KEY TAKEOUTS

• A recent report by the Harvard Growth Lab identifies the breakdown in state capability as one of the key reasons underpinning South Africa’s economic underperformance.The formation of the GNU and the marginalisation of populist political forces provides an opportunity to change this dynamic, with significant middle ground highlighted across the two main GNU parties, the ANC and the DA.
• Through Operation Vulindlela the ANC and the DA can dramatically increase the pace at which economic reforms are implemented.
• This should progressively remove key short-term constraints to growth like energy capacity challenges and lift South Africa’s growth from its near-term trend of about 0.5% to around 1.5%.
• Over time, a single-minded focus on removing supply constraints to growth should be capable of lifting growth closer to 2.5-3.0%.

In his opening address to South Africa’s seventh administration, President Cyril Ramaphosa emphasised unity and cooperation while putting growth at the centre of government’s priorities. This bodes well for South Africa. While it was born of necessity, the Government of National Unity (GNU) can lift South Africa’s growth over the medium term. To do this, the GNU and its principal partners, the ANC and the DA, will need to emphasise areas of agreement and secure short-term wins if they are to build a durable unity delivering real results to South Africans.

As President Ramaphosa has acknowledged, South Africa has barely grown in the last decade and a half. Failing state capacity, ideological gridlock and rampant corruption have diverted state spending away from productive investment towards current spending and increasingly higher debt service costs. Business and consumer confidence has eroded, and society has paid an increasing cost due to failing state-owned enterprises and failing provision of basic public goods like safety, health and education.Fixed investment to gross domestic product (GDP), which already lagged far behind most emerging markets, has trended down since 2008, and as a result GDP growth has ebbed. After averaging 3.6% per year between 1994 and 2007, real GDP growth has averaged just 1.3% since then. In real per capita terms this is even more stark; per capita income grew by 2% per year between 1994 and 2007, but since then has declined by -0.3% per annum. The legacy of the last fifteen years is a poorer nation lagging its peers in emerging markets.

Finding political middle ground

A recent report by the Harvard Growth Lab led by Ricardo Hausman identifies the breakdown in state capability as one of the key reasons underpinning South Africa’s economic underperformance. The report highlights four key characteristics of this collapse in state capability:

•  The first is the ideological and political gridlock that has prevented critical decisions from being made on time in key areas like energy and transport.
• The second is the statist ideology that has seen the ANC baulk at a wider role of the private sector and provincial and local governments in providing key goods and services like energy.
• The third is the mistaken belief that preferential procurement in the interest of empowerment could be imposed on network industries like energy without significant cost.
• The fourth is the rampant level of political patronage and corruption that has pervaded government departments and state-owned enterprises.

The formation of the GNU and, in particular, the marginalisation of the populist Economic Freedom Fighters (EFF) and uMkhonto weSizwe Party (MKP) from the process provides a golden opportunity to change the above dynamic. Importantly, in their negotiations and in the subsequent elaboration of the GNU’s priorities there is significant middle ground between the two main parties in the GNU, the ANC and the DA.

Prior to the formation of the GNU, the DA underscored their support for Operation Vulindlela. This is a key project of the President’s and provides a non-contentious platform upon which the ANC and DA can cooperate. Indeed, the inclusion of the DA could well see reforms envisaged under Operation Vulindlela fast-tracked. The rapid moves by the new DA Minister of Home Affairs to address the backlog of skilled visa applications is evidence of this. The ability to find common ground to drive selected reforms will be very important in lifting short-term growth prospects, but also in cementing the relationship between the ANC and the DA and neutralising populist forces.

Resolving party tensions

Defusing major areas of conflict between the GNU parties will also be important as these have the potential to collapse the GNU, opening up the path to an alternative populist political future for the country. President Ramaphosa has been at pains to emphasise the historic nature of the GNU, likening it to CODESA which gave birth to South Africa’s Constitutional Democracy.  

President Ramaphosa underlined his desire to find common ground on contentious areas of policy by highlighting the potential to find an intersection between parties on the controversial NHI. He said that “while there is much contestation around the NHI, there is broad agreement that we must draw on the resources and capabilities of both the public and private sectors to meet the healthcare needs of all South Africans equally. In implementing the NHI, we are confident that we will be able to bring stakeholders together, and that we will be able to resolve differences and clarify misunderstandings.”

On the policy front, while short on detail, the president’s opening of parliament address hit the right notes in outlining the key strategic priorities of the GNU being to:

• Drive inclusive growth and job creation
• Reduce poverty and tackle the high cost of living
• Build a capable, ethical and developmental state

Doubling down on reform

In particular, the President emphasised the importance of growth. “We have decided to place inclusive economic growth at the centre of the work of the GNU and  top of the national agenda. Our experience over the past 30 years has shown that when our economy grows, jobs are created. When our economy contracts there is no job creation and jobs are lost. The GNU will pursue every action that contributes to sustainable, rapid economic growth and remove every obstacle that stands in the way of growth.”

The formation of the GNU presents a golden opportunity for South Africa’s political leaders. By marginalising the destructive populist narratives of the EFF and MKP and indeed the Radical Economic Transformation faction within the ANC, a significant scope has been created for the DA alongside the Ramaphosa’s ANC to double down on implementing reform to build a more efficient and competitive economy. To the extent that this delivers faster job creation and better service delivery, this will take the wind out of the sails of those in the populist opposition in Parliament.Through Operation Vulindlela the ANC and the DA can dramatically increase the pace at which reforms are implemented. This, in itself, should progressively remove key short-term constraints to growth like energy capacity challenges and should lift South Africa’s growth from its near-term trend of about 0.5% to around 1.5%. Over time, a single-minded focus on removing supply constraints to growth should be capable of lifting growth closer to 2.5-3.0%%.

While 2.5% still remains well short of the rate of growth needed to significantly dent unemployment, it would buy time and space to implement more difficult reforms over the medium term in key areas like safety and security, education, health and spatial planning that are needed to build a faster growth competitive economy. But the clock is ticking with local government elections in 2026 and the ANC’s Presidential election in 2027 representing dates that could be key determinants of the GNU’s success.