Liberals can espouse black empowerment

It is possible to formulate a liberal case for black economic empowerment (BEE). At first glance it seems that BEE, with its stress on racial group identity and its reliance on state interference in the economy, is incompatible with liberalism, which is fundamentally concerned with individuals and markets. BEE could fit fairly comfortably within the Rawlsian social-democratic form of liberalism, but this form is unfamiliar to most South Africans and its theory revolves around socio-economic groups, not racial ones. Alternatively, liberals may be persuaded to accept BEE on the grounds that South Africa’s economic viability and democracy will be threatened unless the majority of black South Africans achieve a greater stake in the system. If liberals accept this argument, their role will be to advocate safeguards and to argue for a cut-off (sunset clause) once clearly defined goals have been attained. They must press for BEE initiatives that promote entrepreneurship rather than increased dependence on the state. Secondly, they should advocate policies that help all economically marginalised South Africans irrespective of race. Thirdly, liberals must spell out the costs and benefits of policies. Race-based policies everywhere tend to benefit mainly those members of the target group who are already advantaged, but liberals need to insist that public benefits should not be channelled disproportionately to established elites. Promotion of small business activity should be regarded as an important complementary strategy to corporate empowerment deals. Empowering all citizens by providing an appropriate enabling environment for business is a market-based approach that all liberals can support, and one that is likely to empower a substantial number of currently marginalised black citizens. Excessive regulation creates disproportionately high compliance costs for small businesses and the informal sector, which cannot afford the services of legal and tax specialists. It also inhibits the formalisation of informal-sector businesses. Small business development is an essential strategy because SMEEs employ more than 54 per cent of the workforce, and 97,5 per cent of all registered businesses fall into this category. Moreover, 86 per cent of the people involved in the informal sector are black. Small business must be brought back into the centre of BEE policies in order to turn BEE from a redistribution to a growth strategy.

It is possible to formulate a liberal case for Black Economic Empowerment (BEE). Beyond this, there are essential roles for liberals in formulating and implementing BEE policy. Small business development, while not the complete solution, offers an empowerment vector that is both consistent with liberal principles and likely to deliver practical benefits.

Liberalism is centrally concerned with individuals and markets. It would thus seem at first sight that the very concept of BEE poses an intractable problem. BEE seems to place (racial) group identity ahead of individual talent and aspirations in determining outcomes. It also appears to hinge upon state interference with market forces. Although few liberals insist their policy ideal involves absolutely no state involvement in the market, it is not terribly profound to point out that the proposals recently placed on the table by the BEE Commission suggest interventions well beyond those likely to be countenanced by even the wettest liberal.

There are two possible ways of dealing with what appears to be an inherent contradiction between liberalism and BEE.

First, it might be argued that there are forms of liberalism that are not as wary of group identities as the Anglo-Saxon tradition - usually described as conservative in US politics - within which the South African liberal tradition is rooted. These forms of liberalism might be referred to the continental tradition, associated with (a liberal reading of) thinkers like Rousseau, Hegel and in the Twentieth Century, especially John Rawls. It is perhaps best described as the social-democratic development of the liberal tradition.

There are at least two problems with deriving a BEE policy from this tradition. It is esoteric to the South African liberal tradition - it is not what people mean when they use the word "liberal". Also, while this tradition perhaps sits more comfortably with group identities, most of its theory revolves around socio-economic groups, not racial ones. It justifies interventions to address economic marginality.

Second, although race-based policies can never be properly liberal, realities may demand some compromise to achieve other desirable ends. It has been argued that if the black majority does not achieve a greater stake in the system, their frustration will threaten economic viability and democracy. It has also been argued that the economy will operate at a level lower than full potential if the black majority remain excluded. Despite a number of problems with the extreme formulations of these two arguments, liberals cannot easily oppose either of them. But several points should inform their position.

First, if BEE is a necessary expedient, required to maintain a minimum degree of social stability (a form of the Hobbesian liberal argument, which stresses the maintenance of order as a precondition for freedom), the role of liberal democrats is to advocate safeguards. There need to be clear benchmarks, with established goals and the clear understanding that it will cease to operate as soon as those goals are attained (a "sunset clause"). Interventions also need to enhance entrepreneurialism. They have to facilitate the development of individual capacities to act as autonomous economic agents; the alternative is BEE that increases dependence on the state.

Second, the need is for policies that will address economic marginality irrespective of the skin colour of the beneficiaries. Socio-economic realities mean that the vast majority of beneficiaries will be black. It also suggests that the benefits should be restricted only to blacks who are economically marginal. The alternative is BEE that readily translates into privileging an established elite.

Third, liberals must spell out the costs and benefits of policies. Clarity and honesty are the touchstones. Where interests are involved, ideas are often fudged. It is not surprising to find that some of the individuals who stand to benefit most through corporate empowerment deals are most vociferous on how such policies benefit - or at least do not harm - the poor. But the costs and benefits of policies accrue disproportionately to different interest groups. In every instance liberals must ask who benefits, who pays, what is foregone (the opportunity cost) and whether there are non-economic costs and benefits? In particular, policies that amount to rewards for rent-seeking must be excluded in favour of policies that reward risk-taking entrepreneurial behaviour.

It is characteristic of race-based preference policies everywhere - and South Africa is no exception - that the main beneficiaries are the already advantaged within the target group. This is not to say that there should be restrictions (outside of normal criminal and procedural laws) on the activities of those who are already highly able to pursue their own interests. Indeed the more these individuals do so, the more benefits will accrue to society generally. However liberals need to assert that public policy should not channel public benefits disproportionately to established elites, including the new black one. But there is no reason for liberals not to agree with the deputy minister of trade and industry: "No black person should be ashamed of wanting to become filthy rich" (quoted in the Mail & Guardian, 7 March 1997). The issue is the rules under which such ambitions are pursued.

