The effect of Black Economic Empowerment (BEE) on racial inequality in South Africa

Term Paper 2016 27 Pages

Economics - Case Scenarios


Table of Contents

List of Tables and Figures

List of Abbreviations and Terms

1. Introduction

2. Background
2.1 Economic inequality before the implementation of BEE
2.2 Black Economic Empowerment

3. Theory
3.1 Basic labor theory
3.2 Need for an affirmative action program in South Africa

4. Main findings
4.1 Trends in South African Economy since the implementation of BEE
4.2 Beneficiary and payers of BEE

5. Conclusion


List of Tables and Figures

Table 1: Elements of a BEE scorecard and their respective weights

Table 2: Unemployment rates by race

Table 3: Average monthly wage by race

Table 4: Gini coefficients of per capita income by race

Figure 1: Income inequality in South Africa in 1993

Figure 2: Lorenz Curves for monthly income over time

Figure 3: Lorenz Curves for monthly income by race

List of Abbreviations and Terms

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1. Introduction

During Apartheid, black people were excluded from major parts of South Africa's economy. This resulted in an unequal income distribution in South Africa. Even after Apartheid ended in 1994 income was distributed unequally between races. In order to reduce this inequality and equalize opportunities between the different races in South Africa, the government implemented an affirmative action program called Black Economic Empowerment (BEE) in 2003. In this case and in the following sections, the word “black” defines a racial group, including Africans, coloreds and Indians and can thus be used as synonym for “non-whites.”[1] BEE introduced a scorecard which rates companies based on their economic inclusion of black people. If the respective company receives a low rating on the scorecard, there will likely be a negative effect on their profit compared to a company with a high rating. The basic critique of BEE is that its main beneficiary is a small elite.[2] Studies about the actual effects of BEE are rare, as data on this topic is limited. This paper investigates the BEE program and its economic justification by analyzing the trends in both, intra- and interracial inequality, since the implementation of BEE. Even though, inequality is driven by many different factors, this paper attempts to analyze whether BEE was able to effectively reduce inequality in the way that it was intended. My findings suggest that BEE might have helped to reduce inequality between different races, but that it increased inequality among black people.

2. Background

In order to better understand why BEE was implemented by the government, the following section describes the economic inequality in South Africa after Apartheid.

2.1 Economic inequality before the implementation of BEE

Throughout South Africa's history, a large fraction of the population was excluded from participation in the economy. Colonialism and Apartheid aimed to maintain the power of the white minority.[3] This resulted in an unequal wealth and income distribution in South Africa.[4] As data in the field of total wealth are scarce, this paper focuses on income inequality.

When Apartheid ended in 1994, white people earned about ten times more than Africans. Similarly, 89% of the white population belonged to the middle or upper income class, while only 7% of African people did.[5] Additionally, the white population was more educated than the black population. In total, 61% of adult white people completed at least matric (ten years of school) compared to 11% of the black population. Furthermore, the ownership of stock companies was unequally distributed, as less than 1% of the market value of the Johannesburg Stock Exchange was owned by black people.[6]

Figure 1 shows the income groups and shares of the South African population in 1993. The distribution of income is unequal overall. Furthermore, income is highly correlated with race. For example, 90% of the households in the bottom six deciles were Africans, the remaining 10% mostly coloreds. On the other hand, the top decile consists of 75% of whites.[7]

Figure 1: Income inequality in South Africa in 1993

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Source: Own representation based on Nattrass/Seekings (2001), p. 48.

Even though, income distributions differed between races, when Apartheid was abolished, rich and poor were no longer synonyms for white and black. During the last decades of Apartheid, more black people participated in the economy, and the black middle class was strengthened by an increase in the average income of the black population. Between 1975 and 1996, the income share received by white people fell from 71% to 52%, whereas the share received by black people rose from 20% to 36%. The share of black people in the upper income deciles rose from 1% in 1975 to 22% in 1996. However, intraracial inequality was rising. In 1996, the average income of the richest 10% of the black population was 250 times larger than the average income of the poorest 10%. Moreover, the richest decile of the black population earned one sixth of the national GDP, which is more than the other nine deciles combined.[8]

2.2 Black Economic Empowerment

In order to decrease the interracial inequality caused by colonialism and Apartheid, some affirmative action programs were considered by the new government of South Africa. One of these programs is the Black Economic Empowerment (BEE) which supports Africans, coloreds and Indians.[9] Before explaining the BEE program, the following paragraph will illustrate the evolution of black empowerment.

