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South Africa’s economy is stuck in a growth rut, expanding at just around 1% of GDP annually – and it has been stuck there for nearly 15 years. Yet in the roughly 15 years from 1994 to 2008 the economy grew at 3%, and then 4%, and then 5%. The Common Sense explains why.

Understanding why those two eras differed so much requires understanding confidence.

Two types of confidence can be measured.

The first is the confidence of consumers, and it is measured by an index. The index on the chart below shows that the indicator rose for the period 1994 to 2008 (it got knocked down by the Asian crisis in 1998 but recovered). After 2008 it slipped and never reached earlier levels.

The second is the confidence of businesses to invest. This is shown on the table below and follows the same pattern.

Now look at what happens when these confidence numbers are plotted over the fixed investment rate.

The fixed investment rate measures capital invested in South Africa as a share of GDP. It rose as confidence rose and then fell as confidence receded.

The fixed investment rate in turn is strongly linked to a country’s economic growth rate. The investment rate is plotted against the growth rate below and completes the explanation of why the economy grew quickly to 2008 and then stopped doing so.

Turning South Africa’s economy around therefore starts with restoring confidence. That requires, perhaps above everything else, a supply of cheap and reliable electricity, efficient rail and port infrastructure, and a competitive tax and property rights regime.

While load-shedding has been addressed, not enough has been done to take advantage of defunct coal power stations to raise electricity production to where it would entice new industrial investment. As a consequence, the manufacturing economy remains constrained, something that The Common Sense has investigated in detail here. Port and rail infrastructure needs to be fully outsourced to private operators by the state. If that happens, efficiencies will lift enough to justify new investment in mining, agriculture, and export-focused manufacturing. Lastly, expropriation policy, introduced after 2008, and a key culprit for low confidence, needs to be redrafted to make clear that the state cannot take investments for less than their market value. Do those three things and the odds are that the rate of economic growth would again approach 3%, starting the same upward cycle South Africa experienced between 1994 and 2008.