South Africa’s GDP now stands at 0.8% for the second quarter, with economists asking where the investments to grow the economy are.
We all know that South Africa’s economic growth, or rather lack of economic growth, is a major problem for the country, but it has been going on for so long that barely anyone can remember how and why it started.
However, Dr Roy Havemann, senior economist at the Ipulmelelo Growth Lab at the Bureau for Economic Research (BER), conducted a study which found that South Africa experienced a remarkable deterioration in economic growth between 2005 and 2025.
He uses a growth accounting framework to show that the reasons for the growth deterioration were that productivity shrank and investment stagnated. Post-pandemic, productivity recovered, but not investment.
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How can we do something about these issues blocking economic growth?
How do we fix it? Havemann says cutting red tape, political certainty, and faster progress on other structural reforms will reignite growth.
How is it that a country can experience a growth reversal, with annual growth falling from 4%-plus to almost zero in just a few years? In short, Havemann says, a collapse in productivity growth led by inefficient state-owned enterprises, which consumed a large share of savings without any benefit to the economy.
“This largely reflects the impact of South Africa’s state-capture decade in the years after 2010, which crowded out private sector investment, which has remained stagnant in real terms at around R500 billion a year, which is far too little to support a meaningful and much-needed expansion of the capital stock.”
In addition, he says, fiscal policy directed resources to unproductive uses while tax rates increased further, dampening growth. Faced with an inflationary environment, the real interest rate increased, which meant there could be little growth support from monetary policy.
Havemann explains that in the post-Covid period, productivity returned, but investment is exceptionally weak, with investment growth negative during 2024 to 2025, when the total capital stock grew by an average of 0.4% between 2022 and 2024.
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How can we fix this to kickstart economic growth in South Africa?
“A policy reset would restore growth. The 1994 policy choices hold lessons for 2025. Indeed, from 1994 to 2004, growth accelerated from near zero to 5%.
“Those policy choices included the significant restructuring of state-owned enterprises, including the privatisation of Telkom, opening up of the economy to support the improved competitiveness of manufacturing and fiscal and monetary policies that focused on (and delivered) fiscal sustainability and lower inflation.”
Havemann says restructuring state-owned enterprises should be the priority, such as the unbundling of Eskom. “This will support private sector investment growth and bring a range of interlinked benefits and buoyant growth. Delays in long-needed reforms to state-owned enterprises, particularly at Eskom and Transnet, delayed growth.”
He says a clear monetary and fiscal policy would also support growth. “The inflation targeting framework brought certainty to monetary policy. Fiscal policy recently turned a corner, achieving a small primary surplus in each of the last two fiscal years. This should be locked in, and a shift to a debt stabilising primary surplus together with a clear point target for monetary policy will support lower long rates.”
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Economic growth can return with right policies
Therefore, Havemann makes the point that growth can return with the right policies. “The post-1994 period highlights that South Africa’s economy previously grew at an accelerated pace. In 2024, the BER undertook an extensive “what-if” scenario of accelerated reforms and increased investment.
“While our view is tempered by a difficult start to 2025, internationally and domestically, we still believe that accelerated investment, on the back of a strong reform push, could see potential growth creep over 2% and towards 3% within three to five years.”
Havemann points out that the growth accounting exercise shows that weak investment growth is the reason for weak economic growth. “Reform can restore investment growth, but must be accelerated.”
The BER put forward an extensive “what-if” scenario of accelerated reforms and increased investment last year. Havemann says while their view was tempered by a difficult start to 2025 internationally and domestically, they still believe that accelerated investment on the back of a strong reform push could see potential economic growth creep over 2%.
“Growth could possibly increase towards 3% within five years, although reform progress remains very slow. Critically, reforms must happen to unlock growth. The first Business Leadership South Africa Reform Tracker finds that 26 reform deliverables were marked as ‘100% complete’ out of about 240 that the research team tracked for the past 18 months.”
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Recent steps in the right direction for economic growth
He notes that there were steps in the right direction in all the major areas, and the most significant positive announcements include:
- Steps towards an independent power transmission programme, including a credit guarantee vehicle. While the delays with Eskom unbundling remain a hurdle for independent transmission, this is a step forward, Havemann says.
- Concessioning of rail, with 11 successful private sector bidders announced.
- Positive steps on the water concessions model and important lessons learnt from existing water public/private partnerships.
Havemann says despite the stark deterioration in economic growth in the state-capture decade after 2010, its continued downward slide is not inevitable as the rapid growth South Africa achieved in the preceding years suggests that it is capable of growing faster, provided the right conditions are in place.
“Our base case is still to expect sub-2% growth for the next two to three years, but upside risks remain. Granted, the pace of change is too slow, business has become disconsolate, and the economy is just muddling through.
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How can SA unlock a cycle of investment, business confidence and economic growth?
“But a stronger reform push, coupled with greater political and policy certainty and improved fiscal and monetary policy co-ordination, could unlock a virtuous cycle of investment, business confidence and growth.
“We did it before against much greater odds, and there is no reason why we cannot do it again, although downside risks remain. The pace of reform has been very slow, and while some milestones were reached, there has not yet been a durable increase in growth. The slow deterioration in per capita income, plus rising unemployment, poses long-term risks. In short, the reform programme must accelerate.”