. Mutual respect may only follow after the rising group consolidates substantial gains.

He noted our human tendency, or prejudice, to think in stereotypes and misjudge group capabilities. Employers are profit-driven and rarely collude ethnically. Real differences do exist in capability, reliability, work attitudes, and other economically-relevant variables between groups (and within groups) at a given time, as well as changes over time. 'But if earnings differentials reflect substantial misjudgements of current productivity on the job, some employers could reap unusually high profits by concentrating on hiring members of low-wage groups. Even if employers of all other ethnic groups were too blinded by prejudice to seize this opportunity, it would leave a great opportunity for extra high profits by employers belonging to the same ethnic group.' If white employers are indeed prejudiced, black employers can score'.

Instead he focussed on the rules of the game. Most employers prefer making more money. Sometimes government agencies or regulations stop them hiring misjudged minorities to make more profit. Then the employer can hire following his own prejudices without paying a price in lost profits. So wherever profit rates are externally controlled and limited, expect more discrimination than in unstructured and uncontrolled competitive markets. Employers in regulated industries aren't unusually prejudiced, but in highly controlled areas of the economy you get extreme discrimination because its cost is reduced or eliminated.

Should government aim to make an impact on ethnic minorities and race relations generally? Are the effects of government policy different for different racial groups? It doesn't matter whether government policy is explicitly racial, or even racial in intention. Racial discrimination is a matter of observed outcomes, not of policy-wording.

We've had over-regulation and racial discrimination. Surely transformation by deregulation beats discriminatory new state interventions?

State-regulated industries lack many of the economic constraints that force competitive industries to hire minorities. Instead they get more political constraints. So they can exhibit more racial discrimination while there's no great public outcry. Then when political forces attack discrimination, they have to make a more sudden about-face. Sowell offers the example of the US telephone industry:

'A highly regulated industry which had long had an extremely low percentage of Negro employees, even in jobs such as operators and linemen which require no special education and experience. Yet when employment discrimination became a major issue in the 1960s, there were great increases in the hiring of Negroes in the telephone industry - even in occupations where the total number of jobs was declining. In the South, where political pressures were not comparable, there was virtually no increase in the proportion of Negroes hired, even though the industry's employment was growing fastest in the South. In the North one-third of the new employees hired between 1966 and 1968 were Negroes.' (USA has 30m Negroes, or roughly 10% of the population)

Our Constitution's wording could be used to prohibit public discrimination by race and gender, but getting there would be all uphill. Far better to shift the problem into the private sector with maximum deregulation. Economic considerations – the profit motive – constrain discrimination far more effectively than empowerment regulation ever could. The market isn't perfect but government makes things worse. Especially with apartheid-style discrimination.

We've had a huge public sector and discrimination. Surely transformation by privatisation and deregulation beats compulsory reverse discrimination?

State-imposed minimum wage rates, Sowell observes, are 'typically set above the level that would have occurred by uncontrolled economic forces, otherwise there would be no point in such a law. There are many ways of getting a job done with fewer employees, and as the cost of employees rises, more of these ways are used. The net result is that the number of jobs decreases as the number of applicants increases.' Discrimination becomes free or less costly even to the profit-seeking employer. 'Facing a chronic surplus of job applicants, he can pass up whatever race, religion or nationality he does not like, while still getting all the qualified workers he can actually use.'

On the other hand, wages in competitive labour markets tend to settle where few qualified workers are without jobs and few employers cannot find workers. Any persistent worker shortage (or surplus) would tend to raise (or lower) wages. 'Without the legal restriction on wages, the employer's opportunity to make more profit, by offering somewhat lower wages and filling the jobs by hiring a larger percentage of the qualified applicants, is one of the economic factors which tend to erode ethnic barriers to employment.' Sowell's example brings it all home:

'Even in the Union of South Africa in the early twentieth century, before government regulation, ethnic barriers to employment eroded along an advancing frontier as black workers began acquiring the skills and experience to replace European workers in a number of occupations. Some indication of the strength of this trend is that the white supremacist government had to threaten many firms and industries with various reprisals if they did not maintain a certain quota of European employees. Only when minimum-wage laws were passed and extended to the black workers was the South African government able to reverse this trend. Employers who had not given in to government pressure now gave in to the economics of the situation, and black workers lost many jobs which they previously had been holding in South African labour markets.'

Well, here we are again. By grossly over-regulating wages and other terms of employment with the best of intentions, government has created obscenely high 'structural unemployment'. This has certainly delayed the private sector's natural profit-driven processes. Instead of normalising our employment demographics, they may well have been doing the reverse. But the answer is not for government to pile on still more regulations and black empowerment charters. It is to stop 'unemploying' South Africans by decree.

We have chronic structural unemployment. Surely transformation by deregulating the private-sector labour market beats discriminatory empowerment charters?

Author: Dr Jim Harris is a freelance researcher and writer. This article may be reproduced without prior consent but with acknowledgement to the author. The patrons, council and members of the Foundation do not necessarily agree with the views expressed by the author.


Further reading
Sowell, Thomas (1975) Race and Economics, McKay, New York.

FMF Article of the Week/15 January 2003