What's holding back South Africa's economy? Key insights from experts

The Star

02-07-2025

Failing infrastructure, systemic corruption, collapsed rule of law, state incapacity in public service and state-owned entities, erosion of local government, and high crime rates are among the key factors causing a decline in South Africa's economic growth, according to experts.
This is despite the positive growth from the agricultural sector, where the Gross Value Added (GVA) expanded by 15.8% in the first quarter of 2025. Agriculture became the main driver of South Africa's overall GDP growth in Q1 2025, contributing 0.4 percentage points to the national GDP expansion of 0.1%.
However, experts say that agriculture, although it has driven the country's economic growth, is volatile and dependent on factors such as weather, electricity supply, and transportation, among others.
Professor William Gumede, from the Wits School of Governance, said the country's political culture has made corruption, incompetence, and misbehaviour acceptable if it is done by those who share a similar colour, party, and ideology, which has contributed to the economic decline.
'Property rights are vulnerable. The rule of law in many parts has collapsed, the lower courts are inefficient, and policing is ineffective. Corruption is systemic. State capacity in many parts of the public services, among state-owned entities, and local government has been eroded. Crime is out of control. The state cannot efficiently enforce laws, rules, or policies. Infrastructure has collapsed in many areas. Many sectors of the economy, such as public transport, mining, and construction, have become informalised. The country has been deindustrialising,' Gumede said.
He added that state infrastructure development plans and forums, including the Reconstruction and Recovery Plan and initiatives such as Operation Vulindlela, have become virtual talk shops, and structures set up to play an oversight and coordination role, and provide governance over infrastructure, have not been able to do so.
'The breakdown of infrastructure drives up inflation, just as state, SOE, and policy failures do, as they drive up prices, the cost of living, cost of business, and erode savings and deter future investment. The Reserve Bank has warned that the breakdown in infrastructure threatens the stability of the financial system.
'Loadshedding, for example, has caused not only the loss of lives, but also of businesses, capital, skills, employment, and investment. It has contributed to South Africa's low-growth path, possibly taking away up to 3% of possible growth. South Africa needs around R150 billion per year just to replace the destroyed infrastructure, let alone build new infrastructure,' Gumede said.
He added that water provision has also plunged, with many of the water infrastructure SOEs, municipal entities, and boards having fallen into disarray. The provision of water in many of South Africa's cities and towns has deteriorated to such an extent that many citizens are without water for long periods during water outages.
'Transnet, the state-owned logistics giant responsible for South Africa's ports, rail, and pipelines, is, like Eskom, a major contributor to the country's low-growth path. Transnet has a debt burden of R136 billion. Its inefficiencies are causing bottlenecks at ports and limiting rail freight, undermining trade. It costs the economy over R1 billion per day," Gumede said.
Transnet estimates it needs to invest R200 billion to restore the railways to capacity, however, Gumede said i t will be a waste of money to invest in Transnet without bringing in merit-based management, cleaning up procurement by exempting the organisation from preferential procurement rules, and discarding ideological objections to having the organisation fully partner with the private sector in delivering infrastructure services.
According to the Department of Public Enterprises, between 2012 and 2023, the debt levels of the largest 10 SOEs rose by R313.6 billion. The government had to bail out these SOEs with R318.1 billion during that period.
In its latest Financial Stability Review, the Reserve Bank said while electricity availability appears to be gradually returning to historical trends, other critical infrastructure, such as the supply and quality of water and transport infrastructure, especially rail, port, and road networks, continues to degrade.
Gumede said an external economic shock, such as a prolonged fallout with the US Donald Trump administration, will have a disproportionately debilitating impact on the South African economy.
Political actors and groups who reckon South Africa can quickly pivot from the US market to alternatives, such as BRICS, have a case of wishful thinking, as a loss of the US market cannot be immediately replaced. A transition to new markets cannot be achieved overnight. Worse, SA's state trade negotiation capacity is currently possibly at its weakest, most over-ideological, least agile, and opportunity-minded, since the end of apartheid. State capacity has been eroded in state trade structures, as in other parts of the state, through cadre deployment, exclusion of minorities, and informalisation, he said.
China may be South Africa's largest trading partner by volume, but it mostly takes South Africa's raw material, not manufactured products – it has trade barriers, but sends manufactured products to South Africa, which displaces local jobs. US companies manufacture in South Africa, meaning they have larger multiplier impacts, Gumede said.
The International Monetary Fund ranks South Africa as the most difficult place to do business globally among 49 countries in the IMF's ease of doing business index. It argues that halving SA's restrictive business regulations relative to its emerging market peers could increase medium-run output by 9% and boost employment, Gumede said.
He added that policymakers underestimate the impact of state failure, corruption, incompetence, and anti-growth policies on the economy, which reduces revenue and undermines business confidence.
In the 1990s, the Johannesburg Stock Exchange had around 850 listed companies. By 2024, this had dropped to under 300, including some companies that have dual listings.
He highlighted the lack of inclusive compromises on key policies, the NHI, the Expropriation Law, apparent refusal to renegotiate aspects of the Basic Education Laws Amendment (BELA) Bill to make it more inclusive, and perceived anti-American foreign policies have caused investment, capital, and skills flight as some of the factors.
'Many ANC politicians do not genuinely think growth should be at the centre of economic policy, arguing wrongly that to do so will be promoting 'neo-liberalism'. Policies that undermine growth will have to be jettisoned,' Gumede said.
He said state debt levels need to be brought down, and key catalytic growth sectors will have to be prioritised.
'Manufacturing remains important; its declining trend needs to be reversed. Agriculture is critical. It is important that land reform is not populist, emotional, ideological and revenge-driven, but rather, that it focuses on securing food; fostering an agricultural, manufacturing, processing, and technology industrial hub; and fostering related artisan, technical, and research skills. This would mean partnering with the private sector to bring back artisan programmes, agricultural technical institutions – especially in the rural areas – and fostering agriculture technology,' he said.
Dawie Roodt, a chief economist at the Efficient Group, said the biggest challenge in South Africa is a government that is destructive, inefficient, and is quite often corrupt.
'The government policies are broadly wrong. The Expropriation Bill, for example, is one of those policy choices that is wrong for economic growth because you must protect private property rights. There's also the inefficiency of the state.
'All good things go together in the economy. If per capita GDP goes up, then life expectancy, quality of life, and education follow suit,' Roodt said.
He added that it is wrong to point out the three triple challenges of poverty, inequality, and unemployment. The emphasis must be on economic growth and unemployment or employment with jobs to look after themselves.
'Poverty in itself is not the problem. The problem is that we do not have enough rich people. The emphasis must be on creating more wealth. Now we've got all this emphasis and so-called job creation and trying to end poverty, while the emphasis must be on economic growth.
Professor Sipho Seepe, a political analyst from the University of Zululand, said the government's role is to set a policy environment that enables investor confidence, whether domestic or foreign.
'Unfortunately, the ANC has been a party that is unable to take one position, and it hides under the notion of being a broad church. That means that it is a party faced with many persuasions. And when you want to invest, the fact that there are so many tendencies pulling you from different directions does not give you a sense of guarantee, and that has been the problem of investors.
'The second challenge that the investors have is the capacity of the state. When you have a state that is unable to do the bare minimum services, then you can't invest in that country. You take a case of crime. If you have a crime-ridden country, and you have a state that appears to be incapacitated and unable to stem the tide of crime. Investors worry about that,' Seepe said.
He added that most of the legislation people think is a problem is misunderstood.
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