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News Article : The effect of indigenisation, such as BEE, on financial development
Category: Economy & Global : Local Economy
Author:Edited by ITInews
Email:[email protected]
Posted:10 Dec 2015

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Indigenisation as an economic intervention is frustrated by high levels of corruption

Every economy needs a highly developed and efficient financial system in order to drive financial and economic development.

However, the financial development index reveals that, on average, financial development is progressively decreasing.

A new study by Professor Jan Kruger of the Unisa Graduate School for Business Leadership (SBL) and Florence Zimunya of the North West University links indigenisation, referred to as Black Economic Empowerment in South Africa, to low levels of financial development across 49 countries.

The research further concludes that the intended effect of indigenisation as an economic intervention is frustrated by high levels of corruption.

“The duration and intensity of indigenisation programmes, commonly understood as the drive to increase local participation in the economy and the ownership of foreign-owned or managed companies, varies by country,” says Professor Kruger.

“Indigenisation includes the reservation of certain types of business activities for exclusive ownership and control by indigenes."

"Politicians often claim that national approach which seeks to benefit all indigenous citizens leads to economic development."

"However, our study shows that indigenisation as an economic intervention can be linked to low levels of financial development, to the extent of 81.3%.” 

The study found that the indigenisation of manpower and technology had a significant effect on financial development, with that of manpower accounting for 54.5% and that of technology accounting for 10.2%, a total of 64.7%.  

“This effect is only significant after the effect of corruption is eliminated, because corruption interferes with indigenisation process in terms of indigenisation of ownership and control, indigenisation of manpower and indigenisation of technology,” says Professor Kruger.

According to Professor Kruger, indigenisation efforts by governments in many developing countries are surrounded by controversy and may be done for less than noble purposes such as ‘lining’ the pockets of local politicians or misappropriating intellectual property and technology under the guise of local empowerment. 

There is a growing cynicism among foreign businessmen and corporations operating in some developing countries about the use of corrupt practices to subvert and sabotage national policies and promote their own corporate interest. 

In the case of South Africa, Professor Kruger concludes that political will is a key ingredient in the transformation effort to ensure that corruption does not thwart indigenisation efforts and result in continued low levels of financial development. 

“Political will provides the soil and the nutrient which allows the seeds of anti-corruption work to germinate and grow. Political will entails government matching their words with deeds by mobilising the entire public sector, the private sector and the public at large, to fight corruption together,” says Professor Kruger.

With a strong political will as the foundation, the study brings out five major pillars as part of the recommendations:  effective anti-corruption laws and regulations, effective anti-corruption agencies, effective adjudication, effective administration and effective education.

1.     Effective anti-corruption laws and regulations

Governments should put in place simple and clear indigenisation laws and regulations accompanied by incentives in order to attract multinational companies that would invest in a country without wanting to evade the country’s regulations. 

2.     Effective anti-corruption agency

If there are stringent laws but sloppy enforcement, corruption will still flourish because the corrupt escape investigation. An independent corruption agency is critical.

3.     Effective punishment

Sure detection and strict enforcement of laws, no matter how effective, must however be complemented by effective judgement.

4.     Good governance

Alongside the legal measures dealing with corrupt offenders, a proactive approach to curb corruption should be adopted by governments. 

Strict rules and regulation have to be formulated to govern the conduct of both public and private sector officers.  An efficient administration is one which values integrity and incorruptibility. 

5.     Effective education

Governments should be willing to review school curricula to include study of ethics and moral education at a young age, from Kindergarten to university.

Media publicity should ensure that effective enforcement cases are well published through the press releases, media conferences and interviews. 

There must be Corruption Prevention talks and Ethics Development seminars for public service and business sectors.

Additional recommendations include:

1.     Installing smart technology

Frequent direct contact between government officials and citizens can open the way for dishonest transactions. 

One way to address this problem is to use readily available technologies to encourage more of an arms-length relationship between officials and civil society. 

In this way e-governance has proved to be an effective key to reduce corruption.

2.     Avoid high taxation

Governments should not levy too high taxes. This usually causes even foreign companies to want to evade tax. If taxes are not excessively high, companies and individuals will be less likely to evade tax.

An efficient tax collecting system by governments should be in placeto ensure that all members of the public who are supposed to pay tax, do so.

3.     Government fund disbursement and monitoring mechanism

There should be a reasonable fund pay-out mechanism to the business sector and should cover a broad range of participants to allow anyone interested in productive activities to participate for their own benefit as well as the benefit of the economy at large.

As a way of monitoring the use of allocated funds, some incentives should be provided to indigenous business people, especially to SMEs. 

Appropriate penalties should be put in place to deal with those abusing the disbursement mechanism.

“When all the suggestions given have been implemented, financial development throughout the world will certainly improve and all the stakeholders will stand to benefit,” says Professor Kruger. 

“The business sector will be able to give financial support to broad-based indigenous business people who will in turn generate more and continue to expand the financial development of their countries.”

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