The idea of black empowerment was widely-spread in the society. The term “black economic empowerment” was already present in 1988.[10] The idea originated from three different groups. The first group was the Pan Africanist Congress (PAC), a movement which advanced a view of black liberation. This was viewed as the most radical group, as they supported the view that South Africa should get rid of all white people. The second group had a view of equality and human rights that did not take race into account. In accordance with this view the second group supported national liberation. The third group, consisting of Marxists and Socialists, completely supported the view of the second one, but they were more concerned about classes. The African National Congress (ANC), the party which runs the country since Apartheid, combined these three groups.[11] Hence, to decrease the inequality and to equalize opportunities between the different races, the ANC introduced BEE in 2003.[12] As there was no program such as BEE in the world yet, many people recognized that the effects of it might be difficult to foresee and that the big hopes would be accompanied with large risks.[13]

BEE is a growth strategy which targets economic inequality.[14] It was legally introduced as the Broad-Based Black Economic Empowerment (B-BBEE) Act of 2003 and has been modified repeatedly since then. B-BBEE defines rules and regulations such that companies have an incentive to do business with the government and its institutions. Companies which do not comply with this legislation will not be punished, but they may be unable compete for government funded projects. Additionally, as the following paragraph will demonstrate, the “Indirect Empowerment” element of the scorecard shows that the BEE rating also depends on the rating of “partner companies” such as suppliers. In general, companies with a low BEE rating are publically denounced which might have negative influence on their future profitability.[15]

The BEE rating is determined by four main elements and seven sub-elements, which are depicted in Table 1. The term Direct Empowerment includes the share of the company owned by blacks as well as their participation in managerial functions. This element determines 30% of the rating. The second element is the Human Resource Development and Employment Equity. Employment Equity measures the share of black people in different hierarchy levels as well as the working and income conditions for different races. Additionally, the Skills development sub­element measures the quality of advanced training for black people. Together with Employment Equity, this section determines 30% of the rating. The third element is called Indirect Empowerment. It contains Preferential Procurement, which takes into account the BEE ranking of the suppliers of this company. This means that companies have an incentive not to do business with companies with a bad BEE ranking. It also contains Enterprise Development, which considers projects to develop black companies through investments or donations. This section determines 35% of the ranking. Lastly, Socio Economic Development measures the effort of the company to help black people gaining sustainable access to the economy. This element is responsible for 5% of the ranking.

Table 1: Elements of a BEE scorecard and their respective weights

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Source: Own representation based on Jeffery (2014), p. 143; Kransel (2012), p. 10; and Benjamin/Raditapole/Taylor (2005), p. 3-26.

This ranking system applies to firms in all sectors of the economy including the public sector. Large companies[16] have to comply with all seven sub-elements of the scorecard.[17] In contrast, small companies can pick four out of these seven elements in order to qualify for BEE status. These four elements are weighted equally, such that each element gives 25%.

3. Theory

Before analyzing the effects of BEE, theoretical background needs to be introduced. In order to understand the labor market in South Africa and the economic results of Apartheid, the following section reviews basic labor theory.

3.1 Basic labor theory

Generally, the demand of a rational profit-maximizing company will be determined by the costs of a worker, namely his wage, and by the benefits of a worker, namely his productivity. Putting these two determinants together, a rational firm will aim to maximize the following profit­function:

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Thus, the profit of the firm (Π) will be determined by the revenues of the firm minus the costs. To maximize this function, I will derive it with respect to labor (L) and set it equal to zero. This gives us equation 2:

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Defining [Abbildung in dieser Leseprobe nicht enthalten]- as the price elasticity with respect to production[18] gives us the following expression:

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[1] Cf. Benjamin/Raditapole/Taylor (2005), Ch. 3 p. 12.

[2] Cf. Patel/Graham (2012), p. 193.

[3] Cf. Esser/Dekker (2008), p. 161 and Manning/Jenness (2014), p. 313.

[4] Cf. Alessandri/Black/Jackson (2011), p. 230.

[5] Cf. Coleman (2013), p. 25.

[6] Cf. Nattrass/Seekings (2001), p. 46.

[7] Cf. Nattrass/Seekings (2001), pp. 48-49.

[8] Cf. Nattrass/Seekings (2001), pp. 48-49.

[9] Cf. Benjamin/Raditapole/Taylor (2005), Ch. 3 p. 5.

[10] Cf. Browning (1989), p. 15.

[11] Cf. Turok (2015), pp. 143-144.

[12] Cf. Alessandri/Black/Jackson (2011), p. 230 and Turok (2015), p. 144.

[13] Cf. Madi (1997), p. 2.

[14] Cf. Attwell (2013), p. 148.

[15] Cf. Manning/Jenness (2014), pp. 314-315.

[16] Note: A company is reckoned large, if its annual turnover exceeds 35 million Rands [Cf. Jeffery (2014), p. 142.].

[17] Cf. Jeffery (2014), p. 141.

[18] Note: The price elasticity with respect to production states how much the price will change if production increases marginally.


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University of Wisconsin-Madison – Economics
Black Economic Empowerment BEE Affirmative Action Rassen Ungleichheit Race Inequality




Title: The effect of Black Economic Empowerment (BEE) on racial inequality in South Africa