Commentary

Well-Intended South African Mining Charter Is Recipe for Disaster

South Africa’s legendary mineral wealth is vital to that nation, its people, and to the world. South Africa is a gold mine, literally and figuratively. The country accounts for some 80 percent of the world’s platinum, 48 percent of palladium, 17 percent of manganese and 17 percent of gold. But supply of those important resources, and South Africa’s financial health, could be jeopardized by a new policy that, though well intended, has severe economic ramifications.

The South African government recently adopted a charter aimed at altering the racial composition of the mining industry. The measure’s stated goal is to “empower the previously disadvantaged” groups through racial quotas in both employment and the ownership of mining companies’ stock.

The racial quotas established by the government will likely result in economic harm to the country, and to black South Africans. In hiring, the quotas will place the racial classification of each applicant at the center of the selection process, instead of the worker’s ability to do the job. In other words, one of the mining companies’ most important business decisions — the hiring of workers — will be dependent upon non-business-related criteria.

The hiring requirements will likely have their most severe effects at the managerial level. South Africa has an undersupply of qualified management personnel — a fact that the charter acknowledges. For that reason, the mining companies have been urged to produce qualified staff from within their own ranks. The managerial training of mineworkers, who in many cases do not have any formal schooling, will come at a significant price. The same holds for the other goals of the charter, including improvements in company housing and nutrition, and increases in home ownership among employees.

The mining companies have also agreed to raise $10 billion over the next five years for the purchase and transfer of company stock to non-whites. This will drive down the profit margins in the industry and the mining companies will be forced to cut their costs by hiring fewer employees than they normally would, or by letting some of their employees go. As a result, unemployment will grow. That outcome, of course, is the direct opposite of what South Africa currently needs and what the government aspires to do.

South Africa’s top mining executives publicly express support for the charter, but in private they are said to be gravely concerned about the cost associated with it. That is a bad sign, for it means that the businesses will now likely resort to political maneuvering to escape charter requirements. In other words, the companies will believe it more beneficial to spend their limited money and energy to try to get around the charter and any legislation that may arise from it, instead of devoting those resources to improving and expanding their business.

The unease about the new measure is, therefore, palpable. The charter adds to the already complicated picture of the mining industry, which has to function under increasingly difficult conditions. The country’s inflexible labor laws are a major concern for potential investors, and the recent nationalization of South Africa’s mineral rights makes long-term returns on investment even more uncertain. The expansion of the mining companies overseas needs to be seen in the light of that increasing uncertainty. As such, the recent investments of South African companies in the mining operations in Canada, South America, and Australia must be perceived not as signs of growing prosperity, but as ways of getting the accumulated capital out of the country.

It appears clear that South African companies are hedging their bets against future negative developments. Time will show whether their concerns were justified.

Marian L. Tupy is assistant director of the Project on Global Economic Liberty at the Cato Institute.