The Hindu Business Line : Preferential programmes and despairing disparities

The benefits of preferential programmes, as manifest in Malaysia and South Africa, have usually gone disproportionately to the already well placed and the more fortunate. This is not all: Group polarisation has in effect tended to increase in the wake of preferential programmes.

A large part of humanity remains mired in a dichotomous state: On the one hand, there are lofty ideals of equality, freedom and democracy to be cherished and practised. On the other, despairing disparities continue to highlight stark social and economic disadvantages suffered by millions. Even the world's richest country, the US, is racially stratified.

In his book Malay Dilemma, Dr Mahathir Mohamad, the former Malaysian Prime Minister, explains how the Chinese had succeeded in owning more than four-fifths of all the retail establishments in his country. Of all the corporate equity capital investment in 1970, three-fourth was foreign-owned, with the Chinese owning about three-fifths of the remaining domestically-owned corporate investment. While 1,488 Chinese received science degrees between 1960 and 1970, only 69 Malays graduated. Similarly, 408 Chinese earned engineering degrees compared to four Malays. The preferential policies for Malays expanded after independence and it included the Malayisation of government employment. Preferential policies expanded further after the race riots of May 1969.

Malaysia's NEP

The Malaysian government introduced its New Economic Policy (NEP) in 1971 to achieve what it called "racial balance" in favour of bhumiputras (sons of the soil). The target set was for a 30 per cent share in the economy for bhumiputras from 2.5 per cent in 1970. The NEP ended in 1990. But not the many tangible benefits for bhumiputras.

The National Development Policy, 1991, gave even more emphasis to bhumiputras, and on employment growth and human resource development. Yet, the stark fact is that, at most, five per cent of the Malays benefited from these policies. Income inequality among Malays increased under the preferential policies; the income share of the top 10 per cent rose from 42 per cent to 53 per cent of all income received by all Malays. While the masses provided the political support for the preferential policies, they benefited the Malay elite .

South Africa's BEE

The African National Congress (ANC) government in South Africa pledged to redress the injustices and inequalities that scarred the country during the over four decades of apartheid, and centuries of colonial rule. An important scheme in the redress package was the establishment, in 1998, of the Black Economic Empowerment (BEE) Commission and the promulgation of the BEE legislation in 2003. The underlying objective of BEE is the "de-racialisation of capitalist class."

The broad-based Black Economic Empowerment Act, 2004, lays down a slew of obligations on companies that may do business with government. To be BEE-compliant, companies are obliged to have a designated share of blacks in upper and middle management, pay for skill development, and make a proportion of their purchases from other BEE companies. Three core BEE elements included:

Direct empowerment through ownership and control of enterprises and assets — with a target of 25 per cent ownership of companies by 2014;

Human resource development and equitable employment;

Indirect empowerment through preferential procurement and enterprise development.

South Africa remains afflicted by the apartheid legacy. As The Economist (April 8, 2006) put it, "the geography of apartheid" remains very much intact and Mr Nelson Mandela's vision of a "rainbow nation" still a distant dream, notwithstanding the post-apartheid government's commitment to more inclusive economic growth, building 1.9 million homes, providing electricity for 4.5 million households, and running water for 11 million homes.

Growing disparities

The ANC's core supporters and a large multitude of population remain overwhelmingly poor: Unemployment is in excess of 25 per cent, and despite the five per cent GDP growth, glaring disparities and inequality are conspicuous. This is what led the country's President, Mr Thabo Mbeki, to speak of the "gaping divide between South Africa's `first economy' and `second economy'."

By way of job-creating schemes, Mr Mbeki has now launched an ambitious programme — Accelerated and Shared Growth Initiative for South Africa (ASGISA). The programme provides 370 billion rand for public works, mainly infrastructure. The President has also been busy establishing permanent institutions such as NEPAD (the New Partnership for Africa's Development) launched in 2001, with the objective of making African countries responsible for upholding standards of democracy and good governance through the African peer review mechanism.

Here again, as elsewhere, the scheme has led to the creation of a miniscule elite that is rich, politically well-connected black beneficiaries, an increasingly affluent black middle-class visible largely in cities such as Pretoria and Johannesburg, while the disadvantaged masses are conspicuous everywhere.

Mr Mbeki hails the present attempt as South Africa's "age of hope." A major part of the gains for the black middle-class has emanated from public sector jobs. Appointment of blacks in senior positions in the private sector has had only a marginal impact.

The government has, therefore, brought about a more rigorous form of affirmative action in the shape of the 2004 BEE legislation.

The move has, in turn, led most companies to target the public sector for sourcing their senior manpower in order to comply with their "employment equity" targets. A negative fallout is the emigration of a number of skilled white workers owing to discrimination in favour of blacks.

Benefiting a minority

As in India, primary education has not percolated to the blacks who are at the bottom of the pyramid. This in spite of the government providing as much as 20 per cent of the national budget for education and an annual subsidy of 500,000 rand to schools for teaching children from disadvantaged communities.

Yet, there is progress: The number of independent schools has risen from 517 in 1994, to 2000; the proportion of blacks in them has risen from 36 per cent in 1990 to 60 per cent.

In Preferential Policies: An International Perspective, Thomas Sowell maintains that what is called "affirmative action" in the US is part of a much larger phenomenon found in many countries. Preferential programmes, even when explicitly designed as "temporary," have tended not only to persist but also to expand in scope. What is further revealing is that, within the groups designated by the government as recipients of preferential treatment, the benefits have usually gone disproportionately to those members already well placed and more fortunate.

This is not all: Group polarisation has in effect tended to increase in the wake of preferential programmes. Yet another seamy side of the scheme is the widespread claims of those belonging to the designated beneficiary groups.

Further, in his seminal book, Affirmative Action Around the World: An Empirical Study (2004), Sowell refers to evidence that benefits of affirmative action are sharply negative: For example, in Tamil Nadu, just over 10 per cent of the backward classes has received more than half the admissions and jobs reserved for backward classes; in Malaysia, the richest 17 per cent of the bhumiputras have received over half the admissions reserved for Malays.

Likewise, in Sri Lanka, a tiny minority of the Sinhala elite has received the maximum benefits. Again, in the US, a small minority of blacks, especially in the Washington D.C. area and the Eastern Corridor, are firmly in the middle-class, but the majority in urban ghettos.

(The author is a former Chairman and Managing Director of Concor.)

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