A two-year research project by Harvard professor Ricardo Hausmann's Growth Lab says that the government's proposed economic reforms are unlikely to reverse the collapse of State capacity which will continue to be blocked by patronage, ideology, and political gridlock.

South Africa needs "new strategies and instruments" to achieve its economic growth and inclusion goals. 

Based on nine in-depth papers, the report drills down into the reasons for South Africa's poor economic performance, which it says is exacerbating exclusion and inequality, and identifies two classes of problems: State collapse and spatial exclusion. 

Of these, collapsing State capacity is the "predominant driver of South Africa's weakening economic performance and is at the heart of intensifying macroeconomic stress." 

While the government and the investor community have pinned their hopes on structural economic reforms to extract the country from its economic malaise, the Growth Lab says current policies are not working.

In earlier reports, the Growth Lab itself has said the key to growth lies in microeconomic reforms, particularly in the network industries.

"We find that current reform momentum is unlikely to reverse this collapse because reforms are encountering systemic, deep-seated, and underlying issues of political gridlock, ideology, patronage, and overburdening State organisations with goals beyond their core missions and capabilities. South Africa needs a strategy to recover State capacity or else slowing growth, and increasing exclusion will continue to worsen," says the report.

Among the biggest causes of State collapse are two policies the African National Congress government has expressed profound commitment to: preferential procurement and cadre deployment. The report recommends that preferential procurement be relaxed for all State-owned entities and that cadre deployment be phased out.

Preferential procurement is a scoring system used by government departments, State-owned companies, and municipalities to give black-owned businesses a leg up in winning government contracts. It intends to redress the economic imbalances of the past, which is provided for in the Constitution. 

But, says the report, rather than giving preference to previously disadvantaged groups, small and medium enterprises, and local producers, preferential procurement has undermined economic inclusion in important ways. For example, failing infrastructure excludes and disadvantages the very people and businesses it is intended to benefit.

"In our investigations into the drivers of State collapse in the electricity system and at municipal government level, we find that preferential procurement is a critical component of State collapse and thus deserves serious attention," the report says.

The report quotes a 2023 paper by the IMF that estimates that preferential procurement raises government costs for goods and services by 20% or 3% of GDP and has expanded the opportunities for patronage. The "tenderpreneur economy" has benefitted "an exceedingly narrow few at the expense of the rest of society".

The second class of problems that have weighed down South Africa's growth potential is the apartheid legacy of spatial exclusion of the poor, which has been reinforced by the State's housing and rural development policies. Spatial exclusion makes it difficult for the poor to access opportunities to contribute to the productive economy. Without specific policies to redress spatial inequality, economic exclusion of the black population will endure. 

Social grants have not helped in this regard and have been more "palliative than curative". Grants are a poor substitute for empowering people to participate in the economy. 

The report makes specific recommendations to rebuild State capacity and address spatial inequality. 

The electricity crisis and the crisis at municipal levels are focused on in a significant amount of detail. Among the suggestions to improve State capacity are:

• The urgent liberalisation of the electricity market and faster unbundling of Eskom;
• The relaxation of preferential procurement, including in the Renewable Energy Independent Power Producer Programme (REIPPP);
• The phasing out of cadre deployment;
• The use of the IPP model to expand the distribution and transmission of electricity;
• Reallocating responsibility for the distribution of water and electricity to regulated regional companies due to the failure of municipalities to collect charges; and
• Connecting municipalities to regional providers of services for which they do not have the skill or capacity. 

A range of recommendations are also made with regard to promoting spatial inclusion. These include: 

• Regulatory changes to enable densification and more compact cities;
• Utilising under-used land in urban areas; and
• Re-orientating the budget for housing to "more experimental" mixed-use projects

In looking towards solutions to the country's growth crisis, the report urges the government to take advantage of the opportunities offered by "green growth" in which South Africa could use its potential to supply the goods, services, and know-how that the world needs.

It provides a detailed exploration of how this could be done, from active industrial policies to better exploit valuable minerals and value chains to the manufacturing of green versions of grey products. The country could also use its considerable technical know-how to export solutions the rest of the world wants.