Two broad challenges – collapsing State capacity and spatial exclusion – have led to South Africa’s economy being defined by stagnation and exclusion and the country needs a strategy to recover State capacity.

Otherwise, slowing growth and increasing exclusion will continue to worsen, the ‘Growth through inclusion in South Africa’ report published by Harvard University’s Harvard Growth Lab shows.

Collapsing State capacity is the predominant driver of South Africa’s weakening economic performance and is at the heart of intensifying macroeconomic stress. The systems of electricity, rail, ports, telecoms, security and water have been deteriorating dramatically, and this has had an enormous impact on the ability of the economy to produce, the report outlines.

State capacity has collapsed across many government functions that are essential for a functioning economy. Critical network industries, including electricity, transport infrastructure and services, security and water and sanitation have experienced major deteriorations over the past 15 years, the report notes.

The collapse of State capacity increases exclusion, including through breakdowns in connecting infrastructure across the country. In the presence of these supply-side problems, demand-side instruments of fiscal policy have not and cannot improve outcomes, the researchers say.

“These issues have caused the South African economy to lose its historic sources of comparative advantage, including its cheap and reliable electricity, and have kept the labour, talents and capabilities of far too many South Africans disconnected,” they emphasise.

The underlying capabilities to achieve sustained growth by leveraging the full capability of its people, companies, assets and know-how remain underused, they note.

Historical spatial exclusion in urban and rural areas, which has enormous consequences for the potential of the economy, has undermined the development of denser and more inclusive cities, thereby leaving many South Africans with no option but to choose between formal housing far from opportunity and informal housing closer to opportunity.

“Effective inclusion of the marginalised black majority will require direct responses to spatial exclusion through urban and housing policies that will allow for more inclusive cities, as well new strategies to bridge know-how between the productive economy and rural areas of former homelands, which remain largely excluded,” the researchers say.

Additionally, in 2022, South Africa’s debt interest payments represented 4.8% of gross domestic product and 17% of total revenues, limiting the capacity of government to use its revenues to address other needs.

“South Africa needs to regain its investment grade if it wants to be competitive in the kinds of growth opportunities that are on the horizon,” the report states.

However, current reform momentum is encountering systemic, deep-seated and underlying issues of political gridlock, ideologies that limit the full use of society’s capabilities, systems of political patronage, and an over-burdening of State organisations with goals beyond their core missions and capabilities, the two-year applied research project report outlines.

Additionally, with unemployment and poverty high, there have been large pressures for social transfers and public employment.

“Grants are more palliative than curative. They are about redistribution more than inclusion.”