The COVID-19 pandemic has swept across the global economy, causing havoc and leaving many economies teetering on the brink of economic and social collapse. Moreover, the arrival of a second and now third wave of infections and a further mutation of the virus is driving the economy further into peril and uncertainty. The announcement by Cyril Ramaphosa, back in March 2019, that two of South Africa’s wealthiest families and the pinnacle of big business, the Rupert and Oppenheimer families, would be donating R1 billion each was met with admiration from all corners of the country. These commitments have since been matched by the Motsepe group of companies and Naspers, donating R1.5 billion. To date, the fund has amassed over R3.22 billion in pledges from a wide array of private, public, and political donors.

Responses of this type are understandable when combining the already bleak outlook for the South African economy with a significant and potentially catastrophic supply shock. However, a question that may be playing on many South Africans minds is: why, given the fact that South Africa’s economy has long struggled with growth and several structural issues, is this response from big business only coming now in the face of a global pandemic? An easy answer may be that there has not yet been an event of this magnitude for big business to respond. However, a counter to this argument is that businesses should continuously be re-investing their profits regardless of the economy’s health.

South Africa has a long history of the inefficient use of profits, which favours hording cash and conducting unproductive investments such as mergers and acquisitions. These uses of profits are a direct result of the skewed incentives facing the agents of many large companies. For instance, many CEOs are incentivised through sizeable bonus packages to maximise the shareholders’ value rather than focusing on the long-term health and sustainability of the business. This short-term view causes CEOs to opt to retain earnings rather than embark on risky research, development, and innovation endeavours that often fail but may result in enormous payoffs if they succeed economically and socially. Short-termism is a result of a corruption of the idea of value creation where price is associated too closely with true value, nuturing an entrenched system of extraction that contributrs to worsening economic and social conditions. This is something the professor in the Economics of Innovation and Public Value at University College London, and director of the Institute for Innovation and Public Value, Mariana Mazzucato laments in her book The Value of Everything.

Economic incentives should be designed better through appropriate nudges and a better understanding of the behaviours of firms during normal economic conditions and during times of economic downturns and panics. Moreover, incentives should be combined with the correct framing of problems and potential solutions that arise through collaborations between the public and private sectors.

In this post, I use Mazucatto’s idea of value in arguing that South Africa currently possesses weak incentives that makes value extraction more attractive to big business than value creation. Weak incentives are created by the State, thus far, fostering an economic order that prides itself in winning at all costs over progress within society. In the words of, Susan Strange and others, including Mazzucato, Casino Capitalism is a looming spectre that will continue to haunt South Africa unless incentives can be better designed and managed to popularise an altruistic business environment that puts people before profits.

How economic incentives are crucial in driving investment

Policymakers use incentives to encourage private sector firms to create jobs, invest in communities, and strengthen local industries. Incentives aim to harness an individual’s self-interest in the service of the common good. Nevertheless, the idea of self-interest and individual well-being maximisation is a driving force behind many capitalist economies today and gained prominence in Adam Smith’s 1776 book The Wealth of Nations. In the book, Smith suggested that “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest”. However, the butcher and baker pursue their self-interest, led by what Smith termed the invisible hand. This invisible hand is meant, as Smith writes in chapter I of his Theory of Moral Sentiments, to lead the individual “to promote an end which was no part of his intention.” This is often the role attributed to the state in debates regarding its involvement in the development of the economy. Many believe the state has a much more significant role in facilitating and directing economically and socially optimal outcomes. 

This more prominent role for the state highlights the importance of incentives and their ability to direct economic production and resources held in private hands towards ends that will benefit the public good rather than enriching a few and further exacerbating the economic and social inequalities that continue to plague our developmental prospects. Incentives can also be offered either as direct incentives, indirect incentives and non-fiscal incentives to address market failures. They can also justify government intervention to correct externalities and information asymmetries and assist infant industries. The most common form of incentives includes taxes, rebates, subsidies and other financial incentives. In addition, however, incentives can extend to disincentives that come in the form of punishment as a way to encourage a particular action. This is the typical carrot and stick analogy.  

