Featured Titan

Featured Titan
"Listen Attentively, Think Critically, Act Decisively!"

Tuesday, July 1, 2014


So it’s been 10 years since the Broad Based Black Economic Empowerment Act was gazetted into an all encompassing law. Suffice to say, the outcomes of the legislation have roused many an opinion from every Man and his dog. Some of this opining has been well within reason and has contributed much to the ongoing debate about empowerment in South Africa. Yet much of it has been mired in political rhetoric, at times, with zero economic rationale.

Gone are the days, or are they?, when most people thought of BEE as the preserve of a few political elite who donned button-collar striped shirts with sharp-pointy shoes and drove in German sedans. The days when the mere mention of BEE would have you ostracised and likened to a wannabe bourgeoisie. Nowadays, even the layman understands that BEE is but a mere policy of Government aimed at redressing the economically entrenched imbalances of our shameful past.

So what has BEE achieved in 10 years? Have we made significant progress and taken bold strides towards that nirvana of economic emancipation for the majority of the previously disenfranchised? OR perhaps, have we perverted the very concept of empowerment and merely redistributed the economic cake to a few ‘connected’ individuals? Have our political forebears and custodians of policy sold out on the ideologies enshrined in the freedom charter, all in the name of BEE?

That BEE has conferred economic benefits to black people goes without saying. Billions of Rands have been accumulated by the savvy oligarchs, the politburo and a few lucky buggers! The first phase of BEE [ala 1994 – 2004] was characterised by an almost free for all seizure of opportunities. White owned companies literally “gave-away” equity to the black who’s-who that occupied the upper-echelons of the ruling party. It was a banquet of untold proportion that to this day remains the envy of all the uninvited onlookers.

Worryingly, apart from a handful of the new beneficiaries of South Africa’s very own gilded-age, BEE doesn’t seem to have even remotely changed the lives of many? Yes the middle class have doubled from roughly 2 million in the 1990s to roughly 4 million now. Yes there are more people with access to lever-flush toilets, running water, electricity, access to the internet and all these wonderful things that have scant correlation to BEE.

Indeed, the ascent of the South African middle class can be said to be a once-off (at-least for a while) phenomenon caused by economic development in general and not BEE in particular. Think about it; empowerment is a subset of development, without economic development there can be no economic empowerment. At best, there can be economic redistribution but certainly no national wealth creation. One of the reasons for this extraordinary growth is that economic growth, driven entirely by exogenous factors, averaged 5% from 2003 to 2007.

This could explain why the swell of the middle class peaked in 2007; since then, growth of the middle class has just about stagnated. We all know the economy has gone to the dogs since then. The BEE banquet has turned into famine with big deals virtually unheard of these days. Smaller deals abound but fail to attract the newly rich and difficult to finance for the wannabe rich. Nowadays being involved in BEE deals means; complex tax efficient structures of vendor financing with decades long return horizons and dividend based debt amortisation schemes. In English, lots of debt, that may never be paid off!

One may infer from the aforesaid that BEE has been one puddle of mud that got the nation talking, often at each other, but has not added value. Narrow-based unemployment remains at a decade’s high of 25%, many South Africans are still poor and conditions of employment have still not improved (take a peep at the number of productive days lost to strikes). The middle class are under the tax whip, the Government’s share of the economy is nearing 35% and the social welfare check is at an astounding R150 billion. That said, one shouldn’t blame BEE for this country’s woes, the point made is that BEE has not contributed much to the solution.

Even so, the DTI kicked off, in earnest, the third phase of BEE on 11 October 2013 when they published and Gazetted the infamous 2013 BB-BEE Codes of Good Practice. These new codes have reduced the compliance burden for small businesses, introduced new requirements to improve the efficacy of BEE and sort to minimise loopholes and easy pickings for big businesses. If you ignore the sometimes conflicting sections, errors, misguided assumptions and interpretative problems, the new codes are an improvement to the old ones.

Magnified into view, BEE doesn’t seem to be much more than a policy tool to give effect to Government’s other laws, such as the Employment Equity Act, Skills Development Act, PPPFA, and etcetera. The only new thing with BEE is the concept of black ownership and local content, but only marginally so. It may have been easier to take a leaf from Brazil, India China or even Zimbabwe (BICZ nations) by enacting an Indigenisation Law requiring companies to be at-least 50% black owned to trade in South Africa.

The Government’s objectives with BEE must be lauded, after-all, the goal of empowering more black people in an economy from which they were precluded from meaningfully participating, is a noble one. The question to be asked is whether BEE is the correct tool, no use in having cricket bats in a tennis match. If the preceding 10 years is anything to go by, then we are beating the same path to nowhere. All in the name of BEE!

Monday, October 28, 2013

Youth Wage Subsidy [Disembowelled]

There has been so much brouhaha surrounding the youth wage subsidy that I considered sitting this one out instead of commentating. But the escalating insanity around some arguments has made it difficult not to weigh in on the debate. Besides, I believe I have quite a unique vantage point as a small and big business owner, economist and black youth.

