Make or break for South Africa

South Africa is currently at an inflection point, with ongoing structural reforms in key sectors of the economy needed to arrest the decline of key institutions. 

The decline of these institutions, such as the rule of law and good governance, is the main cause of South Africa’s stagnant economic growth. 

Thus, the ongoing improvements in the country’s electricity and logistics sectors should be seen as part of broader reforms to South African institutions, Standard Bank chief economist Goolam Ballim said. 

Speaking to the media during his annual presentation, Ballim explained that there is a clear correlation between economic growth and the quality of political institutions. 

In particular, the rule of law is vital for a modern economy to prosper, and declining trust in this institution could prove fatal for economic growth. 

In contrast, a strong belief in the rule of law translates into increased prosperity, as businesses are willing to invest capital over the long term, expand their operations, and increase their headcount. 

Therefore, the rule of law enables businesses and individuals to plan for the long term by engendering trust. 

Ballim explained that in South Africa, the rule of law has been steadily declining in the past two decades as crime has become rampant and the judicial system is beset with delays. 

In the decade after 1994, South Africa enjoyed strong economic growth, and individuals saw their quality of life greatly improve. A key reason for this was the strengthening of the rule of law.

Ballim said that since the mid-2000s, the South African state has become increasingly ineffective in implementing new legislation and enforcing existing laws. 

This has translated into declining trust in the rule of law, not because of poor legislation but a lack of government efficiency. 

The graphs below, courtesy of Ballim and Standard Bank, show the effect of such a decline in trust in the rule of law across the economy. 

Ballim said the government’s reform process should be viewed in light of the deterioration of South African political institutions. 

As such, the process should be judged as an institutional reform process and not merely an opening up of the electricity and logistics sectors to private companies. 

The process aims to strengthen local institutions through improved performance at key state-owned enterprises (SOEs), which should renew trust in the government. 

Furthermore, new reforms set to be implemented in the second Ramaphosa administration are set to focus on local government and the civil service. 

This aims to make the state much more efficient and effective to rebuild trust in its capacity and key political institutions. 

Ballim said the most difficult part of these reforms is proving to be the third prong of crime and corruption, which is far more challenging than electricity and logistics. 

While those issues are largely technical, crime and corruption involve significant social elements which cannot be engineered or mechanically altered. 

All of these challenges mean that South Africa is in the midst of a generational moment, with the ongoing reform process and political decisions impacting the country’s course for the coming decades. 

The creation of the Government of National Unity (GNU) has freed up significant space for accelerating existing reform processes. 

Crucially, these reforms are already underway, making the euphoria after the GNU was formed vastly different to the Ramaphoria of 2018. 

The period of Ramaphoria was characterised by a sharp improvement in sentiment towards South Africa, but it was followed by an equally quick decline as investor optimism evaporated. 

Since the formation of the GNU, however, the optimism has been sustained, with ongoing reforms bringing tangible change through the reduction in load-shedding and increased efficiency at local ports. 

Ballim said these reform processes need to be seen through in order for optimism to be sustained and investment in South Africa to pick up. 

Broadly speaking, Ballim explained that financial indicators suggest that investors believe that South Africa’s future is better than its past, with improvements being structural and not temporary.