By R.W. Johnson
The great engines of change are war and trade. In Asia the two huge empires, Russia and China, had little to do with one another until the 17th century. Then Moscow found itself under acute economic pressure due to its continuous wars with Poland and Sweden. War was expensive and the Czars needed money. Russian trade with Europe was essentially about a single product – furs. And, as a key early impact of globalisation, this trade had been badly hit by the huge and surging importation of furs from North America. So in 1644 the Czar sent the first Russian mission to open trade with China.
Sometimes history does repeat itself. Under pressure from its war with Ukraine, launched in 2022, Russia was struck by Europe’s resulting decision to cut its trade with Russia. Once again, that trade was dominated by a single product – hydrocarbons. Reeling from the loss of the trade in oil and gas with Europe, Putin turned to China and in a few short years Russia has become ever more dependent on its China trade.
All of which makes one wonder what the impact will be of the Trump administration’s decision – communicated via a Freedom Front delegation to Washington – that it doesn’t want any American companies to be subject to BEE laws and nor does it want any of its companies to be subject to a nil compensation expropriation law. Given that this edict arrives at the same time as the thunderbolt of a 40% tariff on South African goods, Pretoria has been left in no doubt as to the country’s awful vulnerability to Washington’s decisions.
In effect the tariff decision alone has created a huge national economic emergency. Suddenly, all economic forecasts have been scrapped. We will have no growth and will do extremely well if we can avoid a recession. All the plans about a national dialogue smoothing the way to the local elections will now have to be junked and the loss of many tens of thousands of jobs will spread a pall of gloom over the country.
The Trumpist stipulation about BEE creates all sorts of major complications. The ANC regards the BEE laws as Holy Writ but it would be extremely ill advised simply to ignore this demand. Many US companies are already in South Africa and most will have already been forced to comply with BEE laws, so do these decisions need to be reversed ? If so, what is the moral for local companies or companies from Japan, the EU, the UK and elsewhere ? And, in the case of new entrants like Starlink, will the ban on BEE extend to equity equivalent schemes ? After all, their impact will be much the same: in either case a new entrant to the South African scene has to pay all manner of extra costs unrelated to its business functions in order to be allowed the privilege of operating in South Africa. So the disincentive to investment here remains the same.
And, after all, no other African country imposes penalties of this sort on foreign investors. And at the end of the day there is the same dreary result of a country starved of foreign investment setting out obstacles to further foreign investment, encouraging investors to stay away. The spluttering and self-righteous defence of BEE by Ramaphosa and the Black Business Council cannot disguise the fact that this is deeply irrational and self-harming.
However, the damage is not merely economic. Partly as a result of the fuss over Starlink and Elon Musk, the whole issue of South Africa’s racial laws has received wide international attention. This is humiliating for the ANC which still likes to boast that it is building “a non-racist, non-sexist South Africa” and which has been happily celebrating the 70th anniversary of the Freedom Charter with its similar insistence on non-racialism and on a South Africa which “belongs to all who live in it, black or white”.
South Africa used to attract a great deal of international opprobrium because of its (apartheid) racial laws, but those are supposed to be the Bad Old Days. So the first indignant ANC response is a straightforward denial that we have any racial laws. Instead we have redress. But this simply won’t wash. The Institute of Race Relations has counted up our racial laws and there are 142 of them. As Elon Musk has pointed out, even though he was born in South Africa his investment here would not be welcomed unless he complies with (BEE) racial laws. Musk is obviously also correct when he insists that he would not be subject to these laws if he were black.
One senses that, as with apartheid, the fight to defend BEE is a defensive battle which the ANC is bound to lose in the end because BEE is, like apartheid, ultimately a parochial policy preference which is at odds with the rationale of the international market economy. From the outset BEE was a much easier sell back home in South Africa where it was not difficult to find white businessmen eager to ingratiate themselves with the new ANC government and happy to be quoted as saying that BEE was both desirable and necessary.
Yet international investors have never been quoted as saying such a thing. Typically, they said nothing but just stayed away. When pressed by those who conducted surveys on the subject, they naturally said BEE was the No.1 reason to steer clear of South Africa. The difference was that local investors were already here and had to make the best of that situation while international investors had a free choice.
The fact is that BEE results in the deliberate (and often dishonest) inflation of procurement costs, deliberately creates opportunities for rent-seeking which also pushes up costs, often requires the award of contracts to companies which are far from the best in their category and which are sometimes incapable of carrying out their contracts to completion, and whose costs are artificially inflated. In addition it is a tax on investment.