Given the immense barriers to entry (BTE) that characterises much of the South African economy, the most recent incentive of government is the Black Industrialists Strategy (BIS) programme that focuses on structurally transforming South Africa’s industrial base through various financial incentives to introduce more small, micro, and medium-sized enterprises (SMMEs). It also aims to increase investment and participation among previously disadvantaged people and communities. The BIS programme is primarily funded through state departments such as the dtic and other government entities with a mandate of economic development like the IDC and Public Investment Corporation (PIC).

As history has shown, however, that programmes such as BBBEE have registered very little success. Instead, they have tended to reinforce the prevailing economic structure. Similarly, the BBBEE-linked Enterprise Development Programme tried to funnel private sector investment into fledgling black-owned businesses with several incentives. However, this programme again struggled to achieve its targets as many companies approached it more as a compliance exercise to access the incentives. The failings of these programs have left many black-owned companies without the necessary funds to grow their businesses and have given rise to corruption on several levels.

Rethinking and redesigning incentives for inclusive development

There could be many reasons why incentives fail to achieve their mandates and targets. One of these could be a disconnect between the government’s current list of development targets and their accompanying incentives and the private sector’s own goals and targets. A rethink of these incentives is necessary to identify where existing incentives fall short of sparking positive and productive investments by big business in South Africa. The economic crisis that is looming over the South African economy can be widespread if not addressed correctly.

In the past few years, companies listed on the Johannesburg Stock Exchange (JSE) have been hit hard by a decline in equity trading on the back of negative sentiment surrounding emerging market economies. As a result, revenues and profit levels have also seen declines in the last couple of years. These declines have also come with a decrease in the number of listings, particularly firms with small and medium market caps, has meant that the money available for expansionary capital expenditure has decreased in response. The decrease in available funds means that big business in South Africa might increasingly tighten their pockets and possibly consolidate their respective markets in response.

In response to this, the government needs to think of new ways to incentivise big businesses to utilise their profits productively by investing in productive and expansionary assets rather than allowing them to engage in investments that will ultimately lead to greater degrees of market power and increased concentration. Research, development, and continuous investment into developing new markets and products is the cornerstone of a dynamic economy. In the words of Mariana Mazzucato, these types of investments are value-creating rather than the value extracting investments that we have continually witnessed in multiple industries and sectors in South Africa.

Using this framework, the government can shape market outcomes rather than purely taking a reactionary stance focused on market fixing. Given the dire situation that the South African economy finds itself in and given the limited effectiveness of policy incentive programmes such as Broad-Based Black Economic Empowerment and the Black Industrialists Scheme, the attention of government should shift from one of reaction to one more focused around shaping the future outcomes of the economy. A potential economic and social crisis such as the one South Africa currently is in means it is the right time to examine and correct existing economic incentives to channel investment to realise socially and economically beneficial outcomes. A careful reexamination of incentives is crucial because when push comes to shove if the economy crashes – everybody loses.

Unfortunately, however, the economic track record of South Africa shows that the public and private sectors have often failed to find common ground when it comes to designing the right economic incentives that result in productive investments to develop new products, industries and markets. The problem, it seems, is designing the incentives to attract and reward productive investments by big business while at the same time addressing some longstanding structural inefficiencies that have continually hindered economic progress.

Furthermore, this rethinking extends to the respective roles of the public and private sectors in enhancing growth prospects to be more inclusive to a more significant portion of society. Economic theory suggests contradicting roles for the state and its involvement in the economy beyond what classical economics terms its essential duties. These include defending the country from attack, administering justice, educating its population, and, as Adam Smith noted, “erecting and maintaining certain public works and certain public institutions”, which are not deemed profitable for any individual or business to undertake. Nevertheless, private businesses and firms have an integral role and the capacity to enhance inclusive growth prospects because of their ability to create new and higher value-adding products and industries. These benefits can further spill over into other industries and firms, creating a virtuous cycle of investments that redefines the relationship between big business, society, and value.

Jason F. Bell is a Researcher at the Centre for Competition, Regulation and Economic Development at the College of Business and Economics, University of Johannesburg. He tweets at @jasonfbell_.

Photo: President Cyril Ramaphosa addressing the South Africa Investment Reception on the margins of the World Economic Forum (WEF) taking place in Davos-Klosters, in Switzerland. By GovernmentZA.