At the heart of South Africa’s crisis is the failure of its economy to grow; at the heart of its economic stagnation is its failure to attract sufficient investment.

This is the message from the Institute of Race Relations (IRR) in the latest report in our Blueprint for Growth series, “Open(ing) for business”: South Africa’s investment malaise and how to escape it.

We argue that investment is the engine that propels growth. Without it, durable socio-economic development and redistributive efforts are not possible. The National Development Plan (NDP) has envisaged a future in which South Africa would achieve levels of investment equivalent to 30% of GDP. The country has never remotely managed that – in recent years, investment has sat at around the 15% mark.

Not only is that about half of the level the NDP wished to see achieved, it is less than half of the aggregate for South Africa’s middle-income peers, which see investment flowing at levels in excess of 30% of GDP.

Data shows that South Africa is far behind where it should be.

Investment laggard

From a global perspective, South Africa is an investment laggard, underperforming by a wide margin the middle-income societies that have been the most significant winners of globalisation. It’s even failing to match the aggregates for lower- and upper-income societies whose investment performance is modest by global standards.

Much of the investment South Africa has received – and remember, this is local and international investment – has been geared at dealing with the failure of public services provision. Think about mitigation measures to deal with the power crisis. Cumulatively, this should serve as a warning about the state of the South African economy.

The IRR report traces the roots of the crisis into the country’s political economy. Successive governments – before and after the transition to democracy – were committed to extensive state intervention in the economy. However, the steady decline in the country’s economic foundations (security and infrastructure), and in the inputs necessary for enhanced productivity (education, government understanding of the economy, and the regulatory environment) has steepened.

South Africa has allowed its foundations to decay, while pursuing economic objectives that would not be possible without a reliable supply of high-quality human capital and skilled administration.

In other words, South Africa lacks the means to achieve the goals that an ambitious official mindset has decreed. It has burdened businesses with a badly administered but costly regulatory environment, while being unable to keep the trains running or to protect life and property. Despite quite respectable spending, education outcomes are some of the most dismal in the world. This is not an environment into which resources would willingly be committed at scale.

Ideological and political commitments

This is driven in large part by ideological and political commitments: hostility towards business in some quarters, deference to entrenched interests by others, and feeding the patronage networks that have grown up around the state and those dependent on it for their prosperity.

We also discuss South Africa’s (potentially) changed circumstances with the inauguration of the Government of National Unity. Greeted with hope that it might accelerate reform and encourage investment, it has proven – in this respect at least – a disappointment.

Some useful movement has been made though invariably on issues that do not excite political passions, such as the issuing of visas. By contrast, there has been a doubling down on more intrusive and politically loaded matters, such as empowerment and procurement and labour policy.

The reality is that as it stands, South Africa does not make a compelling investment case to either local or foreign investors. Greater demands on existing of prospective investors simply drive what one analyst calls the “exhaustion factor”.

Until the country steps away from the current course, it is unlikely that South Africa will achieve the investment it desperately needs, to drive the growth on which its future depends.

Turn around

Fortunately, South Africa is favourably positioned to turn this around. The country has sophisticated infrastructure, albeit one in need of extensive rehabilitation. It has mineral, agricultural, and climatic resources. It has long-standing relationships with markets across the world. It has a robust, imaginative business community that has weathered considerable abuse. It also has some R1.8 trillion in corporate savings. These are the tools of a recovery, if a suitable – “good enough” – investment environment could be created.

But this hinges on policy and governance choices.

The most important grounds for optimism are that South Africa has the tools to address its problems. The real barrier to doing so is a governance mindset that has prioritised ideology over outcomes, that is reluctant to engage the often-questionable patronage system that has developed, and that has – in the words of the National Planning Commission – “rejected” meritocracy.

With different policy orientation, and a different set of choices – as is outlined in the IRR report – a high-investment future for South Africa is eminently possible. It will start with making different choices, ones which understand the universe of possibilities properly and which recognise that there is no substitute for excellence.