In the face of SA’s challenges — slowing growth, high unemployment, deep-seated inequality and mounting fiscal problems — it becomes evident that these are not isolated issues but symptoms of a single plague: a collapse in state capacity.
In addition, persistent spatial exclusion, a more structural player in this narrative, compounds the plight of many, leaving regions and people away from economic opportunities. Our new report, which follows a two-year research engagement by Harvard University’s Growth Lab in the US, explores how these factors are interconnected and recommends strategies to mitigate or reverse their impact on the economy.
Addressing these challenges can help SA achieve its economic potential. While they may seem overwhelming right now, the promise of the Rainbow Nation is not out of reach. SA’s resilience lies in its inherent capabilities and human potential. Despite the current setbacks, the nation possesses the capacity to mend what is broken and leverage the opportunities that will create more robust and equitable foundations of future growth.
SA’s performance has been disappointing over the past 15 years. Growth has been decelerating since 2008, but also trailed behind other Sub-Saharan countries and emerging economies throughout the 2000s. Moreover, output is expected to continue to stagnate. Unemployment at more than 33% is the world’s highest and the unemployment gap between black and white South Africans has widened.
Inequality also ranks at the top globally. Attempts to tackle these issues through fiscal interventions have not dealt with the root causes and have thus only weakened the country’s macroeconomic position, as evidenced by the increase in the cost of borrowing and deterioration in its creditworthiness. SA is caught in stagnation and exclusion. But why?
SA once had the capabilities to provide the public goods and services required for a functioning economy. However, over the past 15 years in particular these capabilities have been eroded across all critical network industries and beyond. This collapse in capabilities has perniciously seeped into the core of the nation’s governance and functionality, robbing the country of its comparative advantage in cheap coal-fired electricity, and stifling productivity and economic growth. For instance, the economy fell in terms of economic complexity from ranking 47th in 1995 — on par with China — to 68th in 2021, right behind Colombia and Egypt.
The electricity crisis, dating back to 2007, serves as a glaring testament to a system in disarray. From two hours of outages per month in 2007 to a staggering 20 hours in 2020, businesses suffered losses and manufacturing faced a sharp decline that outpaced deindustrialisation processes witnessed in other countries. But it’s not just electricity — transport infrastructure, security, municipal solvency and water and sanitation services have experienced major deterioration over the past 15 years. For instance, the decline in rail and port capacity has generated large losses in exports, undermining the country’s competitiveness.
The report identifies four causes of the collapse: political patronage, gridlock, ideology and overburdened public organisations. While political patronage has been thoroughly documented by the Zondo state capture commission, the other three have been somewhat overlooked. Gridlock in the government has delayed critical decisions, as shown by the sluggish response to the electricity crisis. Chile and Colombia resolved similar crises within only five years.
Ideological convictions favouring the state’s dominant role in the economy have prevented society from contributing to supply needs. Finally, postapartheid aspirations to transform society and include more South Africans through preferential procurement systems have backfired in significant ways and overburdened state institutions with multiple difficult goals. By working through procurement to achieve transformation, SA has faced increased tendering costs and too many examples of failed public works projects.
While the aspirations were well justified, the outcomes have been poor. Similarly, local municipalities were entrusted with numerous responsibilities for delivering public goods to bring decisions closer to local needs. However, a significant number of them lacked the necessary local capabilities to execute them effectively.
Rebuilding state capacity must top the agenda for SA’s growth. Yet it goes hand-in-hand with the imperative to include more of its population and know-how in productive activities. The country cannot prosper with more than half of its working-age population not working. Urban areas face low employment rates by international standards, but the situation is even grimmer in the rural areas of former homelands.
While spatial exclusion has obvious origins in SA, we find that the way cities have been growing spatially since the end of apartheid has significantly limited their capacity to absorb people and has undermined labour dynamism.
SA cities do not work effectively as labour markets. They have low-density, disconnected structures, leading to high commuting costs and reservation wages and low foot traffic around people’s homes. This significantly discourages both formal and informal work. Postapartheid housing policies, while commendable in their motives to house all South Africans, perpetuated spatial segregation.
Public housing construction in the disconnected periphery of cities further excludes people from market opportunities. Moreover, urban planning and zoning regulations inadvertently maintain barriers to creating dense, affordable housing in desirable central areas.
Inclusion demands a seismic shift in urban and housing policies. Empowering people to choose where to live and work is the key. Relaxing restrictive building and zoning regulations, allowing for accessible housing in city centres and reallocating the housing budget towards more demand-side instruments, rather than supply-side subsidies, can bring people closer to labour opportunities.
It is also crucial to bring labour opportunities closer to people in rural areas, particularly within the former homelands, where 30% of the population lives. Achieving this requires both physical and know-how connectivity. Investment in critical infrastructure such as improved road networks is vital for better access to inputs and markets.
Moreover, we have found successful examples of business partnerships between commercial businesses outside former homelands and communities within them. These partnerships face significant hurdles in getting off the ground, but this business model has the potential to scale substantially across the country.
If SA tackles these challenges it has a chance to seize green growth opportunities by exporting products and innovative solutions that can help the country develop new sources of comparative advantage as well as help the world decarbonise. While SA’s competitive edge in cheap coal-fired electricity has eroded — in a world where coal is not cheap anymore — the country has the capabilities to exploit wind and solar generation.
Given SA’s mining and manufacturing history, the country has the know-how to expand into the green technologies demanded by the world for decarbonisation. For instance, leveraging the mining boom and manufacturing vanadium redox flow batteries, fuel cell and electrolyser membranes, electric vehicles and low-carbon fuels. Green industrial parks can help to globally relocate energy-intensive production to places that can generate cheap, reliable, clean energy, helping both local growth and global decarbonisation.
In sum, growth through inclusion in SA requires the recovery of state capacity and the empowerment of all members of society to exercise economic choice. To leverage its human capabilities, knowledge, assets and natural endowments fully, the government must adopt a more effective form of statism. It is time to rebuild and reimagine an SA where everyone has the opportunity to contribute and thrive.
• Prof Hausmann is head of Harvard University’s Growth Lab. This article was co-written with Lucila Venturi, Alexia Lochmann, Tim O’Brien and Andres Fortunato, based on a new Growth Lab report, ‘Growth through Inclusion in SA.
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