An upfront disclaimer is in order; I am a big advocate of economic intervention where large systemic market failures prevent the market mechanism from operating efficiently. South Africa has a litany of such market failure. Everything from inequality to jobless growth and cronyism is indicative of malignant defects to the market mechanism.

Wage subsidies, for all the noise, are neither new nor peculiar instruments used to incentivise employers towards employment choices, which they otherwise would avoid. As a matter of fact, the current Learnership programmes run by various SETAs could be said to be employment subsidies.

The employer can claim a tax incentive of between R30 000 and R60 000 for each learner in a registered Learnership. Furthermore, the SETAs often pay small stipends (between R5 000 and R40 000 per annum) to each learner. Since Learnerships are targeted at people between the ages of 16 and 35, one could infer that this is the original youth wage subsidy. Learnerships enjoy higher per capita funding than the proposed youth wage subsidy, not to mention the fact that employers (not all tax payers) provide the funding for this.

So why then is there so much noise about the youth wage subsidy? Opponents argue, unconvincingly, that it will have a displacement effect on current labour markets and may lead to deadweight loss. The displacement argument purports that employers will dismiss or marginalise existing employees to fill the workplace with subsidised employees, increasing their profits and causing untold economic mayhem.

This argument is mostly poor, particularly in the South African context where workers are protected by motes for laws, that it is difficult to believe it to be premised on sound economic rationale. The risk of such churning is negligible and can be mitigated by design of the subsidy. Deadweight loss, on the other hand, occurs where the employer gets the benefit of the subsidy even though they would have employed the subsidized anyway. Seeing that the economy has shed 1.5 million jobs in 3 years, this is a doubtful outcome.

A more sound argument is one which posits the question; “why should the government attempt to entrench cheap labour in order to subsidize inefficient businesses”? Could this end up in a scenario where you and I are subjected to higher taxes to finance what is inevitably a futile experiment with the usual gamut of monitoring institutions and compliance requirements?
After-all, by their own admission, National Treasury does not believe that a youth wage subsidy will solve the youth unemployment problem in South Africa. They concede that youth unemployment is complexed in low education, low economic growth and a severe defect in the construct of the South African economy. So does this mean we are playing petty politics and speculating ever so generously with the national purse?

Proponents of the subsidy, on the other hand, postulate that employers are not employing youth because “entry level wages are high relative to the risk of hiring these inexperienced youths”. By implication, a subsidy will reduce risk and correct this market failure. This group sees a wage subsidy as a means of reducing the cost of employment relative to non-targeted groups. As such, companies will demand more of such subsidised labour and would incrementally employ younger people currently hindered from entering the labour market.

This seems like a rational argument enriched with neoclassical economic connotations; a sure favourite amongst many an economist. Take a look closer and you see that the subsidy is R12 000 over 2 years OR an average of R500 per month. It seems rather a pittance to entice business, particularly big businesses, to employment young people. The subsidy is actually a tax credit and not a cash incentive, meaning it will not confer any cash flow benefits to small businesses.

So who is this target at? It seems rather inappropriate for both Big business (too little) and Small business (no conferred advantage). Small businesses generally don’t like complex incentive programmes they can’t make heads or tails of. Take a look at the complexity around Learnerships and you see why they aren’t the runaway success they were originally envisaged to become.

What the proponents do not seem to consider in their argument is the fact that even when labour is free, it comes attached with costs. What is the point of having subsidised employees if this will end up costing you more in training, babysitting and administration? Suffice to say that when factories lie idle and machinery gathers dust, employers cannot create employment at any given wage. It will not be enough to subsidise labour when the domestic producers are ravaged by cheaper imports from countries with little regard for international fair labour regulations.

Perhaps if there is R5 billion to be availed in support of youth employment initiatives, it should take the form of a grant to youth owned co-operatives? You can couple this with a personal tax incentive for Big business CEOs to provide mentorship to such co-operatives. In this way, you can create massive youth entrepreneurship and provide concomitant support for it.

At R500 000 per co-operative, you can create a minimum of 10 000 new youth owned businesses and a minimum 50 000 new self-employment jobs. What’s more, a rider could be included to insist that these co-ops must be in labour intensive sectors or use labour intensive production methods. This to me seems the more sensible gamble with tax payer money. In the main, both arguments for and against the youth wage subsidy are neither here nor there.

Personally, after much agonising over the issue and synthesising the economics behind the politics, I'm convinced that as it stands, the subsidy will not work to create the projected levels of employment. For the subsidy to work, the benefit has to be a cash incentive targeted at small businesses with little admin required. Moreover, the subsidy has to be conditional upon marginal increases on the unit labour force to avoid churning (displacement).

It is not so much that the idea is inherently bad as it is that it is premised on the wrong economics.