South Africa: Mbeki's big mistake
International Herald Tribune
October 27, 2005
Jeffrey Herbst 

OXFORD, Ohio In the 11 years since it abandoned white minority rule, South Africa has made enormous progress in many areas. But as the dominant African National Congress under President Thabo Mbeki undergoes its evolution from an armed resistance group to the governing party at the head of a proud, business-friendly democracy, it too often continues to view all politics through the lens of the national liberation struggle, identifying racism as the basic problem and solidarity as the only answer.
 
Among the tragic consequences of this fixation have been Mbeki's almost bizarre response to the AIDS epidemic and his failure to publicly criticize the regime of Robert Mugabe of Zimbabwe. A less well publicized but also problematic stance is the ANC's policy of Black Economic Empowerment, known as BEE, which involves the attempt to shift the equity ownership of South African companies from the current (white) hands to black ones. To this end, the government has established industry-specific charters that generally mandate that 25 percent black ownership be achieved within the next decade. The shares are supposed to be sold to their new black owners at market value, but because of the government-imposed time limits, businesses have not had much leverage in negotiations.
 
As a result of the policy, a small number of politically connected black South Africans have made a tremendous amount of money. For instance, 60 percent of the empowerment deals struck in 2003, valued at 25.3 billion rand (about $4 billion at current exchange rates), went to just two individuals.
 
The dramatic enrichment of these "BEE-llionaires" has generated increasing criticism, even from within the ANC. Kgalema Motlanthe, its secretary general, complained that in addition to the same names appearing on deal after deal, many transactions have resulted in wealth "transfer" rather than "transformation," because they have done nothing to alter the economic structure of South Africa.
 
Accurate as such criticisms are, they misunderstand Mbeki's strategy for transforming the economy. He is deliberately working to create an iconic black business elite in the hope that this will improve the relationship between his government and the corporate world, extend the ANC's influence outside politics and help win more investment in South Africa.
 
Creating a high-profile group of ultra-rich blacks is, in Mbeki's logic, the best way to end the "investment strike" that South Africa is said to be suffering from; the white business class, it is supposed, will never be friendly to the new South Africa.
 
Such a top-down redistribution strategy may seem surprising given the ANC's former socialism and the extraordinary destitution of a large percentage of black South Africans, the party's core constituency.
 
The president's thinking seems to have been influenced by the successful Afrikaner effort to build up an Afrikaner business elite in the 1920s as part of a comprehensive strategy to end the "poor white problem" and seize control of the state from the British.
 
There is also the Malaysian example. Malaysia is an attractive precedent because it too had an economy dominated by a small, racially defined elite (Chinese) and yet has managed, despite some significant stumbles, to grow at an extraordinary rate since the early 1960s. It did this in part by enacting laws that, through affirmative action and the targeted use of government assets, encouraged the emergence of an ethnic Malaysian business class. These laws were the brainchild of Mahathir bin Mohamad, prime minister from 1981 to 2003, who argued that the best way to keep the shares of privatized state assets in indigenous hands was to hand them over to those Malays "most capable of retaining them, which means the well-to-do."
 
Unlike Mahathir, however, Mbeki has not taken the other steps to change the attitudes of blacks toward business. Having spent much of his adult life in exile, Mbeki seems to have neither the skills necessary to create mass mobilization nor the desire to lead such a drive. He has not, for instance, tried to develop a culture of stock ownership among ordinary blacks or to encourage them to invest their savings in the formal economy. He has also done little to create a truly indigenous vision of capitalism.
 
Unfortunately, Mbeki's top-down approach is unlikely to succeed; simply creating a number of black capitalists will not, by itself, improve economic growth in South Africa. There is no reason to believe that black business people will do anything but seek out the best business opportunities for themselves and their companies. And if Mbeki keeps forcing companies to diversify their ownership, this could discourage outside investors, who will worry that their equity could be lost in the near future as the result of government-mandated sales or transfers.
 
South Africa needs to accelerate its economic growth by increasing the incentives for investment and savings. Mbeki seems very unlikely to change his ways before he leaves power in 2009. It will be up to his successor to build on the many positive developments that have occurred since 1994.
 
(Jeffrey Herbst is provost at Miami University in Ohio and a co-author of ''The Future of Africa: A New Order in Sight?'' This article is based on an essay that will appear in the November/December issue of Foreign Affairs magazine.)

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