Economic racism is, in one sense, a mystery. Firms that arbitrarily discriminate, whether in labour or customers, should lose the competitive game to those that do not. Discrimination is expensive — your non-discriminatory competitors should have lower costs and better sales.
But this basic economic logic doesn't hold in reality. From the United States to Malaysia, economists have pondered why discriminatory economic practices persist, whether it be in the form of wage differentials or in the ownership of firms.
The economist Gary Becker, who did the first serious work on understanding the economics of racism in the 1950s, assumed that racism itself is exogenous to economic systems — that it depends on the "tastes" of consumers and producers. Without changing those tastes, free markets are unlikely to end racial biases in economic participation on their own, he postulated.
Other economists, particularly from a Marxist perspective, argued that racism works hand in hand with the exploitative practices of modern capitalism. In the history of South Africa there is evidence for either view. What we do know is that we have mounted one of the most concerted efforts in the world to deal with it, in the form of black economic empowerment (BEE).
There certainly were economic motives to the racism formalised by apartheid. Pre-apartheid race policy aimed to force labour out of rural areas into urban areas where workers had little choice but to sell their labour to the mines.
Formal apartheid, however, was motivated at least in part by the anti-racist logic of free markets. The Rand Rebellion was sparked in the 1920s by the attempts of large mining houses to promote some black workers into positions of seniority above whites.
Saving costs
The mines's concern was to save costs rather than any sort of ambition for employment equity. But they were obeying basic economic logic and poor Afrikaner labourers didn't like it.
The rebellion was brutally crushed by the state, with over 200 deaths, but political momentum gathered after the Rand Rebellion and led to the election of the National Party in 1948. Apartheid then set about ensuring full employment and a protected labour market for its white, mostly Afrikaans, political constituency.
When apartheid fell, it was clear that although political power had been democratised, economic power was still grossly distorted, reflecting centuries of discriminatory policies.
Was there a way to use that political power to drive a more equitable distribution of economic power? Would the invisible hand of the market undo the legacy of racism? And if not, what form of intervention would work?
To answer these questions black business groups created the Black Economic Empowerment Commission under the chairmanship of Cyril Ramaphosa in 1998. At the time, black empowerment was already a major policy initiative, but black business initiatives and the transformation efforts of white-run companies were haphazard.
The commission set about composing a coherent policy strategy that the government could adopt. It took the commission three years to produce its report.
It then called for business and politics to rally behind one key theme: redistribute in order to grow the economy: "[The report] argues that South Africa's growth prospects will increase as we address inequality through access to productive assets and targeted measures to improve the productivity of those assets."
Transforming the economy
This was a win-win proposal. By transforming the economy one should unleash its growth potential.
To drive that transformation, the commission proposed the development of a National Black Economic Empowerment Act, driven forward by the state's procurement muscle.
Companies should have to meet various transformation targets in order to do business with the state. The targets mainly concerned black ownership and management of the economy. A key focus was the role of the banking sector as a vehicle to finance transformation by supporting black entrepreneurs and black consumption.
By the time the report was published, three years into the presidency of Thabo Mbeki, transformation of the economy was a key policy objective. Mbeki and his key advisor, Joel Netshitenzhe, were convinced that forceful intervention was needed. The report therefore landed on willing political ground.
In the meantime a parallel process had been unfolding regarding the mining industry.
Backed by the rhetoric of the Freedom Charter —which had called for nationalisation of the "commanding heights of the economy" — laws had been written to transfer mining rights to the state.
Private sector companies would continue to mine those resources but, by controlling the rights, the state could determine which companies would be allowed to do so. In 2002, however, the mining sector was thrown into turmoil when a draft of the mining charter was leaked. It called for majority black ownership of mines, leading to a pummelling of mining share prices.
In the face of market panic, the ownership targets were wound back down to 26% in the final version. The mining charter debacle made it clear that great damage could be done if business did not actively engage in shaping its own future. With that in mind the financial sector initiated its own charter process and many other industry bodies began considering doing the same.
In 2003, shortly before the BEE Act came into being (now called the Broad-Based BEE Act), a financial sector charter was published that had been negotiated by industry and black financial services professionals. It had been a monumental process, led by Standard Bank's Jacko Maree on the industry side and Kennedy Bungane, head of the Association of Black Securities and Investment Professionals, on the side of black business.
The charter laid down a new and important theme in empowerment: that different industries could do different things to aid transformation. Banks, for instance, could finance poor black home owners and empowerment deals.
But the game was changed when the B-BBEE Act finally was published later that year, though it lacked a critical component: the codes of good practice that were to define just what targets businesses would be expected to meet.
Draft codes were published in 2003, but we had to wait until 2007 for final codes to be published, and with those came a much broader focus: skills development, enterprise development and social spending were elevated to the same levels as ownership and management targets.
The codes and the Act set a clear bar for all of the economy, complete with the scorecard that is used by Empowerdex to rank most companies in the M&G Most Empowered Companies.
A basic benchmark
But the codes led to an awkward tension between the "generic codes" (as the Act's scorecard came to be known) and those which had different weightings and elements — such as the financial sector charter.
The solution was to set the generic codes as a basic benchmark, but to allow industry groups to design their own codes to address specific issues within that industry. Those sector codes would still need to be approved by the department of trade and industry.
The mining charter remained within its own legal framework, a legacy from before the B-BBEE Act.
This remains a somewhat awkward compromise of different pieces of policy all forced to work together. The often Byzantine weightings and calculations that the plethora of scorecards have developed, were created in an effort to keep the multitude of different interest groups happy at the same time.
It has been a near impossible task and, with the codes now going through a much delayed revision, it's not over yet. Has it worked? By some accounts, that early optimism that growth can be achieved through redistribution has been born out. One of the major drivers of economic growth in South Africa has been the emergence of a black middle class. Between 1993 and 2009 black purchasing power climbed from 35% to almost 50% of the total.
On the other hand, the 2011 census figures show that whites still earn on average six times their black counterparts's wages. Critics of empowerment policy, Moeletsi Mbeki most prominently, argue that it has created a group of patsy black capitalists, happy to protect the old structure of the economy in return for a slice of it. But empowerment has failed to create a class of black entrepreneurs to rise up and build companies of their own.
That criticism is consistent with other analysts, who complain that only so much can be done at the level of companies — they need to be able to recruit the right skills. And when you chart the history of policy around black empowerment, it is stark that so little effort has been put into the education system in comparison.
Ultimately, empowerment policy will continue to drive reform of the economy, but entrepreneurship and skills remain the missing links.
Although this article has been made possible by the Mail & Guardian's advertisers, content and photographs were sourced independently by the M&G supplements editorial team. It forms part of a larger M&G Most Empowered Companies supplement.