An objection to small business as a BEE vector is that it assumes blacks are only fit for small business. But this is not the liberal position. Removing the impediments to black people getting into the market though small business activities is a perfectly legitimate policy goal provided it is not established as an alternative to corporate empowerment deals but as a complementary strategy.

Empowering all citizens through the mechanism of an appropriate enabling environment is a market-based approach. It is not necessary to assert that markets solve all problems. But it is necessary to reject the inadequate belief that market forces tend to favour the well-resourced with the result that those already in an unequal position are most likely to stay that way. This neglects one of the most attractive features of a market-based economic system - its robust propensity to expand dramatically when allowed an appropriate enabling environment, a process that tends toward the increased empowerment of all through their response to widening opportunities.

Black Economic Empowerment is not a narrow or self-contained policy area. To treat it as such is not only intellectually lazy but results in bad policies. Where the problem is conceived of as a (racially-defined) group lacking something, it is a short step to suggesting that government should intervene to transfer that something to that group. From a liberal perspective, this fails to get to grips with the fundamental problem; disempowerment is multidimensional and has education, health, welfare, safety and security, skills development and macro-economic dimensions. The most genuine empowerment is a product of economic growth and education. Jobs and even more, the opportunity to open one's own business, are the most empowering policy options that could possibly be advocated.

The challenge is thus to create an enabling environment for economic growth. The particular form that growth takes is important. It must enable private enterprises across the entire size spectrum, from multinationals to one-person micros, to thrive, in order to spread the benefits across as much of society as possible. This depth is important. The empowerment effect is lower where growth is driven by corporate giantism, South Korean style.

An appropriate enabling environment allows the expansion of businesses, thus increasing employment and incomes. This is the one policy option that is both indisputably consistent with liberal-democratic principles and likely to empower a substantial number of currently marginalised black citizens. It simultaneously refuses to mobilise racial and interventionist appetites while at the same time promising to make empowerment accessible to a constituency that is overwhelmingly black in profile.

The extent to which the South African economy is burdened by inappropriate regulation is probably not adequately appreciated by policy-makers. Smaller businesses and the informal sector lack a voice, but it is precisely these enterprises that are disproportionately affected. The problem is not one of tax, labour, health, skills development, planning, property registration, borrowing, import and export procedures, and immigration, irrespective of the substantial problems in each of those areas. Rather it is the total compliance cost involved when business is confronted by these factors simultaneously. High compliance costs impact on the performance of all enterprises. But the extra burden is crippling for small business which cannot afford to carry dedicated human resources, legal and tax specialists.

Regulation constitutes a wall that inhibits the formalisation of informal sector enterprises. Of course most survivalist businesses never seek formal status anyway. Only a tiny minority (perhaps five per cent) are likely to become substantial formal businesses. But formalisation is a step forward because it makes access to finance, infrastructure and the law easier. But from the moment of formalisation, the small business has to comply with a Byzantine web of laws and regulations. The scale of the regulatory wall tends to trap even the most enterprising survivalists in the informal sector.

An adequate enabling environment is characterised by appropriate levels of state intervention. The private sector is not crowded out, not only in the more widely used sense of borrowing and investment, but also in the provision of goods and services. It might reduce absolute poverty where the state provides - although the longer-term sustainability is dubious at best - but it does not properly empower people. Rather, it renders them clients of the state and thus deprives them of full socio-economic citizenship. When people become clients they cease to be citizens.

Today, even social-democrats appear to accept the need for the state to disengage directly from much of the economy. But while better than discredited older policies like nationalisation, the potential harm that can be inflected by an over-regulating state is only beginning to be recognised.

BEE, as conceptualised by interests clustered around the African National Congress (ANC), requires another layer of regulation, as reflected in the proposals of the BEE Commission (community reinvestment legislation, a proposed regulatory agency and public sector empowerment fund).

While small business development is no silver bullet that will entirely inflate the economy and mop up unemployment, it is an essential strategy. Of course it cannot succeed in isolation and has to be seen in conjunction with education, skills development, trade, industry and macro-economic policies.

Small business development faces the danger of being dismissed as of little relevance in a situation where so much more appears to be at stake in high profile corporate empowerment deals. But it will make a difference to the lives of far more South Africans than such deals. The latter is a reshuffling of the racial composition of the national elite. Even with rapid growth, those empowered in this way will be a tiny minority. Small, micro and medium businesses on the other hand employ at least 54,5 per cent of the workforce (Ntsika Annual Review, 2000, p. 25) and fully 97,5 per cent of all registered businesses fall into this category.

Small business development naturally complements socio-economic processes. Cyril Ramaphosa has observed: "Many black people have forged ahead in business in unlisted companies; there are many unsung heros and heroines". The process was described, by John Kane-Berman, as South Africa's "silent revolution". A focus on this sector is less forced than the alternatives and thus less likely to have negative unforeseen consequences.

Appropriate regulation as well as some targeted supported measures is likely to see an impressive increase in the employment figures associated with small business. In this area, policy does not have to single out race groups for blacks to be the predominant beneficiaries. 86 per cent of the 1,2 million people in the informal sector are black. The presence of black enterpreneurs does admittedly decrease as the size of businesses increases. But this does appear to be changing. The number of black franchisees, for instance, doubled between 1995 and 2000.

Small business was once the premier vehicle for black economic empowerment, in both business and liberation movement circles. It now appears to be somewhat marginalised in favour of corporate empowerment deals. But if BEE is not to be dysfunctional to economic growth, small business has to be brought right back into the centre of the policy. This is necessary to bring about the required depth to make skills and asset transfers sustainable. Practically speaking, it is what is needed to turn BEE from a redistribution to a growth strategy.