Perhaps worst of all, it is greatly damaging to South Africa itself. The clearest case is that of the country’s mining industry, for over a century South Africa’s key economic activity. Thanks to the BEE requirements of the Mining Charter and the constant pressure from the mining minister, Gwede Mantashe, to further strengthen these requirements, no new mines have been opened in South Africa in well over a decade. In effect the requirement that mine-owners must surrender 30% of their equity to BEE partners has killed off all chances of growth – or even survival. On the one hand few if any BEE partners have the necessary capital to buy a 30% share and no mining group can afford simply to give away 30% of its investment.
In addition, other countries don’t make these demands and even the 30% share is by no means the end of extra costs that mining companies are expected to bear. In effect they are required to fill the space and functions vacated by both the national and local governments in the areas where they mine. And on top of that many mines are virtually under siege by criminal mafias, driving up security costs. All told this makes South Africa a very unappetising jurisdiction.
Mantashe seems uncaring about the effect of his policies. South Africa used to account for 35% of all Africa’s mining exploration budget but today it attracts only 7%. Mantashe wants South Africa to account for 5% of global exploration expenditure – as it once used to – but in fact it has failed to achieve even 1%. What this means is that the entire mining sector is dying: as mines get worked out they will close and not be replaced by the opening of new mines. While the mining sector still employs 475,000 people, this number has been steadily shrinking for many years.
The result of all these lost jobs is that more and more ex-mineworkers become part of the criminal world of the zama-zamas, working under unsafe conditions and usually for a fraction of the wage they once used to command. Yet the truly crazy part is that the sacrifice of all these mining jobs is not buying any gains for black business because the BEE partners so vaunted by Mantashe are actually mythical creatures. In practice they either don’t have the money to invest; anyway choose not to invest; or simply don’t exist.
Now, of course, Mantashe has brought in similarly crazy BEE legislation to cover the oil and gas sector. Not only must investors hand 30% of their equity over to BEE interests but the state will take a further 20% share for no payment at all – the so called “free carry” portion. So on Day One the private investor loses 50% of his investment. Not surprisingly, this has successfully killed all hope that South Africa can emulate the burgeoning success of the Namibian oil and gas sector. (The Namibian government has a 10% “free carry” interest and there is no BEE requirement.)
It is all reminiscent of Thabo Mbeki’s policy in the late 1990s to attract private investors to build new power stations. The terms they were offered were so unattractive that no bids at all were received. A key stipulation was that the government would set the price for electricity. The notion that any company would willingly surrender to a third party – let alone a corrupt African government – the power to set the price for the sole commodity which that company produces is, of course, an idea which only the ANC could come up with. Anyone with even a passing acquaintance with economics knows how preposterous that is.
As may be seen, the Trumpist attempt to veto BEE legislation at least insofar as American firms are concerned is thus merely putting into words the already heavy pressure against this policy exerted by market forces. In effect, once BEE was introduced international capital mainly went on strike against the policy. Nobody spelled it out but in effect market forces declared that if you persevere with this policy you will suffer a huge drop in foreign investment and at least some reduction in domestic investment. This will cost you many jobs and thus a major source of political capital. Despite that the ANC has ploughed on with this hopeless policy. Sure enough, none of Ramaphosa’s investment summits have come to anything and the enormous loss of jobs has cost the ANC its majority.
Despite that Ramaphosa insists that he will carry on with this policy. In part this is doubtless because he is the most successful BEE mascot there has ever been, but it is also a sign of his (and the ANC’s) complete ignorance of economic matters. Moreover, the more the ANC vote shrinks the more dependent it is on subventions from BEE beneficiaries, so the party is trapped in a downward spiral. (Between August 2022 and October 2024 ANC membership fell from 691,381 to 494,146 – a reduction of almost a third.) And all this is true despite polls showing that BEE is unpopular with both black and white voters.
What is striking is that as the ANC crumbles it is coming out with more and more extreme policies requiring BEE and trying to force a demographic reshaping of the labour force – a sort of affirmative action on stilts. Many interpret this as a desperate attempt to grab for advantage before the ceiling finally falls in on the ANC. Now, however, Trump’s tariffs and his demands against BEE and expropriation have created a political as well as an economic crisis. The only possible way out of this would be a large acceleration of fundamental economic reform. That would be the rational response. But no one should be surprised if the ANC puts its head in the sand and tries to pretend that this new set of realities is simply not happening.
FEATURED IMAGE: Gwede Mantashe, minister of mining and mineral resources, briefs the media on the gazetting of the Mining Charter, 2018. Image: GCIS on Flickr.