The strategic reforms that could transform South Africa's economy

Daily Maverick

2 days ago

The key is to break the strangleholds that Eskom and Transnet have on our electricity, ports and railways.
Introducing real competition into electricity generation and the operation of ports and railways is the key to unlocking real growth in South Africa's stagnant economy.
So said Deputy Finance Minister Ashor Sarupen at a seminar organised by the In Transformation Initiative last week, where Jakkie Cilliers, head of the African Futures unit at the Institute for Security Studies (ISS), presented the unit's latest report, co-written with Alize le Roux, which forecasts SA's growth trajectory to 2043.
The seminar pondered why, despite the creation of a government of national unity (GNU) last June and the virtual end of load shedding, the South African economy only grew by a miserly 0.1% in the first quarter of 2025.
Cilliers said South Africa was caught in a 'classic upper middle income growth trap'. From 1990 until 2025, South Africa's economy had grown by an average of 2.3% a year, and on its current path, without significant reforms, he forecast it would grow at an average 2.4% annually from now until 2043. That would expand GDP from about $402-billion in 2025 to about $628-billion in 2043, in constant 2017 US dollars.
This 'slow but steady growth' would not be enough to dent poverty. It would barely keep pace with the population, which the unit forecast would expand from about 65.5 million in 2025 to about 77 million in 2043.
Cilliers said annual GDP per capita would therefore rise from $12,600 in 2025 to about $14,700 in 2043 — with South Africa falling behind the rest of the world (except Africa) where he forecast average annual GDP per capita would climb from $20,300 in 2025 to $28,500 in 2043.
He noted that on its current development trajectory it would take South Africa until 2037 to return to the peak GDP per capita of $13,800 that it reached in 2013.
South Africa had been stagnating for years, with steady deindustrialisation, weak investment, and a growing dependence on social grants undermining growth, particularly during the Jacob Zuma presidency, Cilliers said.
Cilliers noted that 740,000 South Africans entered the labour market every year, and because of slow growth and a very capital-intensive economy the number of unemployed people increased annually.
In 2023, the International Labor Organization (ILO) found that South Africa had the highest unemployment rate globally after only Eswatini. Because being part of the informal sector is considered 'work' by the organisation, South Africa's relatively small informal sector contributed to this high percentage. In South Africa, only about 18% of the labour force is employed in the informal sector.
Cilliers noted that about 62% of South Africans were now living below the World Bank's poverty datum line for upper middle income countries, of $6.85 per person a day. On South Africa's current economic path, that percentage would decline 'modestly' to 58% in 2043, though the absolute number of people living below that poverty datum line would increase, from some 40.9 million in 2025 to 44.4 million in 2043 (because the overall population would rise).
Cilliers said South Africa should now be reaping a 'demographic dividend' because its ratio of working age population – aged 15 to 64 — to its dependent population (children and elderly) had now reached 2.1. In the African Futures calculations, the demographic dividend should kick in when the ratio of working people to dependents reached 1.7. he said,
Economic growth stunted by poor human capital
But South Africa was not earning this dividend largely because economic growth was being stunted by poor human capital, mainly an unhealthy population, many of whom were still afflicted by HIV/Aids and tuberculosis and low-quality education.
The question, he said, was why South Africa did so poorly on social capital, education and health, given the very high levels of expenditure on those services.
'And the only answer that you can come up with is government inefficiency, the poor use of existing funds. And the question is, how do we escape the middle-income trap?' Cilliers asked.
He said the African Futures team had modelled the effects of reforms in eight different sectors on South Africa's economic development. These were demographics and health; agriculture; education; manufacturing; infrastructure and 'leapfrogging' (i.e. bypassing older technologies); free trade; financial flows; and governance.
They found that the largest return was from increased manufacturing, followed by freer trade and then better governance. So, for instance, all eight sectors combined would increase GDP per capita in 2043 by about 33%, from the $ 14,750 on the current path to $19,650.
Of this, increased manufacturing would contribute about $930; freer trade (with the full implementation of the African Continental Free Trade Agreement) would contribute about $900; and better governance about $800.
The combined impact of those eight reforms would decrease the percentage of South Africans living below the $6.85 a day poverty rate to 50% by 2043, down from 62% in 2023. This would represent 6.1 million fewer poor people than if the economy remained on its current path, though still leaving South Africa with a large poverty burden, Cilliers said.
The African Futures team had compiled a laundry list of recommendations, starting with the need to strengthen governance and accountability through evidence-based policies, curtailing corruption and increasing accountability and inclusivity.
Deputy Finance Minister Sarupen, of the DA, said much of Cilliers' analysis resonated with assessments by the Treasury's own economic policy team and the work being done by the government's Operation Vulindlela and by various parties in the GNU.
He agreed that merely 60% growth in the size of the economy over the next two decades 'will not get us out of the trap that we're in' and that South Africa was in danger of falling from upper middle to lower middle income status.
Structural constraints
The low growth was driven by structural constraints, weak productivity, low investment in capital, higher inequality and an underperforming formal labour market. The Treasury was 'acutely aware of this'.
But he said the government had to prioritise its reforms to tackle the problem because of the many competing demands of a massive amount of social ills and a very strong active civil society.
He noted that South Africa had a system of fairly autonomous government ministries that made it harder to pursue coherent policies.
Cilliers had identified manufacturing and freer trade as South Africa's best paths forward. Sarupen noted that cheap reliable energy with stability of pricing and supply underpinned manufacturing and industrialisation .
'And one of the drivers of our de-industrialisation has been excessive pricing and inefficiency of supply that really hurts manufacturing in South Africa,' he said.
He noted that while prices in the rest of the economy had risen 196% since 2009, Eskom's prices had increased by 403%. So Eskom was driving inflation and deterring investment.
Sarupen added that part of the reason GDP growth had been so low over the past year, despite an end to load shedding, was because companies had sunk so much money into load-shedding-proof themselves over the past few years that they had not spent enough on actual business expansion and employment.
Sarupen also noted that free trade — another key reform advocated by Cilliers — 'requires you to be able to actually move goods and services cheaply and easily around, so the logistics reforms need a lot of depth and need to maximise competition.
'And so in the reform process that we're undergoing we need to be careful to not just bring the private sector into Transnet's monopoly structure. But rather how do we create competition, across multiple ports for example.'
Likewise, South Africa had to maximise competition in railway freight lines.
He agreed with Cilliers that crime had to be tackled much better as it was discouraging investment as well as acting as a deterrent to economic activity inside South Africa because, for example, citizens were fearful of using public transport to go to work.
Rule of law
He said the rule of law was the foundation of all other economic reforms, followed by macroeconomic stability, and then better education and health, and only after that global competitiveness and industrial masterplans.
Sarupen did note though that South Africa's foundation of macroeconomic stability was 'probably one of our saving graces'.
He also said that the government had to reduce debt. He noted that about 90% of South Africa's debt was denominated in rands, and about 75% of that was purchased by domestic markets. Rand debt was generally better than debt in foreign currency but the scale of government borrowing, about R300 to R400-billion a year, was crowding out the amount of capital that could be invested in business ventures and therefore growth.
He added that the relatively high premium of about 11% on a 10-year South African Government Bond was discouraging businesses from investing in riskier ventures.
He noted that many of the investments in this year's controversial national Budget were important — such as in public transport. He said, for example, that while a lower income worker in Vietnam earned a similar wage to a lower income worker in South Africa, the Vietnamese worker spent about 10% of his or her income on transport, the South African workers spent around 50%.
'People are going to work to earn money to be able to go to work,' he said. And this was diverting money away from workers buying goods and services, which was essential for economic growth. DM